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They say “age is just a number”, well not really; It is more than a number; an ever increasing evil. Its annual increase besides making us older brings us closer to responsibilities, liabilities (loans, rents, EMIs, Insurance Premiums etc), stress and eventually to death. A lot is done to deal with the changes that show up when one turns 30, 40, 50, 60, so on and so forth. There is a fight to earn, earn more, make investments, plan and save for retirement. In the midst of EMIs, Loans and rents and Child expenses; one certainly overlooks the fact that they have to financially plan for irreversible and unavoidable truth called Old age. Retirement Planning is considered very trivial when one is young (25-30 years old) or even middle aged (35-50). This mindset has to change.
The fact that more and more children are moving out of their parents' house, for higher education or better jobs would alter the thought process of parents in the times to come. It would help shed their old school thought of depending on their children's income for survival after retirement. This advancement would surely bring both young and middle aged population to the realization that Retirement planning is indispensable in these uncertain and inflation struck times. Your needs on getting old might not increase but would definitely become a bit different. Medicines, hospital follow-ups, maintenance of healthy lifestyle (or at least the need to maintain one) would become a routine. Additionally, an alternate source of income would become a necessity to work out all the above mentioned changes. Therefore, Retirement planning is imperative, but the speculations surrounding each option one thinks of while planning for retirement makes it very confusing for the common man to digest.
To counter the confusing speculations, let’s look at some tips one needs to keep in mind before planning for his or her happy retirement:
The so called Young Generation never makes investments in the name of Retirement planning. As, for them, it is foolish to worry about retirement at the age of 25 or 30. But such thinking has to change. Investing early, say 30 years before retirement helps a lot as your corpus grows by great lengths. The time period of 35 to 40 years is good enough to allow your money to grow by at least 4 or 5 times. Let us understand how:
Suppose an individual aged 25 invests an amount of Rs. 1,00,000 every year for 40 years (till he retires) and the investment brings an average return of 8.5%. The amount is going to grow through compounding, so after 35 years the investor's money would become approximately 3.5 crore rupees. Now there is another individual aged 30 who starts investing the same amount (1 lakh) every year till his retirement age (for 35 years). The average rate of return is again the same, i.e. 8.5%. This amount after 35 years would become approx. 2.2 crore rupees. The difference of 1.3 crore rupees is quite substantial given the fact that the gap in investment was just 5 lakh rupees in the initial years i.e from the age of 25 to 30. Therefore starting late by 5 years could mean losing a large amount in the corpus generated. Procrastination in retirement planning would lead to loss of time and hence money. So, the decision lies on you for how much are you willing to lose to this delay in planning.
Life Insurance is vital for an individual and their family's future, for Death is an uncertain event and one would never want his/her family to be caught in an unwanted money crunch post his/her untimely death. That is why it is necessary to buy a term insurance plan and at an early age like 25 or 30. Before buying life insurance ensure that you compare the products of all leading insurers and opt for the one that best suits your needs. The sum assured chosen should be at least 10 times the annual income of the proposer, so that his family is able to deal with rents, loans, and child expenses etc comfortably. If annual income of the policyholder is 10 lakh then the sum assured must necessarily be 1 crore (10 times the annual income). A hefty sum assured would take care of all the family needs of policyholder in case the latter is not around.
Investments must as well begin when an individual is young (30-35 years before retirement). The age bracket 25-30 should put most of their investments in Equity and rest in Debt. 60% Equity and 40% Debt rule works well for this age group. Starting young is really advantageous, especially when you are investing in Equity. Long term investment of 20-25 years in Equity gives good returns (at least 15%) But with increasing age, your share in equity has to decrease. When you reach 40, your investment portfolio should have 70% of Debt and 30% of Equity. With advancing age, increasing Debt and decreasing Equity trend must be followed to avoid any short term losses due to Equity. You may as well invest in a Unit linked Insurance plan (ULIP), if you are willing to invest for a long period as in a long duration, market trends have always given positive returns at a very good rate.
Health plans form a very significant part of Retirement planning. Like life term plans and investment plans, it is wise to buy health plan when young. Why? Well, it is economical. Premiums are low, pre-existing illness waiting period gets taken care of while you are young and doesn't become a cause of bother in your old age. Lifestyle diseases, the part and parcel of old age, do not burn a hole in your pocket, co-payments and deductibles are less too, all thanks to early enrollment into a health plan. Piece of advice- don't ignore health plans; buy them because you might need them. Be safe, it is always better to be safe than sorry.
Inflation has been in our world for quite long and without any choice, we are learning to embrace it. Inflation may rise or fall, but would never vanish. It would always be one of the reasons behind our increased spending. Considering inflation is crucial before planning for retirement. The amount saved today wouldn't be sufficient to survive 25-30 years from now. The Rs.20 that buys a big chocolate today would only buy a small candy in the future.
While purchasing term plans, prefer the ones that go through a yearly increase of sum assured. For investments, besides debt, put some funds in equity too as returns from equity would be decent and the resultant amount would be inflation proof. Sum insured of health plans must be chosen rationally so that your treatment costs in old age get completely covered without any out of pocket spending. Factor in an average overall increase of 5-6% in inflation before planning for your retirement. That ways you will have prepared yourself for any kind of financial fluctuation.
When Retirement is 10 years away it is essential to pull out almost all your funds from Equity and transfer them into Debt. Such a move is recommended as it protects you from any short term losses due to Equity. Ideally only 10% of your funds should be in Equity and the rest 90% in Debt. Regular monitoring of your investment plans is mandatory; you would know how they are performing. In case of losses, you can switch your funds from equity to debt or vice versa.
Retirement is a phase of life that is meant to be loved and enjoyed. It is actually self devotion; you are freely allowed to unleash the writer, painter, philosopher or musician in you. Imagine you are retired and caught in the cycle of loans and rents payment. Do you think you would be able to follow your passion under such stressful financial burden? Of course not, it is highly unlikely. Plan your EMIs, loans and all other liabilities in such a way that your retirement is oblivious of all Debts. Live life debt-free should be your motto post retirement.
At the age of 25 or 30 retirement indeed seems far. Everyone wants to spend on gadgets, travel, shopping etc. but nobody wants to plan for retirement. You sure want your older years to be as good as or may be better than your younger years. No one can afford to be at somebody else's expense after retirement, so planning for retirement at the earliest is imperative. Well thought of investments, proper insurance and a debt free profile are pre-requisites for a luxurious post retirement life. Aim to achieve that, everything else will fall into place.