How long will you work? – Retirement planning

You put all your efforts during your working years, running around and getting things done and also fulfilling your responsibilities to your ageing parents or growing children. Hence, retirement is your time to fulfil your wishes whether its travel, contributing to a social cause or fulfilling your hobbies. That’s why in today’s time when we joined our work life, we don’t plan to continue it till 60 and now it is said that 40 is new 60, so are you prepared for it? Have you selected your retirement age?

Greater wealth tends to lead to earlier retirement since wealthier individuals can essentially “purchase” additional leisure. Generally, the effect of wealth on retirement is difficult to estimate empirically since observing greater wealth at older ages may be the result of increased saving over the working life in anticipation of earlier retirement.  No matter what is your targeted retirement age, planning it well in advance will help in making retirement as early and as stress free as possible. Also remember when you are out on planning, do not take advice from the one who never planned it. Let me help you with some of aspects which needs to keep in mind while planning for it

1. Plan Early, Start Early – I am sure in today’s time when people join their corporate life, most of them don’t plan to work there till 60. Early retirement is always there somewhere in back of our thoughts. Instead of keeping that thought behind start working on it. The one thing that all of us should do is learn how to save, save and save money because we do not know what future holds for us. Most of us when we start working, have limited responsibilities restricted towards our own self hence we have good opportunity to start working towards objective of financial independence in early stage of our career. With limited financial responsibilities, one can maximise his/ her saving. The early you start saving/investing, the more corpus you gather.
2. Spend Wisely – Spend on things which are necessary to have. Do not buy things to show off. Don’t get in to motto of spend first and invest later. Reconsider your utilities and level down your expenses to a bare minimum on transportation, food, utilities and housing costs (Use public transport, lesser domestic help, frugal food habits, etc.). Many people with early retirement ambitions funnel a major part of their income into savings and aim to live on less than 50% of their income. Avoid debts but a home loan could help save tax and is a key to cutting down expenses. Look for ways to bring in extra income or return on your current investments that can go directly into your early retirement corpus. Your expenses need to be in line and supportive of your financial goals because your corpus may not be able to withstand large withdrawals and this increases your likelihood of running out of money.
3. Quantify – Quantify your current net worth and future requirements. It might be difficult to note down all requirement at beginning of the career but try to quantify your present as well as future requirements as much as possible. Don’t just say that I want to be wealthy, define how much wealth you want. When we try aimlessly, we end up wasting our time and missing out on real wealth. Keep adding to your quantified goals as and when there is change. There are several online retirement calculators which projects how much an investor needs to save, and for how long, to provide a certain level of retirement expenditures. Some retirement calculators, appropriate for safe investments, assume a constant, unvarying rate of return.
4. Early commitment – As we should start investing early, we should also get in to commitment of debt at early stage of career so that we are debt free well before the age of 40. Think about getting loan free by 30-35 and plan accordingly so that one can have their dream home/dream car which is also liability free at right age. Also try to avoid bad debts like credit cards, personal loans as this kind of debts will only reduce your savings and increase your stress. Remember taking debts takes few minutes but paying it back takes months or years.
5. Diversify – Different assets carry different kinds of risk and return potential hence diversify you investment into various asset class like real estate, gold, FD, mutual fund, stock market, bank balance. Diversification of assets class also help in accommodating sudden shock in a particular asset class like sudden crash in stock market or sudden in dip in gold or real estate price. Be a patient and disciplined investor. Also keep you focus on the long term return and future of different assets.
6. Commission and fees – The money you pay as fees and brokerages every year compounds along with investment return over a period of time. Don’t let these high costs eat away your returns. Also check the cost (tax or charges) involved while withdrawing your investment.
7. Insurance – With increase in age, medical risk and expenses also increases. Check your health and term insurance requirements. With the age premium of insurance always increase so choose the right product well in advance so that you can save on higher premium and medical expenses. You may not be in the prime of your health in your sunset years and therefore, start early when it comes to building up the financial safeguard in times of emergency. This ensures that your savings and the returns from the investments made by you do not suffer due to medical contingencies.
8. Evaluate – Most of the time we chase higher returns without knowing the risk attached to it. It is important to focus on whole picture and not ignore the risk you carry on your investment. In search of high interest, never risk capital. Avoid getting influenced by opportunities that benefits only for the short term. Evaluate the performance of your investment on timely basis. Check CAGR which will give you better perspective of performance.
9. Discount – Don’t focus of absolute returns instead look for real returns. To arrive at real returns from investments always discount/adjust inflation and taxation from your investment returns. For e.g. Interest rate of FD : 6%, Tax Rate (TDS) : 10%, So Net Return = Interest (6%) –(minus) Tax rate (6*10%) = 5.4 %. Now let us inflation rate is 8 % , so the real return is Net return (5.4) – (Minus) Inflation (8) = -2.6%
10. Review – Most important point is review your investments and objectives regularly. Always be tactical and rebalance your investment to align with your goals. Also review your goals to factor in any change in lifestyle or life event / planning or economic policy or market volatility.