Retirement planning: It's time to start now

Retirement is said to be the golden years of our lives. The earlier we start planning for it, the more our investments would compound. If you haven’t started your retirement planning, this article will help you understand how to do just that.

What is retirement planning?

Retirement planning is preparing a corpus today for a better tomorrow so that you don’t have to worry or rely on others. The goal is to focus on making enough corpus to live comfortably without compromising on the needs. 

Why is accumulating a retirement corpus important?

Nuclear family: The nature of Indian families has changed over time. So, it’s time that you must think for yourself and plan your retirement well in advance so that you don’t have to depend on anyone during the golden years of your life.

Also Read | Want a worry-free retirement? Buy an annuity product!

Inflation: Whether your money is compounding or not, things are getting expensive.

If you don’t start accumulating today, you might not have enough money to cover all your expenses like medical bills, groceries and other necessities.  

When should you start accumulating your retirement corpus? 

The sooner you accumulate your corpus, the better because it allows your money to compound. 

If you are wondering what compounding is, it is a process where you earn returns on the returns you had earned earlier. So, it creates a snowball effect, and your money grows in folds. 

Therefore, the longer you hold your investment and let it grow, the higher your total corpus would be.

How much accumulated retirement corpus would you need?

There are two ways through which you can accumulate your retirement corpus:

1) The William Bengen way: In 1994, William Bengen came up with this theory known as “the 4% rule”. According to this rule, you must have a total retirement corpus from which you can withdraw 4% every year for a lifetime. So, for example, if you plan to have a retirement corpus of Rs 10 crore and a life expectancy of 90 years, you can easily withdraw Rs 33 lakh every year for 30 years. 

Well, the strategy sounds good, but there are a few drawbacks. Firstly, inflation is not factored in. Secondly, if you have invested this corpus in a fixed income instrument with a long lock-in period, you won’t be able to break that investment to withdraw 4% every year. 

2) The second alternative is relatively simple. Here are the steps you must follow:

Open an excel sheet and record your expected expenses such as grocery, medical bills, vacation, maintenance, insurance bills, etc. Then make a list of expected income such as the pension you would receive, interest income, income from house rent, etc. Now subtract your income from your expenses and determine how much more would you need. For example, if you expect your expenses to be Rs 60,000 per month and your income to be Rs 45,000, then you would need Rs 15,000 more every month.

Now we need to factor in inflation. Assume the inflation rate to be 8% and add this percentage to Rs 15,000 every year and sum it all up.

Now, you have successfully calculated your retirement corpus. But here comes the tricky part, where most of us get stuck. This part is where you should invest to accumulate your retirement corpus.

Where should you invest to accumulate your retirement corpus?

You must invest according to your risk-taking ability. In your 20s, you may have a higher risk-taking ability as you might have fewer responsibilities. So you can choose to invest in direct equities or equity-linked products. 

While as you grow up, you tend to be more conservative with your money. So, you can choose an asset allocation where you diversify your investments between equity to debt instruments.

(The writer is the founder of TejiMandi)