Tips To Keep Ahead Of Your Retirement Planning
It is important that you keep yourself up to date with your personal financial planning and monitor your investments
Photo Credit : BW Archives
One of the best ways to live securely is to plan ahead - whether it is for college, a wedding, a house or for one's retirement. It is a misconception that retirement can be taken care of from pension and other aids. Just because one is growing old, one does not have enough reason to squash their desire to live a comfortable and luxurious life. Instead of depending on pension amount from previous years' services, one can simply use the golden method - financial planning. Sound financial plans and investment never fail. We provide you with some tips on how to plan for your retirement long before you actually retire:
1. Save at least ten per cent of your income per month: It is critical that every working individual (whether self-employed or employed under someone else) should save some part of their monthly income for the purpose of retirement.
In India, every person who has a regular job is required to contribute 12 per cent of their basic salary and an equal amount of contribution is required by the employer to the EPF Account. This is a great way to build a nest egg. The EPF scheme mandatorily requires such contribution to retirement savings which include the Employees' Provident Fund and the Family Pension Scheme. Such a saving accrues interest and whatever be the amount of contribution it will naturally inflate up by the time of retirement.
On the other hand, someone who is self-employed, like those running a small or medium term enterprise not governed by the EPF schemes should systematically save on their own - at least 10 per cent of what they earn every month. This will naturally help them organise their retirement more easily.
2. Start saving early: It is vital that any person starts saving as soon as they start accruing a regular income. Reports say that if a person starts saving at the age of 25, then the amount that he saves for the next five years will account for more than forty per cent of his total retirement fund. When we think logically, it also makes sense. With age, our responsibilities increase whether it is of a spouse, children, family or health and so do our expenses. Therefore, our ability to save a lot reduces. Hence, it is wise to start early and allow the amount and the interest, accumulate for a safe and comfortable retirement.
3. Increase investments as and when your income increases: One of the cardinal rules of saving is that you do not allow your amount of saving to stagnate as your income increases. Simple economics tells us that increase in income should lead to a greater proportion of increase in savings than consumption. What happens in reality is that because of inflation and the consequential increase in cost of living, it becomes difficult for a person to save more. However, it is significant that savings is not deterred. For example, if a person's income increases by 12 per cent, the inflation rate is somewhere about 6 per cent, the concerned person can still save at least the four per cent of the incremental value. If a 30-year-old with a monthly salary of 50,000 starts saving 10 per cent (5,000) for his retirement every month in an option that earn 9 per cent per year, he would have accumulated 92 lakh by the time he is 60. Now, assuming his salary increases by 10 per cent every year and he raises his investment accordingly, he would have a gargantuan retirement corpus of 2.76 crore. If he does waits five years to raise it by 50 per cent, he will have 1.93 crore.
4. Do not use the retirement fund before you retire: The retirement corpus is your golden hen. The prospect of using or rather massacring it is very attractive but the consequences are disastrous. Every time one changes their jobs, their retirement planning is at a dire risk. You are given the choice to withdraw your current PF account or transfer it to the new employers' fund.In case they decide to choose the former, the saved corpus will be required to withdrawn. This would mean that the benefit of further interest and compounding would be lost. Therefore, it would be wiser to instead complete all formalities and transfer the corpus the new employers' EPF scheme. Don't be scared of the little bit of paperwork - these are formalities, which require your time and effort and go a long way in keeping your retirement secure. For example, a person with a basic salary of 25,000 a month at the age of 25 can accumulate 1.65 crore in the PF over a period of 35 years. This is based on the assumption that his income will rise by 10 per cent every year. However, not a lot of people reach the one crore mark - only because they withdraw their PFs when changing employment.Also, such withdrawals within five years of joining the PF scheme is taxable; Therefore, there will be two setbacks - one a flush of sudden liquidity will trigger higher consumption and second, you will have to pay taxes.
5. Cover your bases for different lump sum expenditures of life: As mentioned earlier, with age responsibilities increase and so do expenses. There will be college loans to pay off, a wedding, children, house, children's education, responsibility of parents and so on and so forth. That is daunting list but as long as you plan ahead and don't take impulsive decisions, you will be okay. How to do this? Create funds for each purpose and monitor them closely - put in money regularly but do not withdraw anything. This will not only help you save for each purpose but also, ensure that you do not spend an obnoxious amount, which you could have saved for retirement.
6. Stick to your debt repayment plan: In case, you have drawn loans whether it is a college loan or mortgage on house or car, stick to their repayment plan and do not default. This can otherwise create a huge financial burden on you, can cause you stress and hinder your comfortable life after 60s.
7. Insure yourself properly: Be careful and draw insurance policies on everything and everyone vital in your life from a house to your own self. Otherwise, a burnt house can cause all the planning to go to zilch.
8. Plan your retirement expenses: It must not happen that you outlive your retirement savings. If you have 1.5 crore in your fund, it does not mean you take out all of it as soon you retire. Plan your withdrawals. For example, use only 5 per cent for the first two-three years, while the rest sits and gets interest. This is vital. You don't want to 80 and have no savings, depending solely on pensions. Pensions are mostly late and never enough.
To sum this up, the most important part of your planning is know your budget, save accordingly and spend accordingly. Do not forget everything you save compounds in a bank account and adds to your corpus. It is important that you keep yourself up to date with your personal financial planning and monitor your investments.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.