You are a responsible youth and hence, completely understand the significance of retirement and its consequences on one’s life. That’s why you have started saving diligently for your retirement because, obviously, you don’t want your sunset years to be boring and dull. In fact, you want them to be filled with love, laughter and lots & lots of travel! In short, you want to fulfil every dream of yours that you weren’t able to, due to your hectic work schedule.
However, if you are not clear enough on how and how much to save to lead a comfortable life after your retirement, it might lead to an inadequate or unrealistic plan that will not help you achieve your post retirement goals. You have to take several factors into consideration for a successful retirement plan. Rate of inflation is one such factor, as it will keep on messing with the value of your money every year, which means you will not be able to lead a lavish lifestyle to the extent that you always dream of.
We have enlisted few of the most important golden rules that will help you ensure that you can shape up your finances in a more fruitful way:
Set aside 10% of your salary for investments
This is one of the easiest, yet most rewarding steps towards successful retirement planning. It doesn’t matter how small the amount is, the compounding of even the smallest of contribution can make it a big lump sum in future. The sooner you start your investment, the better it will be for your savings.
For instance, if a 25-year old starts saving a fixed amount of her/his income every month, her/his first five years savings will account for 44% of the total corpus, if s/he retires at the age of 60 years. It’s important to understand here that the later you will start savings, the more you will need to invest. Let’s say, if you have started savings in your 40s or 50s, you would need to invest at least 20-25% of your salary to plan a comfortable retirement.
Keep on increasing your investment as your income increase
Perhaps you are already saving diligently for your retirement, but have you ever considered the fact that you should also increase your investment every time your salary gets a hike? It’s quite a natural instinct for us to put things off and, especially if they demand sacrifice on our part to secure a good future. However, it’s very important to match your investments with the gradual increase in your income, as not doing so can really undermine the value of your retirement corpus.
Let’s try to understand it with an example. If Neha is a 30-year professional, who is earning a salary of Rs 50,000 a month and is investing 10% of her income (Rs 5,000) every month - she would be able to create a retirement corpus of Rs 92 lakhs by the time she retires at the age of 60 years. Now, if she is getting a salary hike of 10% every year and is increasing her investment accordingly, she can easily create a giant corpus of 2.76 crores at the time of her retirement. However, if she puts it off even for the next 5 years and increase the investment amount after 5 years, she would be able to accumulate an amount of approximately Rs 1.93 crores. Hence, it’s important to utilize these annual boosters in your favour to secure a better amount for your future.
Don't take out money from your retirement corpus before the right time
Most of us don’t hesitate to withdraw our PF amount every time we switch jobs. It might be due to any reason, be it need of some extra cash, medical emergencies, etc. However, dipping into your retirement fund before the right time can severely affect the compounding rate of your savings. You would have never guessed but a person with even a meagre salary of Rs 25,000 can easily accumulate an amount of Rs 1.65 crores in her / his PF account over the years (assuming that s/he starts savings at the age of 25 years and retires at the age of 60 years and gets a salary hike by 10% every year).
Hence, you should never underestimate the power of compounding and try to avoid interrupting the flow of money in your retirement corpus - be it your PF account or your personal savings. You never know, how much of a gargantuan retirement corpus you can generate in the upcoming years.
Play safe and plan a systematic withdrawal to avoid unexpected costs
An increase in life expectancy and the ever-rising cost of living (not to mention, the inflation rate) hugely affect the savings of tomorrow’s retirees. It’s important to understand that even with a minimal inflation rate of 6%, the value your Rs 1 crore accumulated over the years will be reduced to Rs 29 lakhs. Besides this, Indians now have a much better life expectancy rate than before – owing to better medical conditions.
Hence, it’s essential for the retirees to understand the importance of a lesser draw-down figure in the beginning of her / his retirement phase which can be increased with the passing years. It will ensure that the retiree won’t have to worry about outliving their savings and face any financial issues in the coming future.
Save 20 times more than your current annual expenses
Last but not the least, make sure to create a retirement corpus accounting your current expenses and the amount you are going to need after 20 or 30 years (depending upon your current age). Although, there are a lot of expenses such as clothing and entertainment that are supposed to go down (depending upon the individual’s hobby and preferences), there would be certain expenses like medical & insurance, transportation, etc. that will go up. Try to add up all your expenses with the help of a retirement calculator and then multiply the result by 240, to get an idea of the approximate amount that you need to save for your retirement corpus. This way, you will be able to tackle any unforeseen expenses in future.
It’s always advised to use different rates of return while calculating your pre and post retirement expenses as inflation has a great role in affecting your costs post-retirement. Always double-check the information about your chosen policy from a reliable source, before making the final investment.
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