Know everything about retirement planning- When to start and how to plan?

Planning for the second inning of life is crucial for achieving financial independence in your golden years, and it requires a well-thought-out strategy tailored to meet future needs.

In this article, we cover the essentials of retirement planning: when to start, key considerations, types of investments, and tips to help you build a secure and comfortable retirement fund. So, if retirement planning is on your mind, this is your first investment towards achieving it.

What is Retirement Planning?

Retirement Planning is the process of designing a financial plan to ensure a comfortable lifestyle after retirement. It involves saving money over time and investing those savings wisely to generate income during retirement.

In fact, it is more than just saving. It is about preparing for a financially independent life when you are no longer working full-time. It considers various aspects like estimating the total corpus required to maintain your lifestyle, planning for healthcare, managing debts, and choosing the right investment mix to grow your savings.

When to start retirement planning?

The best time to start retirement planning is NOW. Most people believe that since retirement years have time, the goal can be parked, and they can start later. If you think the same, you must note that retirement corpus will be your biggest goal - even bigger than buying a house, so it accumulates the fund, you need to start now.

The earlier you start, the better it is - when you start early, you allow compounding to help you achieve your corpus, even with a small investment. The logic is simple. The longer your investments have to grow, the larger the compounding effect, which is essentially earning returns on previous returns.

For example, someone who invests Rs 5,000 monthly at an annual 12% return from age 25 could potentially accumulate a significantly larger corpus than someone who starts investing the same amount at age 35.

What is the complete journey of retirement planning in India?

Let us look at the complete journey of retirement planning in India:

Get the basic data: Even before you start planning, you need to know the age at which you want to retire and estimate your life expectancy. Determine when you plan to retire and account for longevity to avoid outliving your retirement funds. Many people plan for 20-30 years post-retirement.

Setting Retirement Goals: Once you have the basic information, the first step is to define your desired retirement lifestyle, including where you want to live, your desired level of travel, and your hobbies.

Calculating Retirement Needs: Next, you estimate how much money you will need to maintain your desired lifestyle in retirement. This includes considering factors like inflation, healthcare costs, and potential long-term care expenses. For example, if you anticipate needing Rs 50,000 per month at retirement and expect 6% inflation, your monthly need in 30 years might be around Rs 2.9 lakh.

Creating a Savings Plan: Develop a savings strategy that outlines how much you need to save each month or year to reach your retirement goals.  

Investing for Retirement: Choose appropriate investment vehicles, such as retirement accounts or other investment options, to grow your savings.

Risk Management: Parallelly, you identify potential risks to your retirement plan, such as market volatility, inflation, and healthcare costs, and develop strategies to mitigate those risks.  

Reviewing and Adjusting Your Plan: Regularly reviewing and adjusting your retirement plan to account for changes in your financial situation, market conditions, and personal goals.

How to estimate the future corpus?

You need to know your current expenses, inflation (usually considered 6%), and returns expected on your investments. Once you have these data, you can use an online retirement calculator to find your retirement corpus.

Alternatively, here is a step-by-step guide for you:

Step 1: Determine Monthly Expenses at Retirement

Estimate your monthly expenses in today's terms and then adjust for inflation. Let us say your current monthly expenses are Rs 50,000.

Step 2: Adjust for Inflation to Calculate Future Monthly Expenses

Assume an average inflation rate of 6% per year. Use the formula:

Future Monthly Expenses = Current Monthly Expenses × (1 + Inflation Rate ) ^ Years until Retirement

If you plan to retire in 25 years, the calculation would be:

• Future Monthly Expenses = 50,000 × (1 + 0.06)^ 25
• Future Monthly Expenses=50,000 × 4.2919 = Rs 2,14,595

So, you would need approximately Rs 2,14,595 per month to maintain your current lifestyle when you retire in 25 years.

Step 3: Calculate Annual Expenses in Retirement

Multiply the monthly expenses by 12 to get the annual expenses:

Annual Expenses = Rs 2,14,595 * 12 = Rs 25,75,140

Step 4: Estimate Total Corpus Needed

Now, estimate the corpus you will need to fund these expenses throughout your retirement. Let us assume you plan for a 20-year retirement period and expect to earn a post-retirement return of 6% annually (equal to inflation, to keep purchasing power constant).

Since the returns are only balancing inflation, you can use a simple multiplication:

• Retirement Corpus = Annual Expenses × Years in Retirement
• Retirement Corpus = 25,75,140 × 20= Rs 5,15,02,800

Therefore, you would need a retirement corpus of approximately Rs 5.15 crore to sustain your lifestyle for 20 years post-retirement.

Step 5: Monthly Investment Required

You can use a SIP calculator to determine how much you need to invest every month to accumulate Rs 5.15 in 25 years.

Retirement Plans That Can be Considered

Here are some of the best plans you may consider

Employee Provident Fund (EPF): It is a government-backed retirement savings scheme primarily for salaried individuals in India. In EPF, both employer and employee contribute 12% of the employee's basic salary and dearness allowance every month. Amounts can be withdrawn only after retirement or after reaching the age of 58, with some flexibility for emergencies.

National Pension System (NPS): A government-sponsored pension scheme open to all Indian citizens. NPS allows individuals to make regular contributions toward their retirement, which is then invested in a mix of equity, corporate bonds, and government securities. At retirement, 60% of the corpus can be withdrawn as a lump sum (tax-free), while 40% must be used to purchase an annuity that provides a regular pension.

Public Provident Fund (PPF): Another government-backed, long-term savings scheme that offers fixed returns. It is considered one of the safest investment options in India, with an initial lock-in period of 15 years.

Mutual Funds: Equity Mutual Funds are managed funds that invest in equities, providing options suited to varying risk appetites and goals. Equity mutual funds are best for long-term growth. Once you have accumulated a corpus, you can use the SWP (Systematic Withdrawal Plan) feature to generate regular income for yourself in retirement years.

Conclusion

If you are still delaying your retirement planning, we hope the article has made you realize, you need to start now. Retirement planning ensures you can maintain financial stability and a comfortable lifestyle even when you're no longer earning.

By starting early, setting realistic goals, choosing the right investment mix, and regularly reviewing your plan, you can build a retirement fund that provides security and peace of mind for the future. Retirement planning is not just a financial necessity; it is a roadmap to enjoying your post-work years with independence and freedom.