When you think about retirement, the first question that may come to your mind is 'At what age would I Retire? Would it be 60 or 65?'
The next one probably would be 'Will I have sufficient money to achieve a comfortable retirement? Or do I need to work till I drop?'
Well retirement is a global concern.
While one should definitely set his/her retirement goal, not everyone can achieve their dream retirement, without making adequate sacrifice for it.
When setting your retirement goal, you should not only focus on how much to save and where to invest, but if required, be ready to cut down on your unwanted expenses and allocate the saving towards your retirement.
Do not forget to create a plan so you can track and monitor your progress and adjust the plan if necessary.
Planning for retirement doesn't have to be complicated. The key is to determine how much you'll need to live a comfortable retirement life and then develop a plan to achieve your goal.
(Image Source: freepik.com)
Let's begin with few tips that can help plan your retirement efficiently:
Tip #1: Calculate your retirement cost
Your retirement cost will be influenced by many factors, like your expected life style, health care needs, travel plans, number of dependents and so on. While how much you will live on during your retirement depends on how much you need, it also depends on how much you can bring in. So aim to commit the maximum possible savings towards your retirement, during your earning years itself.
There are many retirement calculators out there that can tell you how much approximately you need for your retirement. While you may get a good starting number to aim for, practically you may need much more than you think. Click here to access PersonalFN's retirement calculator.
Tip #2: Allocate your investments wisely
While planning for retirement, your aim should be to save and accumulate enough that can last for at least 30-35 years during your retirement. Once you shortlist the options to invest in like mutual funds, fixed deposits etc., you should allocate your assets wisely to match your risk appetite and years to retirement. If you are unsure about your risk appetite, do not hesitate to consult your investment advisor.
Tip #3: Enter your retirement with Zero debt
Would you like to enter your retirement years with an EMI burden, where you still need to pay for liability from your retirement corpus? You may not have enough income to service your loans, nor would you like to pass on your liability to your kids. So why not aim to close all your loan accounts before you even near your retirement age. It will help you attain a sort of financial freedom during your golden years.
Tip #4: Have adequate health insurance in place
With growing age, your medical needs might increase. Moreover, a long-term or frequent hospitalisation during your retirement may have significant impact on your retirement funds. Therefore, you need to account this well in your retirement plan. With the rising cost of medical expenses, you need to consider a higher impact of inflation on this. As you age, your body is more likely to attract ailments or health symptoms and it would be difficult to get new health insurance cover. Getting one at an early age can be helpful as it can be carried forward even during your retirement.
Tip #5: Maintain emergency fund for unforeseen event
You cannot avoid an uncertainty, which may knock your door without informing you. Yet you have to face it and more importantly, you should know how to handle it wisely. The best part with proper planning is that you can provide for such uncertainties well in advance, by taking care and building a contingency reserve.
Keeping aside 6 to 24 months of your monthly expenditure (including your EMIs) at your comfort is always advisable. You should carefully account this while planning your retirement. After all, this is the money that you might be using in case of emergencies and may not hamper your retirement plan and so your retirement.
Tip #6: Consider your assets
You might have already built some assets for your security. However, against your assets, you may also have some liabilities, which you need to repay before you attain your retirement age. Asset is something that can grow in value and which you can liquidate during your retirement. All your investment in shares, mutual funds, bonds, fixed deposits, gold, ornaments, ancestral properties, land, etc. are your assets (provided you do not have any loan or encumbrances against them). Leaving aside your self-occupied house, the future valuation and cash inflows that you can generate from your other assets could be considered while planning your retirement.
While you should not consider your self-occupied house as an asset, in case of absence of other assets, you should be ready to downsize to a smaller home. This will not only free up your house equity, but a smaller house can also reduce your expenses. Reverse mortgage is another option that can let you convert a portion of your house equity into cash, which could be used during your retirement.
Tip #7: Review and monitor your retirement plan, regularly
It is important to monitor the progress and review your retirement plan at regular interval. This will help you take timely action in case of deviation and be on track to meet your retirement goals. It will also help you with clear expectations about your retirement and take tough decision like delaying your retirement or setting an alternate source of income during your retirement years.
As we mentioned earlier, a comprehensive retirement calculator can give you a fair number to aim for your retirement corpus. However, keep in mind that you may need more than you think to achieve a comfortable retirement. Therefore, it is necessary to boost your retirement savings to the maximum possible.
Here are 5 things you should do to boost your retirement savings…
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Start early with a goal: While many advisors say that, it is never late than ever to plan your retirement, every lost year and month counts. To achieve maximum value of your investment and meet your target retirement corpus, you need to give your investments the much-needed time to compound. With every passing year, you miss out the power of compounding. Therefore, start with investing as early as you can for your retirement, and let compound interest have an opportunity to work in your favour.
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Be systematic while investing for your retirement: Aim to contribute regularly and invest systematically for your retirement. A systematic/regular investment through SIP not only helps you take advantage of rupee cost averaging but also helps ensure you give your investments more time to potentially grow. If you are not in a position to commit maximum monthly or quarterly contribution amount, start with a lower contribution and gradually increase that amount until you reach the desired contribution limit.
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Gradually Increase your retirement kitty: Each time you get an increment in salary, bonus or any windfall, consider increasing your retirement contributions or add it to your retirement kitty. This will help boost your retirement portfolio and you can reach your desired goal before time. While it is important to understand your priorities and plan for your other key life goals too, you need to optimally use your savings, so that you can contribute the maximum towards your retirement goal.
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Look for additional source of income: While it is generally a good idea to contribute the maximum amount possible towards your retirement, any additional amount invested will help enhance your retirement savings. You need to identify such sources that can generate additional income for you during your working years, which can be added to your retirement portfolio. Setting up an alternate source of income can not only contribute to your retirement kitty, but can be a vital source of cash inflows during your retirement years too.
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Cut down on unnecessary expenses: While planning your retirement, it is necessary to examine your monthly spending’s to identify unwanted expenses. You might negotiate a lower rate on your housing loan or save by cutting back on unnecessary shopping, frequent dine outs and movies and so on. Make it a point to Always Save First before you spend (Income – Saving = Spending). Cutting down on unnecessary expenses and increasing your retirement contributions even by a small amount can have significant impact over time.
Let's understand the benefit of starting early and boosting your retirement savings through incremental incomes, through this hypothetical case of Ramesh, Suresh and Mahesh.
| Retirement Portfolio Illustration of Mr Ramesh |
Age
(in Years) |
Annual Income (Rising @8% p.a.) |
Scenario 1 |
Scenario 2 |
Fixed
Investment |
Retirement Portfolio Value (Return @ 10% CAGR) |
Increasing Investment by 5% p.a. |
Retirement Portfolio Value (Return @ 10% CAGR) |
| 31 |
500,000 |
100,000 |
110,000 |
100,000 |
110,000 |
| 40 |
999,502 |
100,000 |
1,753,117 |
155,133 |
2,122,665 |
| 50 |
2,157,851 |
100,000 |
6,300,250 |
252,695 |
8,963,245 |
| 60 |
4,658,637 |
100,000 |
18,094,342 |
411,614 |
28,880,412 |
| Total Investment & Value |
3,000,000 |
18,094,342 |
6,643,885 |
28,880,412 |
| Additional Corpus |
|
|
|
10,786,069 |
This table is for illustration purpose and the rate of return is assumed at 10% p.a.
Source: PersonalFN Research
Here we can see that Mr Ramesh started investing for his retirement at the age of 31, when his annual income was Rs 5 Lakh, which increased by 8% every year.
Starting with Rs 1 Lakh (or 20% of the first year income), if he keeps the contribution fixed for next 30 years till his retirement, his total investment of Rs 30 Lakhs will be valued at around Rs 1.81 Crore (assuming he earns return at 10% CAGR), at his retirement age of 60.
Nevertheless, with rising income if he decides to increase his annual contribution by 5% each year, he will manage to invest a total sum of Rs 66 Lakhs which could increase to Rs 2.88 Crore at the time of his retirement.
By giving a boost of 5% every year to his annual contribution and contributing an additional Rs 36 Lakhs, Ramesh managed to raise an additional Rs 1 Crore for his retirement.
| Retirement Portfolio Illustration of Mr Suresh |
Age
(in Years) |
Annual Income (Rising @8% p.a.) |
Scenario 1 |
Scenario 2 |
Fixed
Investment |
Retirement Portfolio Value (Return @ 10% CAGR) |
Increasing Investment by 5% p.a. |
Retirement Portfolio Value (Return @ 10% CAGR) |
| 31 |
- |
- |
- |
- |
- |
| 41 |
1,000,000 |
200,000 |
220,000 |
200,000 |
220,000 |
| 50 |
1,999,005 |
200,000 |
3,506,233 |
310,266 |
4,245,330 |
| 60 |
4,315,701 |
200,000 |
12,600,500 |
505,390 |
17,926,490 |
| Total Investment & Value |
4,000,000 |
12,600,500 |
6,613,191 |
17,926,490 |
| Additional Corpus |
|
|
|
5,325,990 |
This table is for illustration purpose and the rate of return is assumed at 10% p.a.
Source: PersonalFN Research
Let us consider Mr Suresh delays his retirement planning and starts investing 10 years hence at the age of 41, when his annual income was Rs 10 Lakhs, which increased by 8% every year.
Starting with Rs 2 Lakhs (or 20% of his income), if he keeps the contribution fixed for next 20 years till his retirement, his total investment of Rs 40 Lakhs will be valued at around Rs 1.26 Crore (assuming he too earns return at 10% CAGR), at his retirement age of 60.
Nevertheless, with rising income if he decides to increase his annual contribution by 5%, he will manage to invest a total sum of Rs 66 Lakhs, which could grow to Rs 1.79 Crore at the time of his retirement.
By giving a boost of 5% every year to his annual contribution and contributing an additional Rs 26 Lakhs, Suresh managed to raise Rs 53 Lakhs more for his retirement.
However, if we compare his portfolio with that of Ramesh, Suresh lost on the power of compounding by starting late. Despite contributing more than Ramesh, he ended up with a lesser corpus for his retirement.
Now let us take the case of Mr Mahesh…
| Retirement Portfolio Illustration of Mr Mahesh |
Age
(in Years) |
Annual Income (Rising @8% p.a.) |
Scenario 1 |
Scenario 2 |
Fixed
Investment |
Retirement Portfolio Value (Return @ 10% CAGR) |
Increasing Investment by 5% p.a. |
Retirement Portfolio Value (Return @ 10% CAGR) |
| 31 |
- |
- |
- |
- |
- |
| 40 |
- |
- |
- |
- |
- |
| 51 |
2,000,000 |
400,000 |
440,000 |
400,000 |
440,000 |
| 60 |
3,998,009 |
400,000 |
7,012,467 |
620,531 |
8,490,661 |
| Total Investment & Value |
4,000,000 |
7,012,467 |
5,031,157 |
8,490,661 |
| Additional Corpus |
|
|
|
1,478,194 |
This table is for illustration purpose and the rate of return is assumed at 10% p.a.
Source: PersonalFN Research
Unlike Ramesh and Suresh, Mr Mahesh delays his retirement planning even further and starts investing at the age of 51, when his annual income was say Rs 20 Lakhs, which increased by 8% every year.
Starting with Rs 4 Lakhs (or 20% of his income), if he keeps the contribution fixed for next 10 years till his retirement, his total investment of Rs 40 Lakhs will be valued at just around Rs 70 Lakhs (assuming he too earns return at 10% CAGR), at his retirement age of 60.
Still, with rising income if he decides to increase his annual contribution by 5%, he will manage to invest an additional Rs 10 Lakhs, which could increase the value of his portfolio to about Rs 85 Lakhs at the time of his retirement.
By giving a boost of 5% every year to his annual contribution and contributing an additional Rs 10 Lakhs, Mahesh managed to raise about Rs 15 Lakh more for his retirement. However, if we compare his portfolio with that of Ramesh and Suresh, Mr Mahesh significantly lost on the power of compounding by starting very late. Despite contributing more than Ramesh and Suresh every year, he ended up with a much lesser corpus for his retirement.
Learning: Starting early and gradually increasing your contribution towards your retirement portfolio can help significantly boost your retirement corpus. The additional corpus you manage to create using this strategy could take care of more living years during your retirement.
Heard of the 20% investment strategy thumb rule…
Using it as a thumb rule for creating your retirement portfolio, you can aim to set aside at least 20% of your annual income towards your retirement.
Let us see how this thumb rule worked in the case of Ramesh, Suresh and Mahesh.
| Retirement Portfolio Illustration of Mr Ramesh |
Age
(in Years) |
Annual Income
(Rising @8% p.a.) |
Contributing 20% of his Income |
Retirement Portfolio Value (Return @ 10% CAGR) |
| 31 |
500,000 |
100,000 |
110,000 |
| 35 |
680,244 |
136,049 |
776,501 |
| 40 |
999,502 |
199,900 |
2,391,496 |
| 50 |
2,157,851 |
431,570 |
11,365,985 |
| 55 |
3,170,590 |
634,118 |
21,924,269 |
| 60 |
4,658,637 |
931,727 |
40,627,100 |
| Total Investment & Value |
11,328,321 |
40,627,100 |
This table is for illustration purpose and the rate of return is assumed at 10% p.a.
Source: PersonalFN Research
Had Ramesh followed this thumb rule of setting aside 20% of his annual income (that increased at the rate of 8% every year) towards his retirement, he would have invested massive Rs 1.13 crore in 30 years’ time. At the age of retirement, Ramesh would have accumulated around Rs 4 crore, which is an additional 1.18 crore over what he had accumulated by increasing his contribution by 5% every year.
| Retirement Portfolio Illustration of Mr Suresh |
Age
(in Years) |
Annual Income (Rising @8% p.a.) |
Contributing 20% of his Income |
Retirement Portfolio Value (Return @ 10% CAGR) |
| 31 |
- |
- |
- |
| 35 |
- |
- |
- |
| 41 |
1,000,000 |
200,000 |
220,000 |
| 50 |
1,999,005 |
399,801 |
4,782,992 |
| 55 |
2,937,194 |
587,439 |
11,055,870 |
| 60 |
4,315,701 |
863,140 |
22,731,971 |
| Total Investment & Value |
9,152,393 |
22,731,971 |
This table is for illustration purpose and the rate of return is assumed at 10% p.a.
Source: PersonalFN Research
By following this rule Mr Suresh, would have accumulated Rs 48 Lakhs more than the corpus he managed to raise by increasing his contributions by 5% every year.
| Retirement Portfolio Illustration of Mr Mahesh |
Age
(in Years) |
Annual Income (Rising @8% p.a.) |
Contributing 20% of his Income |
Retirement Portfolio Value (Return @ 10% CAGR) |
| 31 |
- |
- |
- |
| 35 |
- |
- |
- |
| 40 |
- |
- |
- |
| 51 |
2,000,000 |
400,000 |
440,000 |
| 55 |
2,720,978 |
544,196 |
3,106,002 |
| 60 |
3,998,009 |
799,602 |
9,565,984 |
| Total Investment & Value |
5,794,625 |
9,565,984 |
This table is for illustration purpose and the rate of return is assumed at 10% p.a.
Source: PersonalFN Research
Similarly, this 20% investment rule could have helped Mr Mahesh end up with a corpus of Rs 95 Lakhs as against Rs 85 Lakhs he managed to raise by increasing his contributions by 5% every year.
You see, refining your investment strategy and increasing your target contribution amount every year can help you reach your retirement goal much easier. The key is to start early and contribute the maximum you can towards your retirement.
Find out ways to boost your retirement savings, so that you can accumulate decent corpus for your dream retirement. By sacrificing a bit on your current life style, you can make yourself ready to attain your dream retirement and enjoy financial freedom during your golden years.