But, this Golden Age of your life is when your biggest challenges start – finances and health-wise. And experts state that you better start your planning in right earnest.
“Retirement demands meticulous financial planning to ensure that your golden years are fulfilling and financially secure,” says Anup Seth, Chief Distribution Officer, Edelweiss Tokio Life Insurance.
The key factors that should be considered when planning for your retirement is the cessation of your steady income and likelihood that your health-related expenses might increase.
“It is imperative to calculate the financial implications of increased expenses resulting from inflation and an extended post-retirement life expectancy,” advises Mayank Bhatnagar, Co-founder and Chief Operating Officer, FinEdge.
Thus, the retiree should opt for informed risk, aiming for a 2-3X inflation-beating return. Begin as early as possible to leverage the power of compounding, ultimately increasing the likelihood of achieving your desired outcomes.
Before we go into the financial aspects of retirement planning, there are some other factors that you need to consider for retirement.
“Pay off your mortgage before retirement to reduce expenses,” advises Bhuvan Rustagi, COO & Co-Founder, Per Annum. Other tips include staying healthy to minimise medical costs. Also, consider working part-time in retirement for income and mental stimulation.
A recent phenomenon among retirees is also that they want to pursue different passions like travelling, photography, and more.
Back to pavilion
“These factors together will set the direction for your retirement planning, including how much financial corpus you would need to plan for,” say experts.
Once you have identified your needs and therefore the corresponding financial corpus needed to fulfil those goals, determine your risk tolerance. This will help you identify the right wealth building avenues like guaranteed returns products, mutual funds, etc.
“Diversification of your portfolio is important. Allocate 35% of your funds in equity, 35% in guaranteed return options, 20% in security nets like insurance and 10% in riskier or illiquid assets like real estate, etc,” advises Seth.
In long-term financial planning, the disparity between a 12% and an 8% return can have a significant impact on the final retirement corpus, emphasising the profound impact of compounding. This impact should not be taken lightly.
“Keeping this in mind, if your retirement goals extend beyond a 7-year timeframe, then 100% of your investments can be in equity mutual funds. Resorting to government schemes such as FDs and PPF for long-term investments may compromise your financial goals because their lower risk is also accompanied by lower returns,” says Bhatnagar.
Informed risk is necessary to grow your corpus which outpaces inflation by 2-3 times. Of course, this requires a person to remain invested despite market volatility to realise these returns.
An interesting method of balancing risk is putting a percentage of funds equivalent to your age in debt and the remainder in equity. Simply put, as you age and your ability to earn income inches closer to conclusion, your portfolio can minimise the risk it takes on.
You should also consult financial experts in your financial planning for your retirement.
“Remember, the key is to start early, plan strategically, and adapt your plan as needed. Your effective pre-retirement planning will pave the way for a comfortable and fulfilling second childhood!,” says Rustagi.
“I believe a cardinal rule of retirement planning is to start early as it helps you harness the power of compounding for wealth accumulation. For those starting late, annuities and pension plans become viable tools to bridge the gap. Ultimately, a well-structured retirement plan serves as a safeguard against unforeseen expenses, providing the foundation for a comfortable and gratifying post-career life,” says Seth.
Inflation – a wasteful tax
Inflation has been called as a wasteful tax – one that takes but does not return. Experts give us some ideas on how to combat this silent killer.
“Invest in inflation-protected assets, like indexed mutual funds,” says Rustagi.
Also, increase savings regularly: Adjust your contributions to account for inflation.
Review and adjust expenses: Prioritise essential spending, consider flexible budgets.
Ignoring inflation in retirement planning can be disastrous. Not only will you require significantly larger amounts to maintain your current lifestyle, but your retirement fund will also need to stretch further due to increased life expectancy.
It’s crucial to consult an expert to plan the required funds, account for drawdown years, make inflation adjustments and leverage the power of compounding so that you can spend your golden years enjoying life without financial concerns,” say experts.
Tax and retirement
There are some tax avenues to reduce your financial burden post your working years.
“The extent of tax benefits differs among financial instruments,” says Bhatnagar. Typically, most tax-free investments involve large lock-in periods and tend to deliver substantially lower returns compared to equity. Keeping in mind the fact, that investing for retirement usually is for years or decades, taking some risk can result in accumulation of a far higher retirement corpus.
The best approach is to integrate tax-saving within the broader framework of retirement goals, allocating a portion of the monthly investment towards an Equity Linked Savings Scheme (ELSS) mutual fund.
Avoid the misconception that insurance serves as a viable tax-saving strategy. Recognise that insurance and investment are distinct financial mechanisms and should not be combined.
Manik Kumar Malakar is a personal finance writer.
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Published: 04 Jan 2024, 09:12 AM IST