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Session 26: Life Goal 3 - How to Plan your Retirement

We are glad to have you with us for our twenty-sixth session - Life Goal 3 - How to Plan your Retirement

Alright so let's get started...

Many of us work hard all our lives to earn more, so as to give a better lifestyle to our families and provide for their financial goals. But it often happens that planning for one of the most important goals - which is retirement - is ignored or simply delayed.

You see, if you wish to enjoy the standard of living that you are enjoying at present even during retirement, you cannot ignore planning for retirement or put it off to another day. The more you ignore or delay, the more difficult it becomes to counter the inflation bug later.

Noel Whittaker (an eminent financial wizard who has authored several books) has rightly said, "Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing... those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it."

So taking cognisance of these words of wisdom, in this session of money simplified we'll guide you to the path of rich retirement. We will tell you the ways to meet your dream of comfortable retirement and all the measures you should take while planning a hassle free retirement.

First, you need to ask yourself some important questions...

Questions you need to ask yourself while planning for your retirement

When you are jotting down important questions that need to be answered honestly, involve your family. You see, involving your family, especially your spouse is vital while you plan your retirement; because together, you can have better clarity on how and when you want to retire.

In order to live a comfortable or a blissful retired life, here's a list of questions you both should introspect while planning for the golden years. First...

Let's take the first one...

  • When do I want to retire?
    While you decide on this, you need to be realistic. You cannot merely set an ambitious target to retire early. It is imperative to take into account the financial responsibilities you are shouldering and the financial goals that you need to fulfil for your family, such as - buying a dream home (but within your means), children's education, their marriage, etc. ...and then see what you own at present and can build in future to achieve these goals. This will help you recognise the gap between reality and your dreams.

  • How long will I live?
    As you may be aware, the average life expectancy of people in India has increased to 70-75 years of age. This table can serve as a useful reference...

    Average Life Expectancy in India (Age wise)
    Age Life Expectancy Age Life Expectancy
    5 69.7 55 75.4
    10 70.1 60 76.7
    15 70.3 65 78.5
    20 70.7 70 80.7
    25 71.2 75 83.7
    30 71.7 80 86.8
    35 72.2 85 90.3
    40 72.8 90 93.9
    45 73.5 95 97.8
    50 74.3 100 102.0

    While that's good, you have to take into account the fact that old age and health issues go hand in hand. And with the kind of stress and challenging conditions that we are witnessing around us today, we often see people being a victim of some or the other health related problems as early as in their 40s, which impact their lives. Do not forget, you may need to service your retirement for many years and that too with low or no income.

  • What is my monthly basic expenditure?
    You see, calculating your present monthly basic expenditure is the key to predicting the future corpus you'll require when you retire. This is because; during your golden years of retirement you must have a sufficient corpus which can at least maintain the standard of living that you enjoy at present.

    Say, currently if your monthly basic household expenditure is around Rs 1 lakh, you should also consider other additional expenses that you may incur every month: on medicines, fuel, phone bills, life style, entertainment, etc. This will help you gauge your retirement needs well. And do not forget to account for inflation, because, as it has an effect of eroding the value of money...the sum of Rs 1 lakh which you are defraying at present, may be insufficient in the future.

    Through experience we can say that, often, since inflation is not accounted optimally, many individuals encounter a challenge during their golden years.

    So, on that note you need to ask yourself...

  • What will be my cost of expenditure in the future?
    To answer this, take an optimal rate of inflation. Since 1957, Inflation in India has grown at an average of around 7.5%, while over the past 10 years inflation has grown at an average of around 8.8%.

    If Inflation grows @ 8% p.a.
      Current After 25 Years
    Monthly Expenditure (INR) 1,00,000 6,84,848
    Value of Money (INR) 1,00,000 14,600
    This is for illustration purposes only.
    (Source: PersonalFN Research)

    So, if inflation has to grow at say 8% p.a. the sum of Rs 1 lakh which you are expending monthly today, may turn to Rs 6.85 lakh after 25 years. Or in other terms, the value of Rs 1 lakh kept in your safe would be just around Rs 14,600.

  • Do I have enough contingency corpus?
    Taking inputs from one of our earlier sessions of Money Simplified on Planning for Contingencies, you also need to examine this very carefully. You see, one cannot avoid an uncertainty, which may knock on your door without informing you. Thus you have to be well-prepared to manage it. Keeping aside 6 to 24 months of your monthly expenditure (including your EMIs) is always advisable to build a contingency reserve.

  • How much should I provide for my health care and medical needs?
    As you may be aware, with growing age your medical needs may also increase; so you need to account for this while planning for your retirement. Here as well, you have to consider inflation, which in healthcare has been around 10%.

    If inflation on Medical grows @ 10% p.a.
      Current After 25 Years
    Annual Expenditure (INR) 1,00,000 10,83,471
    This is for illustration purposes only.
    (Source: PersonalFN Research)

    So, say you are spending Rs 1 lakh annually today on medical needs and an average rise in healthcare inflation is 10%; then after 25 years, you'll require a sum of Rs 10.83 lakh for annual medical needs...and that may increase with your age as well.

  • What do I own and owe?

      Assets Liabilities
    Self-Occupied House N.A. N.A.
    Second House  
    Housing Loan  
    Stocks / Mutual Funds  
    Fixed Deposits / Bonds / PPF  
    Credit Card Dues  
    Gold Bars / Jewellery  
    Borrowings from Friends  
    Ancestral Property / Land  
    This is for illustration purposes only.
    (Source: PersonalFN Research)

    In the retirement planning process it is vital to take cognisance of your assets and liabilities. While assets are what you own, liabilities are what you owe; which you need to repay before you retire to live a stress-free retirement. Therefore, list the assets and liabilities down. All your investment in shares, mutual funds, bonds, fixed deposits, gold, ornaments, ancestral properties, land, etc. are your assets, provided you do not have any loan or encumbrances against them. Remember, you should not consider your self-occupied house as an asset, since it's your primary home - a house where you are living with your family. The second house of course can be considered as an asset, provided it is free from encumbrances. You should classify which of these assets you would keep for your retirement and which of these you would pass on to your heirs. And as far as liabilities are concerned, of course, since you may not want to pass them on, you should make sure that all your liabilities are repaid as soon as possible.

  • Can I generate cash inflows during retirement?
    You see, while you may have invested in physical and financial assets, you have to assess which of them can generate cash inflows for you during retirement. For instance, the second house that you own and have not passed on to your legal heirs can be one vital medium through which you can generate yield through rental income. Likewise, if you have invested in PPF (Public Provident Fund) or may have even contributed to EPF (Employees Provident Fund) during your working years as a salaried individual, you can expect to get some cash flows in the form of annuity or pension during retirement. Also if you are in receipt of gratuity or investible surplus in the form of bonus, you should deploy such money in safe investment instruments that can provide decent appreciation over time and generate regular cash flows during your retirement.

  • What do I desire to do during retirement?
    Many a time most individuals after having retired wish to travel and see places across the world at least once a year. But mind you, this can be an added expenditure and thus if you wish to do so, you have to plan it well. As inflation erodes the value of money, the cost of travel is also bound to go up.

    If inflation on Vacation grows @ 10% p.a.
      Current After 20 Years
    Annual Expenditure (INR) 1,00,000 6,72,750
    This is for illustration purposes only.
    (Source: PersonalFN Research)

    So, say a sum of Rs 1 lakh that you expend today on your travel for leisure, is expected to grow to Rs 6.73 lakh if inflation on vacation grows @ 10%.

After having asked yourself relevant questions to plan your retirement prudently, you have to also list down which investment instruments would be suitable for you in accordance to your risk profile.

Suitability of Asset Classes

Here you have to recognise the risk-return trade of every asset class and assess if it fits into your risk profile. And while expecting returns from asset classes you need to be realistic. You cannot expect equities to deliver 30% growth every year, or you cannot always expect to make a huge gain like your neighbour did from his investment in real estate. So, here is a chart that can be of help...

Risk Return Trade off
Risk Return Trade off
(Source: PersonalFN Research)

Risk-Return Trade Off = Potential of returns correlated with the risk of respective asset classes. The potential of a return rises with the rise in the level of risk.

Looking at the chart, you can figure out that an asset class like equities has High Risk-High Return characteristic and debt is known to be a Low Risk-Low Return generating asset class.

But before you invest, take into account the following points...

  • (As mentioned earlier...) Relate each asset class to your own risk appetite and investment time horizon. (You see, although you may have a high risk appetite, you should not invest in risky asset classes if you are just a few years (i.e. 2 or 3 years) away from your financial goal.)

  • (While you may maximise your return by taking maximum risk...) Do not forget to allocate your assets to minimise the level of risk for a certain level of return expectation

  • (As allocation across asset classes is the best strategy to diversify your risk, you should...) Maintain a fair level of diversification while you invest

Building a Retirement Corpus

  1. Start Early (The key to accumulating your retirement corpus is to start early. You see, if you procrastinate on the implementation of your retirement planning exercise, the lesser will be the corpus you will be able to build. Remember: The early bird gets a bigger pie.)

  2. (If you are not in a position to save and commit to your retirement planning exercise...) Do not hesitate to cut on unnecessary expenses (...such as weekly entertainment, leisurely vacations, etc. You see, cutting down on such expenses may help you invest more and reach closer to your targeted corpus for retirement.)

  3. Create an ideal investment portfolio (...Taking the learning from our previous sessions of Money Simplified, consider your risk profile to suitably allocate assets. You see, some assets like equities have the ability to offer you a decent inflation-adjusted return; while fixed income instruments can offer you safety. Likewise, gold can be a store of value and act as insurance for your portfolio. Mutual funds offer you various investment options across asset classes and can help you build a well-diversified retirement portfolio. But mind you, while investing, do a thorough risk assessment, considering your age and the time horizon you have before you retire. Once you have invested, a frequent review of your portfolio is necessary to timely re-balance if need be.)

  4. Invest Regularly (To achieve the targeted corpus for your retirement, it is vital to invest regularly in prudently selected investment avenues. Moreover, if you are in the prime phase of your earning life cycle and in receipt of annual bonuses; or have windfall income, or even otherwise ... such funds can go towards planning for your retirement needs.)

  5. (And last but not the least...) When you are already retired, look for regular cash inflows (You see, post retirement, you might not have any other source of income.

    • Liquidity will be the key concern for you. (So, you would have to rely only on your investments to help you manage your expenses during retired life.)

    • (Remember, during such times...) It may not be very wise to hold high exposure into equities (...due to the high risk involved. You should not be holding more that 25-30% portfolio in equity as an asset class.)

    • (On the other hand...) You should be invested in instruments offering a regular interest (...of annually say 8.0 - 9.5%. Therefore you could consider small saving schemes like Post Office Monthly Income Schemes, Senior Citizen Savings Scheme and Bank Fixed Deposits, etc. that can help you generate regular cash inflows. You see, they can act as a safe source to generate regular income from your portfolio. Moreover you can systematically withdraw your money from mutual funds to take care of your regular investments.

So to end our learning exercise today, we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

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Disclaimer: The contents of this document are only for informative purposes and are not to be used or considered to be an offer to sell or buy units of Franklin Templeton Mutual Fund schemes. This video is for information purposes only, provided on an 'as is' basis. Nothing in it should be construed as personal financial advice. You are responsible for your own investment decisions and you should seek advice concerning suitability from your investment adviser regarding any of the investments mentioned. The video is for personal non-commercial use only and may not be copied, stored, redistributed or broadcast in any way. We recommend you read the complete Terms of Use.

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The Retirement Planning Guide

The Retirement Planning Guide