How and When Should One Start Retirement Planning?

Introduction

Change is the only constant in life. Everything evolves with time—whether it is your age, health, or employment status. The smartest approach is to be prepared for every stage of life, especially retirement when your primary source of income stops. This article will take you through the nuances of retirement planning in India, including investment options you can consider to build a strong retirement corpus.  

What is retirement planning?

Retirement planning refers to the process of ensuring a comfortable and financially secure retired life. This includes comprehensive financial planning through several key steps, such as evaluating current financial status, estimating future expenses, saving diligently, and picking the right investments to build a sufficient corpus for your golden years. 

Retirement planning is not just about managing your expenses in your post-work life. It is also about embracing your passion and fulfilling your long-held goals—whether it is starting your own venture, traveling the world, or buying a piece of land for farming. However, since you will not have a steady income during your sunset years, it is best to prepare for these expenses in advance. 

A well-thought-out retirement plan can help you: 

• Fulfil long-pending goals without depending on others
• Stay ready for emergencies, such as unexpected medical issues 
• Beat inflation and safeguard your purchasing power 
• Maintain or improve your lifestyle 
• Remain financially independent and walk into the sunset of life with pride 
• Leave behind a strong financial legacy 

When to start retirement planning?

There is a famous saying: “The best time to plant a tree was 20 years ago. The second-best time is now.” The same logic applies to retirement planning because investing is an integral part of it, and investments need time to grow. 

When you invest your savings early, you get several benefits. You give your money more time to grow through compounding, which means earning returns on the principal and the returns it generates over time.  This concept allows even small, consistent investments to grow into a sizeable corpus. For instance, a monthly investment of ₹5000 has the potential to give you more than ₹94 lakh in 25 years, assuming a return rate of 12%. 

Early retirement planning not only helps build a large corpus for the future but also offers financial advantages in the present. For instance, when you save and invest a certain sum regularly, you tend to start spending rationally. This financial discipline is a must for a healthy financial life. Moreover, if you choose tax-saving investments for building your retirement nest, you can reduce your taxable income during your working years.

Calculate your retirement corpus: Retirement Calculator- Calculate Your Retirement Corpus

The journey of retirement planning: Steps explained

Retirement planning is not a one-time activity. It requires consistency, discipline, and periodic review. Here are the steps involved: 

Step 1: Estimate the number of retired years

Decide when you want to retire. This may or may not be the standard age of 60. Next, estimate your life expectancy. This will help you understand the length of your retired life. For instance, if you aim to retire at 50 and expect to live till 80, you will have to prepare for 30 years of post-retirement expenses.

Step 2: Set retirement goals

Write down all the things you wish to accomplish once you retire. This must not only include your hobbies but also the standard of lifestyle you want to maintain. 

Step 3: Quantify your goals

Estimate the money required to fulfil all your goals and live a peaceful and secure retired life. Begin the math by estimating your monthly retirement expenses. Remember to factor in inflation and provide for emergencies like sudden health breakdowns.

Step 4: Invest to build a retirement nest egg

Invest your savings in smart financial products that can grow your money over time. Understand the features and risk-return profile of different instruments. Choose the one suitable for your age, risk tolerance, and financial goals. 

Even if you start investing a small amount, increase the contribution over time. Maintain a diversified portfolio of investments to balance risk and return. Lastly, ensure you monitor your portfolio regularly to align your investments with your goals.

Investment options to consider for retirement planning

India offers a wide range of retirement-oriented investment tools. Here are some of the popular ones:  

1. Employees’ Provident Fund (EPF): EPF is a government-backed retirement savings scheme designed for salaried individuals. Under this scheme, both employer and employee contribute a certain percentage of the employee’s basic salary and dearness allowance each month. The accumulated amount earns compound interest at a rate declared annually by the government.
2. Public Provident Fund (PPF): PPF is a government-backed long-term savings scheme that offers an interest rate set by the government and reviewed quarterly. Each year, you can contribute any amount between ₹500 and ₹1.5 lakh. Although the interest is calculated monthly, it is credited annually. PPF falls under the Exempt-Exempt-Exempt tax category, making your contributions, interest, and maturity amount tax-free.
3. Senior Citizen Savings Scheme (SCSS):  While PPF is open to everyone, this government scheme is primarily for individuals aged 60 and above. SCSS offers a fixed interest rate with payouts made quarterly. It is ideal for senior citizens seeking a steady income after retirement.
4. Mutual Funds: Mutual funds pool money from different investors and invest in multiple securities to generate returns. There are solution-oriented retirement mutual funds specially designed to support retirement goals. These invest in a mix of equity and debt. An Equity Linked Savings Scheme (ELSS) is another popular mutual fund option for retirement planning. It invests in equity and has the potential to offer capital appreciation in the long run. It also offers tax benefits under section 80C of the Income Tax Act, 1961.
5. Annuity insurance plans: Offered by insurance companies, these retirement solutions require you to make a lump sum or periodic payments to your insurer. In return, you get guaranteed payouts either immediately or at regular intervals. Some annuity plans also offer death benefits, ensuring your family receives financial support in your absence.

Additional Read: 5 Investment Options in India for Retirement Planning

Conclusion

“How to plan your retirement?” – The simple answer is: with careful planning!

Retirement planning is a must to ensure that you enjoy your golden years of life with dignity and independence. The earlier you begin, the better it is for your future. By setting clear goals, investing for them, and reviewing your portfolio regularly, you can maintain or even improve your standard of living despite not being employed.