7 Things to keep in mind while planning for Retirement

While we make elaborate plans for the vacation round the corner or a wedding in the family many of us don’t take the pains to make a plan for retirement. Quite naturally so, considering retirement to most of us seems far away. We refuse to acknowledge it. Retirement is a reality just like death and taxes. It will happen to us whether we want it or not.

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Your parents took care of the first one-third of your life and left no stone unturned to ensure that you had the very best! You slog it out and try to make the best of the opportunities for the second one-third. What about the last one-third of your life? Do you want to be left in a lurch at the mercy of others when you truly deserve to enjoy the fruits of all the hard work put in?

1) Have a plan
Most of us would agree that nothing happens by chance or by itself. Putting away money randomly and believing it should suffice could be a grave mistake. Retirement is a long term goal for most of us. It would be prudent to remember though that time is a luxury when it comes to investing and we must take full advantage of it. The first step in planning is to estimate what is likely to be your expenses post-retirement. Make sure you list your current expenses correctly. Next discard expenses incurred towards children’s education, life insurance premium, EMIs, investments and other expenses which will not exist during your retirement. Once the task of classifying expenses which will be carried forward to your retirement is done, factor in inflation. A good rule of thumb would be expenses would double every 10 years at a inflation rate of 7%. Next would be to calculate the corpus required to sustain you through your retirement. Once you have done this and knowing how much time you have on your side, you will be in a position to choose best fit products which will maximize your returns without taking undue risk.
2) Don’t under-estimate life expectancy

With medical science making advances every day, life expectancy of a moderately well-to-do person is only going up. When asked how long their post-retirement life would be, most people under-estimate their life expectancy by as much as 10 years, sometime even more. If you have to err, than let it be on the side of caution. If you plan to retire at 60, I would recommend that you must plan for a minimum of 25 years post retirement.

3) Start early
The importance of starting early when you are investing for retirement can never be emphasized enough. Starting early and staying focused can make a huge difference in the quality of your retirement. Start small if you must, but the key is to start now!! If you start with a small amount and diligently increase your contribution towards retirement you will be amazed at the magic compounding will weave to make an enviable corpus.
4) Don’t dip into your retirement corpus
Temptation to dip into your retirement corpus will be many and frequent, given that retirement is a long way off and cannot even be visualized and will compete with a need that might offer you instant gratification. But beware! Stay away from dipping into your corpus unless it’s a matter of life or death. Nothing, not even your child’s education should come in the way of your retirement (after all, your child can easily take a loan to fund his or her higher education, reap tax benefits and pay it comfortably considering he or she has a long working life ahead). Also remember that people who willingly loan your child money for higher education will not do the same for your retirement!
5) Don’t be mis-lead into investing in anything with the name retirement attached to it!
There is a trend is to include retirement or child education to the name of insurance or investment products as marketing ploys. Don’t be lured, the product with the name retirement attached to it may not suit your requirements at all and may have very divergent goals. What’s in a name? When it comes to investments, whats important is choosing the right one for your goals.
6)Don’t wait till you retire to take your health cover.
Take a health cover when you are healthy and young even if you are in employment and you are covered by your employer. If you insist that two health covers are a waste, then go for an add-on cover which will offer you cover above a deductible (say 2 lakhs). These types of policies are very inexpensive as compared to normal health covers. This will ensure that should you become uninsurable due to any lifestyle disease like diabetes or hyper tension at a later age, you would have capped the amount to be borne by you towards any post-retirement hospitalization-related expenses.
7) Stay invested in equity
Retirement is not a single stage and neither is it short; it could last one third of your life time! Just because you are retired (or about to), it does not make sense to withdraw completely from an asset class like equity which gives long-term returns which is unmatched by any other asset class. After all, assuming that you retire at 60, you still have 15 years for your expenses when you are 75. That’s a long time and short term volatility should not bother you given the time frame. A word of caution though, take both your risk capacity and risk tolerance into account before deciding on percentage of corpus which will remain invested in equity.

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home-appliances (1)As a Financial Planner or a prudent investor one would be very reluctant to take on debt, it’s the right approach in a majority of the cases. But imagine if you have accumulated the amount required for a big ticket purchase and when you land up to buy it, somebody offers you an interest free loan!  Should you grab it? Or continue as planned and pay upfront for your purchase?

I suggest grab the offer with both hands, provided there are no hidden charges and the processing fee is really small, like in the case of Bajaj Finserve. You have an opportunity to earn 8- 8.5% p.a. while paying 0% interest on the borrowed sum!  What could be better!

Let me explain further on the thought process behind writing this article. A dear friend of mine who is setting up home wanted me to accompany her to help decide on the brand, model, etc.   Once we were done with the nitty gritty of picking the model, the person at the cash counter asked her if she would like to avail of interest free EMI. She being a prudent person said no without checking the offer. With great skepticism I asked about the offer and was amazed to find that the offer was indeed interest free and included a small processing fee which was negligible given that she was buying goods worth two lakhs. The icing on the cake was the process was very simple with very basic documentation.

I suggested that she invest her corpus in liquid funds, and withdraw each month, from the liquid fund to pay for her EMI. I explained that investing in liquid funds (a type of debt mutual fund) is very simple with a Dmat account and you could invest  your surplus even for 2 or 3 days, and earn interest on it. Further, when you want to withdraw the funds you can do so at the press of a button and the funds hit your bank account the next working day. She saw merit in my recommendation and opted for the EMI, parking her funds as suggested. On a purchase of Rs.200,000 she would end up earning Rs12,000 post tax in a period of 2 years!