Ranjeet S Mudholkar
Retirement refers to the end of working life or, in other words, end of regular source of income for an individual. It may happen either voluntarily or once one attains a certain age in the organised sector, often termed as superannuation. In this case, he will get some benefits which will take care of his needs during the post-retirement period.
Traditionally, in the organised sector, retirement benefits like gratuity or pension have been paid as defined benefit plans where the liability to pay the same lies on the employer. This system is increasingly being replaced by defined contribution system wherein both the employer and employee are expected to make a contribution towards the accumulation of a corpus as corporations and governments across the world are finding it difficult to manage the liability by defined benefit plans.
In India, the average lifespan has increased due to improved medical and healthcare facilities. Along side, there is also growing trend of breaking joint family structure, which leaves retired couples dependent on the strength of such accumulated corpus and little support from other sources. The average life expectancy is already in the region of 70 years. If the current trend continues, by 2050 of an estimated 1.6 billion population, over 9 percent, or about 150 million, will be ageing. For the economic strength that India has today, it would be unthinkable to secure the financial well being of a major chunk of this expected number.
The scenario above clearly calls for an approach wherein one should take informed decisions regarding planning for retirement to ensure the financial well being post the working years, whatever profession he/she may be in. Thus planning for retirement assumes critical importance in the financial life of an individual and despite it being a long-term financial goal, it is prudent to start early as it is easier at that stage owing to the benefits of compounding.
Retirement Planning is an exercise which requires investment discipline and regular monitoring. The following important points must be kept in mind while planning for retirement:
Start Early: It may be difficult to plan retirement at the beginning of the career, but it is practical to start at a younger age. A person has higher risk bearing capacity to enable him earn suitably higher returns. The effect of compounding helps accumulate a sizable retirement corpus with the small streams of savings invested. A later planning will require a bigger effort to accumulate the same corpus as one would if he starts early. Besides, at later stage usually people have reduced capacity to take risks, which may hamper the earning of optimum returns from investments made. As an illustration the following table explains this aspect, where a required corpus of Rs 1 crore at the age of 60 is sought to be accumulated through monthly investments in a mix of assets giving an overall return of 12 percent per annum.
It can be clearly seen that all other factors remaining the same, saving Rs 1,815 per month at the age of 25 would be far easier than saving 21,010 per month at the age of 45 when the financial liabilities are also expected to be more.
Set clear retirement goals: One should be clear about the expenses in relation to the income earned. The expenditure post-retirement and the lifestyle that one would like to maintain will give an idea on how much money is required as corpus on retirement and what quantum to be invested periodically at an expected rate of return.
Be disciplined: Since retirement is the most distant goal, the other short-term goals might take precedence and one has the tendency to dip into retirement savings for fulfilling other goals. Also, the investment discipline should be religiously maintained at a robust scale to achieve the designated retirement corpus.
Approach a financial planner: Many people do their retirement planning by themselves without a wholesome understanding of needs at the time of retirement and in the post-retirement period. Engaging a certified financial planner or CFP professional will help identify the goals and suggest strategies to achieve them. Such professionals are adept at taking all factors into account while crafting a wholesome Financial Plan, the retirement planning being an integral part of the same.
India's population has an average age of over 25 years. The retirement planning principle as well applies to the state where the correct and prudent steps initiated would see through conveniently a period after 40 years when over 15 crore people would aspire to spend the next 30 years of their retired life in the peace of financial security. The state would also be absolved of a huge incumbent social obligation. The tenet therefore is to "start early, invest regularly and sleep peacefully".
The author is a Certified Financial Planner and Vice Chairman and Chief Executive Officer, Financial Planning Standards Board India (FPSB India). The views expressed here are personal, and do not necessarily represent that of the organization.
Updated Date: Dec 21, 2014 02:07:14 IST