Planning for your retirement
An average person works for about 30 years and retires at around 60 years of age. Given the advancement in medicine and healthcare, we should plan for another 30 years post-retirement. In the modern nuclear family system, the elderly mostly live alone, paying their bills and managing their households by themselves.
- If you retired with Rs.1 crore today….
- 30 years later it would be as if you had approx Rs.13 lakhs.
*Assuming inflation at 7%p.a. Rs.1 crore discounted at 7% for 30 years, would amount to Rs.13,13,671.
The biggest challenge in retirement is inflation. The income stops, but the expenses remain and grow.
Retirement planning involves two distinct phases.
1. ACCUMULATION PHASE
- The accumulation phase is the building of assets, by saving and investing in the earning years.
2. DISTRIBUTION PHASE
- The distribution phase is the use of assets, by ensuring that retirement is comfortably funded as long as one lives.
Without an adequate amount of retirement assets, investors are unable to beat inflation. Many retirees realize that theirs assets are too small to generate adequate income.
INFLATION: The Silent Killer
Monthly expense of say, Rs.1 lakh at retirement wil balloon year after year.
The distribution phase begins when we retire. We now depend on the retirement assets to generate adequate income. The focus now shifts from growing the value of the corpus, to the regular income it should generate.
Distribution phase requires careful management of the retirement assets, to generate an inflation-adjusted income over a long period of time.
Shift in preference…
In the distribution phase, you are drawing down some of your assets, to fund your expenses. You may need income assets to generate this regular income. You should allow the rest of the assets to grow in value, even if modestly, by holding a small portion in growth assets.
Asset allocation is your key strategy in both phases of retirement planning. Your goals are different in both phases, so the combination should also be different.
Building your Portfolio
During accumulation you primarily need growth, but you also want some downside risk protection. A predominantly growth oriented portfolio shall endeavour to serve this need.
During distribution, you primarily require sufficient income to meet your expenses. A predominantly debt oriented portfolio shall endeavour to serve this need.
You should review your portfolio periodically in consideration with your risk return profile and achieve your retirement goal.
Use the Peak income to Save More
It is ideal if we began early….But in reality, we will find ourselves being able to save more, as we age. In our peak earning phase,many of us may be able to even save 50% of the income. Small amounts saved in early years, topped up by large amounts saved in later years, will help accumulating a large corpus.
Investing systematically, stepping up the amount every year, and adding lump sums to it whenever we can is a good strategy.
Build Big; Build Aggressively
Accumulating adequate retirement assets is a challenge. We can only save a portion of our income, even with the best effort. But to retire comfortably, we need those assets to generate an income that completely funds all expenses, after inflation.
At 7% p.a. your retirement assets will grow into Rs.61 lakh
At 15% p.a. your assets would have grown to Rs.3.46 crore
Saving alone won’t take us the distance. We need an aggressive investment strategy to build a healthy retirement corpus.
Begin Early OR Build Big
Begin early or build big…
- 30s:-Those in their 30s are too busy with other priorities.
- 40s:-In the 40s there is a nagging worry, but most live in denial.
- 50s:-In the 50s there is a sense of urgency and desperation.
- 60s:-By the time it is the 60s,it is too late.
A good retirement plan should begin early. Or should make-up for lost time sooner, then later.
Thinking about retirement as the time to live frugally is so old-fashioned. The new-age retirees look forward to a second innings. An innings filled with travel and discovery; pursuit of new interests; and a life of joy and dignity.
The nagging question however is, can I afford it? With sensible planning, a happy retirement is well within reach for most of us.
This Information is awareness of Mutual Fund and general understanding. Also not intended to be as offer or solicitation for the purchase of sale of any financial product or instruments. Reader of this article are advices to take independent professional advice for before investment.
Mutual Fund Investments are Subject to market risks, Read all scheme related document carefully.