One of the key facets of financial planning is your retirement planning. Over the last 2 decades, retirement planning has assumed a lot more importance. Firstly, cost of living has gone up and you really require a solid nest egg to take care of your sunset years. Secondly, with better healthcare facilities average life expectancy has gone up sharply. That means that you need to provide for more number of years without a steady income. Lastly, most individuals prefer independence and privacy even after their retirement. Hence you need to plan your corpus accordingly. There is one more thing you need to remember; Retirement planning is unique in a variety of ways. While it is also a financial allocation for the future, retirement planning has some unique considerations. Here are 6 such considerations:
Striking a balance between lump-sum and annuity while financial planning for retirement.
This is perhaps the most important aspect of retirement planning. In case you choose to stop working after your retirement then you must ensure that your retirement corpus can take care of your regular monthly requirements as well as your emergency and social requirements. Retirement plans are normally devised as a mix between lump-sum flows and annuities. Your annuities should be structured in such a way that they are secure yet generate the maximum returns for the given level of risk.
How much money do I need to retire?
This is a million dollar question for each one of us. Obviously, you cannot be certain about how much money you will require each month after 25 years but you can make some reasonable assumptions. Here are a few pointers. Firstly, be liberal in inflating your costs into the future. If actual inflation turns out to be lower, you will only be better off. You surely do not want to end up with a shortfall. Secondly, be conservative when it comes to your long term returns. Remember interest rates are going down and that means debt returns could go down. Proportionately, you could see equity returns will also go down. It is better to err on the side of caution. Thirdly, keep monitoring the gap on a regular basis and talk to your financial advisor if you find the reality at divergence with your original plan.
Plan to start your retired life with zero debt.
From the days of Polonius debt has been a four-letter word. An important part of your financial plan should be to ensure that you are debt-free by the time you start your actual retirement. That includes your home loan, car loan, personal loans, multiple credit cards etc. Finishing off your home loan will give you full equity over your house while personal loans and credit cards are high cost of debt. You do not want a situation where the cost of servicing this debt is more than your yield on investments. That will mean negative spread for you. When you get your retirement corpus, ensure that your high cost loans are first paid off.
Ensuring a dynamic investment mix for your retirement plan.
The big question is whether you should be predominantly focused on equity or on debt. The answer will depend on how many years you have to retirement. For example, when you have 20 years to retirement you can well afford to be predominantly invested in equities. That will ensure that the power of compounding works in your favor. However, as your goal date approaches you must look to gradually shift an increasing proportion of your portfolio into debt. You must ensure that at least 1 year before your actual retirement your entire corpus is converted into liquid funds so that you can have liquidity without impacting value. While there is no scientific justification for the (100-age) formula for asset allocation, it broadly captures the gist of the challenge.
Don’t ignore the tax considerations in your retirement plan.
Your retirement corpus has to be meaningful in post-tax terms. Many people believe that since the government offers attractive tax exemptions for senior citizens, they need not worry about tax. But there are other considerations too. Firstly, ensure that your retirement portfolio is not churned often as it will have tax implications. Prefer growth plans when you are planning for the long term. When debt funds pay out dividends they are tax-free in the hands of the investor but they are subject to DDT at source. You will end up bearing an unnecessary cost. You will be relatively better off if you pay long term capital gains tax on your debt funds after considering indexation. In case you have allocations to endowment insurance plans and PF, you do run the risk of these products shifting to the EET format from the current EEE format. That means in the year of retirement the redemption will be treated as income in that year and taxed.These tax considerations can make a vast difference to your retirement corpus.
Make intelligent use of insurance post retirement.
When you are planning your retirement prefer the combination of term life plans and mutual funds over endowment policies. You will bear a lower load and also earn better returns. Continue your life cover even after your retirement so that your spouse has a sense of security and will be taken care of in your absence. Secondly, ensure that you have adequate medical insurance for yourself and your dependent family post retirement, including the requisite riders thrown in. In case you have a company-sponsored health cover, take a personal cover well in advance to lock in better premium rates. Also ensure that your assets and property are insured to avoid any nasty surprises.
Retirement planning is not a simple process, so is mutual fund investing for it which requires extensive research. Allow our investment engine ARQ to help you with investments. This investment engine adopts an automated process free of human bias to match the best mutual fund for retirement planning.
Your retirement is unique as it needs to plan a phase when you will be depending on the wisdom of your past investments. The better you plan it, the better off you will be!