How to do retirement planning?

Retirement planning is all about both financial and personal planning. After understanding the need for retirement planning, the next question is How to do it? People with insufficient knowledge are bound to make mistakes and blunders, while you cannot afford a mistake in such a long term goal that is crucial for your survival after retirement.

Once you know your target, it is equally important for you to have a way / guide to reach your target. Let’s discuss the process of retirement planning which will help one to live a stress-free and financially independent life post-retirement.

Steps in Retirement Planning

1. Estimating the amount required for retirement
2. Deciding right mix of Investments to reach that desired amount (upto Retirement)
3. Taking Tax calculations in consideration while investing and withdrawing
4. Investing in assets post – retirement and withdrawing the amount as required

1.    Estimating the amount required for Retirement Planning

For many people, Retirement is just about survival and living well while for others it is a time to live their life and cherish their dreams and goals like go on a world tour, do huge charity, etc. Whatever is your retirement goal, you have to keep in mind few very important factors while calculating the amount required for your retirement.

1. Age that you want to retire and time left for retirement planning from the day you decide.
2. Inflation – this is most evil thing that depreciates the value of your money. For eg: 1 Litre Petrol cost in year 2000 – Rs. 28/- per litre
   1 Litre Petrol Cost In year 2022 – Rs. 110/- per litre
3. Post-retirement rate of return – this is the return that your retirement corpus will generate after retirement. This is important because your returns after retirement will give you money for your survival and your dreams
4. Tax impact of your pre-retirement and Post – retirement Investments – this is important to know how much will you be able to take home after paying all the taxes, because tax is government’s right over your earning

Let’s understand this with an example

Mr. Ravi, a 32 years old Software Engineer, who is currently earning a handsome salary of Rs. 2 Lakh per month, wants to do retirement planning. He approaches bharatpaisa.com for the same and this is set of questions we asked him and calculated his amount required for retirement.

S.NO.	Questions	Answer
1.	By what age do you want to retire?	At the age of 50
2.	What is your monthly expenses right now?	Rs. 75 thousand per month (excluding EMIs and Child education)
3.	Any Specific Dream or goal for retirement and the amount required today for it?	A Retirement home in hill station – that costs Rs. 40 Lakhs today
4.	Expected rate of Inflation ?	6%
5.	Expected rate of returns from post retirement investments?	5%
6.	What do you want your retirement plan to cover or pay for?	Monthly Expenses and Retirement Home
7.	How long do you want your retirement corpus to pay for or survive?	Till age of 70 years

So, the amount of money required for retirement would be :

• Rs. 75,000 monthly expenses today will be Rs. 2,14,075/- per month after 18 years at 6% rate of inflation. The Retirement home that costs today Rs. 40 Lakhs will cost Rs. 114 Lakhs after 18 years @ 6% rate of inflation.
• The Retirement Amount required should be able to generate Rs. 2,14,075/- per month @ 5% rate of return (post – retirement) and also pay for a retirement home at the time of retirement. So the total Retirement Corpus required at the age of 50 = Rs. 440 lakhs approximately to meet both the retirement goals of Mr. Ravi.

Monthly Expense	₹ 75,000	monthly
Inflation	6%
Time to Retirement	18	years
Monthly Expense (at age of 50)	₹ 2,14,075	monthly
Time after retirement	240	months
Rate of return post retirement	5%
Retirement home (cost today)	₹ 40,00,000
Retirement Corpus required for monthly expenses	₹ 3,25,73,005.23
Retirement Corpus for Retirement Home	₹ 1,14,17,356.61

Don’t be bogged up by the calculation, we will soon put up this Retirement amount calculator on our website for our users. 😊

2.     Deciding right mix of Investments to reach that desired amount for happy Retirement strategy

After calculating the required amount of money for retirement, the next step is to decide where to invest. This is the most tricky part because after all it is your retirement that is at stake. Few points to help you decide the best investments for retirement planning are –

1. Diversify your investments – Don’t put all your eggs in one basket. Diversify diversify and diversify
2. Choose investments that generate inflation beating return
3. Make a mix of investments that are guaranteed and non-guaranteed (i.e. riskier but potential of high growth)
4. Pay off all your debts before retirement
5. Have a top class Health Insurance to cover for your medical emergencies (health insurance is a must to protect your wealth from unforseen expenses and it is better to go for the best one today – for more details, we will cover this topic in detail in next blog)

Few of the most preferred instruments for retirement planning are briefly covered below – just for your knowledge. Before choosing the right mix of investments, always consult your financial planner or advisor or if you can DIY (do it yourself), then do it with complete knowledge.

1.      Provident fund (EPF)

Provident fund is a government-managed investment by both employer and employee contribution. It serves as long-term savings to support an employee upon retirement. EPF is only for salaried people.

There is no single, lump-sum investment required. EPF is transferable from one job to another. 12% of the basic salary is required for this investment. There are certain benefits of EPF as follows-

• EPF has a fixed rate of interest an average of 8-9% which helps in the capital appreciation of money.
• The EPF contains a specific premature withdrawal rule, so we can get money in an emergency case.
• People invest in EPF because it gives a retirement corpus with a sense of security.
• The EPF provides a tax deduction under section 80C.
• EPF contribution = Employee’s contribution Employer’s contribution

2.      Pension Fund(NPS)

The national pension fund is an Indian central government initiative through which an Indian and NRI person can get retirement benefits. Investment in the NPS scheme provides a post-retirement income source for salaried and self-employed persons with an average of 8-10% returns.  NPS has an 18 – 60 years age limit for investment purposes.

There is a minimum NPS contribution of 500 Rs./ year but no maximum limit of rupees. In NPS at the age of 60, when you will get the retirement corpus you can withdraw only 60% of the corpus, and the remaining  40% you will receive as a pension annuity.  NPS has till retirement lock-in period. It is a long-term, flexible and risk-free investment for a post-retirement income source.

3.      Mutual funds (SIP)

A systematic investment plan is important for retirement planning for beating inflation with an average of 12-15% returns. A mutual fund scheme investment requires you to have a good risk appetite. It happens through SIPs. Mutual fund SIPs have no penalty charges in case of insufficient balance in your bank account and you can skip a month’s installment without any pressure.

But if you miss 3 consecutive installments then your SIP will be stopped. SIPs start with 1,000 Rs. and make more wealth in a long tenure through the power of compounding.  Generally, funds have no lock-in period. This  long-term high return investment will help to maintain your post-retirement expenses and lifestyle.

3. Taking Tax Calculations in consideration (very important in Retirement planning)

Taxes are a tricky thing to be covered in one go. So let’s discuss the taxation impact of various investment asset classes in another blog. We will sure cover this topic to give you a complete understanding and clarity so that you can make the right choice.

4.   Investing in assets post – retirement and withdrawing the amount as required

Many retirement investments that you had done for your retirement planning, will start maturing during the time of retirement and it is equally important to invest that sum of money in investments that are safe and yield decent returns with low taxation. It is also important that you get the right amount of money at the right time from your investments, as you have planned and also have a little money for your emergencies that no one can plan for in advance.  We have already covered post – retirement investment schemes in another blog for your exhaustive and complete understanding. We hope you will like it too.

Thanks for reading this article. Hope you liked it.

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