Retirement Planning A Comprehensive Guide

Retirement is a certain event, and there is a good chance that you will live on even after you retire. As a consequence, you will incur expenditures long after you retire. In this case, the cost might be both expected and unexpected. Expected costs include home expenses, discretionary spending, children’s school or college costs, EMI outgo, savings and investments, and so on. Unexpected costs, on the other hand, include things like a medical contingency, a fund to compensate for job loss, and so on. As a result, it is critical to have a retirement plan in place to cover these costs. When you hear the phrase retirement planning, your mind may race with ideas that might land you in a pickle. 

However, in this article, we will walk you through the process of creating a retirement plan step by step. But, before we go any further, it is critical to understand why you should undertake retirement planning. An organised strategy equips you to deal with a variety of situations such as surpluses, deficits and crises. You understand how fast or probable it is that you will reach your retirement goals. Furthermore, you acquire control over your cash flows, income and costs, and the degree of risk required to fulfil all of your objectives. A retirement plan will enable you to create a full grasp of your life goals as well as describe the road to achieving them.

Living Expenses ― As long as you are generating a monthly income, it is simple to meet your costs. However, after retirement, you must have enough money saved up to spend the remainder of your life comfortably. Even after retirement, we must all shoulder the essential living expenditures. Given the fact that life goes on, the loss of our monthly salary or income might turn into a nightmare. The goal of retirement planning is to keep this nightmare from coming true. After retirement, few people get pension or gratuity. Even for those who do get them, the amount is usually insufficient to meet all their expenditures. You may ensure that your family’s standard of living is not jeopardised after retirement by planning and accumulating a sizeable retirement corpus.

Medical Expenses ― As one gets older, the likelihood of health problems and crises rises. With medical costs skyrocketing, you should be aware that it has the ability to burn a significant hole in your wallet. Even dental procedures these days can be very expensive. Mediclaim or health insurance coverage may not cover all your medical bills and gets expensive as you age. As a result, your retirement fund must be substantial enough to meet your own and your family’s medical expenses in order to prevent a financial crisis in your later years.

Inflation ― Inflation is defined as an increase in the pricing of goods and services. It gradually diminishes the purchasing power of your money. Furthermore, this rise will continue until you reach retirement age and maybe beyond. As a result, you will have to spend more money out of the pocket in the future for everything from groceries to transportation to housing. Therefore, if you don’t have a solid retirement plan in place that aims to develop an appropriate retirement corpus while taking inflation, life expectancy, rate of return and other factors into account, it will be difficult to meet all your retirement objectives.

Retirement Goals ― The objectives you want to accomplish during your retirement years are known as retirement goals. These might include travelling to new places or pursuing activities you have always wanted to try. In contrast, if you don’t plan and invest for all such retirement goals throughout your working years, they won’t likely materialise during your post-retirement years. As a result, having a solid retirement plan is critical.

Retirement Planning Steps

Step 1: Determining Retirement Corpus ― It is quite difficult to reach your destination unless you know where you are going. It is also crucial to have an objective in mind for retirement planning in order to live comfortably in your second innings of life. To calculate the corpus amount, you may need to make estimates and assumptions about your retirement age, life expectancy based on family history and health conditions, monthly costs, estimated rate of inflation, pre and postretirement rate of return on investments, and so on. You may then utilise these to determine the corpus amount needed for retirement. This is simple to accomplish with MS-Excel. However, you can do so by using the approach outlined below.

Calculating Real Rate of Return

Let us suppose the expected rate of return on investment is 9 per cent and inflation is 7 per cent. Real returns would be 1.87 per cent in this case.

So, when you reach the age of 60, your monthly living expenses would be ₹2.28 lakhs. However, you should keep in mind that certain costs, such as child education, will no longer be necessary after retirement. As a result, it is reasonable to expect that you would only require 70 per cent of your pre-retirement spending during retirement, which in our case comes out to ₹1.6 lakhs per month at the age of 60. Finally, we must compute the amount needed (retirement corpus) to be financially secure throughout our retirement years. The retirement corpus is computed as follows:

You will need ₹3.82 crore in your retirement account if you plug in all the necessary factors.

Step 2: Start Investing at the Earliest ― People frequently dismiss retirement planning because they assume they have enough time to retire. When it comes to retirement planning,most individuals fail to see that delay is their worst enemy. In fact, starting early assures that you have the time to increase your corpus without incurring any additional financial hardship. Your capacity to take risks declines as you become older. Starting late is detrimental since you will have less time to increase your retirement account. There is also a chance that you may fall far short of your goal. Let’s consider an example to see what we mean. Mohan Krishnan determines that he would require a corpus of ₹25 lakhs at retirement, and we will analyse the investments using different investment tenures of 30 years, 20 years and 10 years. The estimated return is 12 per cent across all scenarios.

1. In Case A, Krishnan must invest around ₹708 every month to reach his target corpus. However, as the investment tenure shortens, the monthly investment amount required climbs dramatically.
2. Case B requires Krishnan to invest ₹2,502 every month over a 20-year period, which is 3.53 times more than Case A.
3. Case C has a 10-year investment horizon and the needed monthly commitment amount is ₹10,760, which is 4.3 times more than Case B and 15.2 times higher than Case A.

As a result, the less time you have at your disposal, the more money you will need to save for retirement.

Step 3: Asset Allocation ― Exposure to several asset classes is critical when constructing your retirement portfolio. Asset classes such as equities, debt, gold and real estate each have unique characteristics that aid in maintaining the necessary balance in one’s retirement portfolio. Having said that, you should invest in various asset classes based on your risk tolerance and the number of years you have till retirement. For example, if your retirement is 10 years away, your retirement money can be invested mostly in equities, with 10 per cent allocated to Real Estate Investment Trust (REIT), 15 per cent to debt and 5 per cent to gold.

This should be done again after considering your risk profile. In contrast, if your retirement is 5-7 years away, having 40 per cent to 50 per cent exposure to equities would be great, with up to 30 per cent to 40 per cent in debt, 15 per cent to 10 per cent in REITs and 5 per cent in gold. However, if you want to retire in less than three years, you should sell your equity holdings and convert them to debt to reduce the impact of market volatility.

Step 4: Review your Plan ― Your retirement plan should be reviewed on a regular basis, at least once a year. By doing this, you can be sure that your retirement corpus goal is on track. Any changes in income, spending, retirement age and so on must be accounted for in the plan. Also, ensure that your plan takes into account any significant changes in the market condition. 

"Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money." –
Jonathan Clements

Writing a Will
It is not essential to wait until you have a large amount of assets to transmit or until you retire to prepare a Will. Life is full of surprises and uncertainties. As a result, it makes more sense to write a Will even if you are in good health since unpredictability comes with no warning. Additionally, having a valid Will spares your loved ones, who are already experiencing the emotional anguish of your absence, from experiencing additional financial and legal pain. Estate planning is the process of transferring assets from one generation to the next. Estate planning is essential for everyone, regardless of their net worth.

As a result, it is prudent to plan to leave assets behind from the moment you acquire them. People frequently assume that they are too young to make a Will or that they do not need to make a Will at all. However, you should be aware that living the world intestate (without a Will) might result in a variety of issues and arguments among your legal successors. You spend your entire life working to provide money and a stable income for your family members. But you can’t even comprehend the chaos and difficulty that may befall your loved ones as a result of your failure to prepare a Will for them.

Conclusion
Retirement planning is an important component of your overall financial planning. This is mostly due to the fact that most people’s regular income in retirement is fairly modest. As a result, retirement planning is crucial to counteract growing costs due to inflation and spend retirement stress-free. The above details will guide you for retirement planning, and if you follow the procedure step by step, planning for your retirement will become a breeze.

However, keep in mind that if you are unable to spend time or want assistance in developing an appropriate retirement plan, investing in the advice of an expert investment consultant will not be a waste of money. Keep in mind that retirement planning is a constant, lifetime activity that requires decades of dedication to reap the benefits. However, if completed, it will ensure that you have enough income each month to cover your day-to-day costs.