Retirement planning is a complex but a very important aspect in our life, especially in today’s context as our country is going through a process of economic and social transformation. As we know life expectancy in India is increasing. Our post retirement life will be at least 20 to 25 years.
Today’s main economic and social transformations are……
These transformations and probably others in future, make it imperative for us to plan for retirement early in our working lives. It is important that we understand the fundamental goal is retirement planning, which is to achieve financial independence and to be able to maintain our current lifestyle even during our retirement years.
Retirement planning is a very structured process. The first step is to calculate our retirement needs. This is where most of us go wrong. A few years back a financial adviser visited me to sell a pension plan. He asked me, how much retirement corpus I need. I gave him a number based on my gut feel, based on which, he sold me a pension plan. Just five years later, after I made a more careful analysis of my retirement needs, I realized that number was way too small. The financial adviser should have helped me to calculate my needs instead of asking me how much money I need for my retirement.
As with many aspects of personal finance, there are several thumb rules for retirement planning. Thumb rules are based on statistical evidence, but one must understand these are general guidelines only.
Here are some thumb rules for retirement planning:-
As mentioned earlier, these rules are only general guidelines. Each one of us has different personal financial situations. Therefore we should employ a bottom-up approach to determine our retirement needs depending on our unique situations.
It is important to note that lifestyle changes with time. If we are young, we are likely to have a lifestyle that fits our budget. As our family grows and income increases, our lifestyle is likely to change. Therefore, retirement planning should be a dynamic process. We should revisit retirement planning as and when required.
Since the goal of retirement planning is to maintain our current lifestyle even during retirement years, the first step of retirement planning is to do an expense analysis. In this approach, we will analyze in fair amount of details, our regular expenses and project how much we will have to spend on our regular expenses, in our retirement years.
To estimate our regular expenses during our retirement, we should make a list of all our regular expenses, and how much will be our projected Inflation adjust expenses.
Inflation is an ugly nine letter word that essentially reduces the value of money. Once estimated our regular expenses as per the current cost of living, we should adjust it for inflation.
How much inflation do we need to factor in? It depends on the time horizon to retirement, and the state of our economy. The current level of inflation is very high. Over a long period of time, it will surely come down significantly, as the economy matures.
However, inflation in India will not come down to levels prevailing in the developed economies 2 – 3% for a very long time. Let us assume our long term annual inflation rates are around 6%. We should apply the inflation rate as a compounding effect on your regular expenses, to determine the inflation adjusted expense for our retirement. The earlier we start saving for retirement the easier the task becomes, due to the effect of compounding.
We Professional money managers help you to understand, calculate and plan retirement needs. “We can make retirement as the golden years of your life with financial freedom.”