So, the most important and base question you should ask…
- Who do you believe?
- What are the right answers?
- Why does this stuff seem so difficult?
I understand how you feel right now. The financial industry makes investing way more complicated than it has to be. There is a lot of bad advice out there when it comes to your financial investments and their future. Even most people get overwhelmed when they are finally ready to start investing. But there’s an easy approach I use, and it’s a good rule of thumb. Not just for me, but for lots of other people.
Here it is …
I know it’s not trendy. It won’t make headlines or get you on the cover of a magazine. But it will get you where you want to go—to your retirement dream.
So why should I invest 10%? Good question. Let’s talk through the answer.
How Much You Invest Makes A Huge Difference
An easy rule of thumb says that you’ll need to replenish 75% to 95% of your pre-retirement income to lead a good retired life. This means if you’re making ₹ 80,000 a month (before taxes), you might need ₹ 59,000 to ₹ 73,000 a month in retirement income to enjoy the same standard of living you had before retirement. For example, somebody plans to retire in the next 15 years. The retirement planning would have to include creating a system to generate ₹ 59,000 to ₹ 73,000 per month income from the year 2034 when they retire.
If you are targeting 70% of your pre-retirement income for post-retirement usage, then you need to not only save but also invest properly in the right assets. This would mean investing in high-return assets so that your savings grow at a faster rate or invest at least 10%.
Ten percent of that would be ₹ 8000 monthly. Over 15 years, that could grow to ₹5,414,905, assuming a 15% return. Sounds awesome, right? Who doesn’t want to be a millionaire?
But what if you only invested 5% of that gross income? That would be ₹ 4000 monthly. Invested over 15 years at the same rate of return, that percentage could get you just over ₹2,707,452. Not bad. But you’ve lost out on more than half you could be used to fund your retirement dream!
Top 4 Reasons Why You Will Need Retirement Planning.
Medical Emergencies -
With rising age, come new and health problems. Medical expenses make a massive dent in your finances post-retirement. Studies show medical inflation is 14-15% a year. This means health costs potentially become 4 times what they were just ten years ago. Take a proper retirement plan, and never lose sleep over long and multiple hospitalizations. With a large enough retirement kitty or pension, post-retirement you will always be well-taken care of.
Price rise is a universal fact. The effect of inflation, even if it appears small in the short-term, can be massive over a few years.
An 8% inflation means ₹ 100 will have the value of ₹ 92 a year later. But, an 8% decline is quite severe. Twenty years later a sum of ₹ 21 lakhs will have the same purchasing power as ₹ 6.5 lakhs today if inflation grows by 8% every year. In growing economies like India, consumer-level inflation can be more than 5%.
Even when you are retired, some costs will always remain. You may not have Equated Monthly Installments (EMIs), or you may not eat out much, but you will still need to buy groceries, medicines, and pay off utility bills. A good pension plan must be bought in such a way that anticipated inflation is accounted for.
No State-Sponsored pension
Private sector employees in India do not have a fallback option like a state-sponsored pension. Unlike the US and UK where they have state-funded/sponsored pensions or social security benefits during retirement, India so far does not have anything similar matching that scale. This means you are on your own when you are retired which is both good and bad.
The good part is that your pension strategy gives you the flexibility to buy a retirement plan and remain in control. Government-funded pensions are a fixed amount that can remain unchanged for years. There are some small benefits for senior citizens, but there is no outright income replacement solution from the government. So, engaging in retirement planning is a smart thing to do. Once you know the goals, invest in a pension plan, and get a self-sponsored retirement income!
Long gone are those days when the elderly could rely on monetary support from a big family. The culture of Indian families is changing as couples are going nuclear and staying separately. They also have fewer children. Twenty-thirty years down the line there may not be many relatives to take care of you as a senior citizen. Children, when they grow up, want to relocate for jobs elsewhere. Plus, the pressure to earn money and have a decent lifestyle would not give them enough time to allocate for parents and elders.
Hence, it is vital to plan your retirement without expecting any financial help from your immediate family. There is a lot of mental satisfaction in having the ability to buy your spectacles, medicines, provide food for yourself, and also your spouse. Why should it change when you are 60? A retirement plan allows you always to keep your head high and live a retired life full of dignity and respect.
Which do you want to do? Yeah, me too.
I know what you may be thinking: My monthly expenses will be much lower in retirement. I won’t have to worry about a mortgage because I plan to pay it off before I retire. My kids will (hopefully!) have graduated by then, so I won’t be paying for college. My fuel costs will go down because I won’t be driving to work every day . . .
Yes and no. Some costs may disappear or drop, but you’ll still have to pay property taxes and insurance and utilities, and all those other monthly expenses. Plus, you’ll have one major expense in retirement: healthcare. And that’s a whopper of a bill.
What Are The Steps To Retirement Planning?
Retirement planning makes you prepared for life after paid work ends. Such planning has some key components. Let us have a look at them one by one.
Firstly, you need to set your retirement goals. Arrange these financial goals into short, medium, and long-term. Most of these retirement goals will require financial resources.
Second, assess your current financial position. At the age of 30-35, your financial situation will be very different from, say, somebody in your late 20s or the early 40s. To achieve your retirement goals, you need to take stock of your current situation. Don't worry if you have not been able to save much so far. The good thing is that you want to save. Without relying on your existing savings pool, investing atleast`10,000 per month in a retirement plan from age 35 will generate well over `1.3 crores for you by retirement. This is if the corpus grows at a modest 10% annually. The final amount will be a lot bigger if the return is 12% or 15% per year.
Three, calculate the amount of money you will need for your retirement goals and account for the help you will get from your current wealth. When done right, retirement planning will try to get you as close to this number as possible. People who have accumulated some money so far may even reach their retirement goal faster. So, you can retire at 55 instead of 60. Sure, sounds like music to the ears.
Four, identify retirement corpus builders. Apart from your provident fund and savings, one of the best ways to get a recurring income post-retirement is by using a retirement plan.
Five, set up a system to generate monthly income from retirement corpus. As a salaried person, you are habituated to getting income from your employer or a business. With the onset of retirement, the paycheque has to be arranged by you. A simple way to do it is taking an Immediate Annuity Plan by investing your retirement corpus. This will ensure that every month a fixed sum of money comes knocking on your door. By giving you fixed income at regular intervals chosen by you, you can live a comfortable life in your golden years. Confidently take care of your daily expenses. Choose from benefits like a guaranteed income for life, pension with the annual increase, and much more.
When To Start Retirement Planning?
Like all planning, retirement planning needs to be done beforehand. With the average work-life being somewhere between 30 and 35 years, the best retirement plans are often started at an early age. This does mean that retirement planning and execution happens across different life stages. When done right, you enjoy the fruits of the retirement plan set in motion years ago.
Power of Strat Early
Imagine 25-year old starts planning for a retirement corpus of `2 crores. He/she will need the money when he/she is 60 years of age, or 35 years away. By saving and investing just `3500 per month in an investment avenue that fetches 12% per year, the 25-year old will cross the target and attain `2.3 crores. But if he/she decides to start the same plan just 5 years later, i.e. when he/she is 30, she will reach just `1.2 crores, i.e. half the corpus by 60. A small delay of 5 years makes a world of difference as you can see. So, it pays to start early.
A proper retirement plan will be divided into the investment phase:
In the first phase, you save and invest money. This will likely be in your 30s to early 50s. It is important to choose the contribution and duration of contribution during the investment phase. For instance, saving `3 lakhs a year for 20 years is not tough for somebody with `12 lakhs annual income. Saving 25% is achievable. Be practical about saving because your financial responsibilities may go up later due to home loans, marriage, and children’s expenses.
As we near the retirement age, one has to ensure that the entire corpus slowly moves away from risky assets to safe assets. When you retire, the focus should be on milking this entire corpus. This can be in the form of staggered withdrawals or a monthly income source. Choose a retirement income plan that allows these flexibilities.
It’s Time To Take Action
Listen to people . . . what happens next is up to you. Your financial future is in your hands, not someone else’s. You start on the path to your dream retirement the moment you take that first step.
Knowing This Information Won’t Change Your Future If You Don’t Act On It.
Investing 10% might feel like a big step. But whether we like it or not, the clock is ticking—and now is the time to act! If you want to go from floating with no real plan to on track and investing in your family’s future, you have to create a plan and stick to it.
If you still have questions about investing, talk to your financial mentor.
Ready, set, go!