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Our parents took care of their parents in old age, probably we would take care of our parents too. Would our children take care of you as well? If your answer is YES, then you need not read further. However, if your answer isn’t a resounding YES, then you have work to do.
While saving for retirement may not be at the forefront of your mind, it should be, no matter how old you are or where you are in your career. Even if you have Rs. ZERO saved, now is the perfect time to begin stowing away money for you financially secure retirement.
Do I have enough to retire
In general, humans tend to do nothing unless prompted. The hardest action is also the most effective one —save more. The more you save, the earlier you start, the more you’ll have when you retire. Whether you seek out a financial planner or use GOOGLE, the idea is the same: Start saving something. Rather than trying to get it right, keep it simple and get started. Questions as how much to save, where to save come later. The idea is the “progress”, not the “perfection”. There is no perfect retirement plan, however, these 5 steps would ensure your progress towards a financially secure retirement.
1. Start Saving — no excuses
The most important step in saving for retirement is starting. Many of us, who want to retire as millionaires have no idea how to get there, and others never get started saving because “one must have the perfect plan right from the start”. Let’s get this straight, there is no perfect plan! Progress towards successful retirement is to start saving some. Something is better than nothing, but nothing is better than absurd. So, start saving and invest your savings as per your risk appetite and risk-adjusted return. If you are in the early stages of your career you can take more risk (via equity investment), if you are closer to your retirement, you should emphasize more on the safety of your investments. Retirement nest must have different colors of eggs, under no circumstances put all your eggs in one basket!
2. Set periodic goals, not a random number
Although you may strive to save up a crore for retirement, set smaller, regular goals, not a random final amount. While there is no one number one should have saved when we retire, it is important to set a target, so you know if you’re headed in the right direction. For instance, set the goal to have ‘x’ amount saved by age 'y.'
Rule of thumb says you could withdraw 6% from your golden nest (retirement fund) every year for it to last your lifetime. Lower the withdrawal rate longer the nest will last.
The first step is to determine a savings goal, based on your intended retirement lifestyle and the number of years you expect to live in retirement (subtract your age from 85). Make sure to take the lifestyle changes of retirement into consideration. For example, your transportation costs might decrease, since you’ll no longer be commuting to work, but the cost of utilities might go up as you will be spending more time at home. Your tourism expenses could rise, if you plan to travel through your retirement, going to places you always wanted to. Your healthcare cost would be higher although you may not have to financially support your kids.
Rule of thumb, 60%-80% of your current expenses would suffice. Effectively one should aim for 20X of your expenses in the nest, closer to the target, lower the adjustments required post-retirement.
3. Balance paying off debt with saving for retirement
While you may want to set aside as much as you can for retirement, you still need to take care of present financial needs, like paying off debts. However, there’s a caveat to this. While it may sound counterintuitive, aggressively save for retirement rather than racing to pay off loan debt. The tax breaks and compound interest that retirement contributions offer is worth far more than the interest saved by accelerated loan repayment.
Caveat: Housing & Education loans qualify for tax breaks. You must pay off your credit card dues, personal loan, auto loans etc.
4. A Disciplined Investment Process
Retirement investing should be a disciplined, integrated process:
- Plan your retirement and determine your priorities
- Select asset allocations based on historical probabilities that can deliver the target return
- Invest with low-cost funds; remember a penny saved is a penny earnedSaving as much money as you can, for as long as you can, is key.
5. What to do with the saving / Where to invest
Below are few investment options, everyone should utilize for the reasons of reasonable risk adjustment returns, some with additional tax benefits.
- Top off your EPF contributions (At least 12% of your salary, more the merrier). Investments up to 1,50,000/- year qualify your tax saving purposes under Sec. 80C of IT Act.
- Invest regularly in National Pension Scheme (Must to have Tier-1 account & good to have Tier 2 account). You may choose your fund manager and investment options (equity, corporate debt and government debt). Investment up to Rs. 50,000 every year in Tier-1 account of NPS, qualifies for additional tax saving under Sec. 80CCD of IT Act.Tier-2 acts like a low-cost Mutual Fund, you can choose to park your short-term surplus funds here, withdraw it as per the need.
- Open an account under Atal Pension Yojana, you could opt for monthly pension ranging from Rs. 1,000 – 5,000 by making monthly contributions directly from the bank.Note: Maximum entry age is 40 years.
- Get insured (Must have Term Life Insurance and Health Insurance).
- Term insurance tenure should cover your earning life only. No need to take term insurance until 80 years of age. It is insurance, not an investment. ULIP plans are not for insurance.
- Getting health insurance at later stages of life becomes difficult and costly, start early, choose the coverage as per your requirements post-retirement. Health insurance also qualifies for tax benefit under Sec. 80D of IT Act.
- Add-ons: Critical Illness Plan, Hospital Cash Benefit Plan and Accident Insurance, if you want more security over your health costs.
- Contribute fully to PPF account, the current limit of Rs. 1,50,000 per year.
- Invest in direct mutual fund plans, not through an agent/bank.A typical regular equity mutual fund is 1% more expensive than a direct plan. 1% every year of your wealth goes away at a compounding rate. Your wealth can easily get a boost of 20-30% if invested in directly. You may choose between equity/corporate debt/government debt plans as per your risk appetite.Even low-cost Equity ETF are also good investment options. If you want to invest in Gold, buy gold ETF/paper gold. Remember expense on Jewelry is consumption, not investment. You don’t want your investment to lose 10% just on investing!
- Unit Linked Investment Plans (ULIPs) qualify for tax advantages, additional cost associated with ULPIs make it a total NO-NO option.
Once you have made your financial plan and invested with discipline, you can answer the “Do I have enough?” question with confidence. “Yes, I have enough!” If you’re asking the question, “Do I have enough to retire?” you probably need a financial plan.
JAYESH KUMAR
General Manager- Planning & Chief Economist