5 Golden rules of retirement planning

My Comments: This was written almost two years ago and a quick read may lead to some confusion. That’s because there are references that caused me to realize the primary audience was people in India. The author’s name should have been a clue.

I also realized that the ideas expressed, if you can simply substitute dollars for rupees, and other similar references, are fundamentally sound whether you live in India, in the USA or wherever. The forces at work on our respective citizenry are very similar.

Life has a way of getting away from us sometimes, and then however many years later we experience regret that so much time has passed and we’ve done virtually nothing to anticipate, much less solve, what is now a looming problem.

by Santosh Agarwal \ 24 DEC 2019 \ https://tinyurl.com/tmwpccz

The concept of an ‘ageing population’ may feel overused, but the fact is that advances in medicine and generally improving living standards are combining to increase how long we can expect to live. A survey by Economic Times stated that India’s population is expected to grow under 0.5% during 2031-41 due to the decline in fertility rate and an increase in life expectancy. Given that life expectancy for both males and females in India is likely to keep increasing.  So, the retirement ages for both men and women is also expected to increase in line with the experience of other countries.  

Until a long time, people generally used to work only till the age of 55 to 60 years and post that they used to retire. However, things have now changed drastically as a large percentage of Indians now prefer working at least 15 years beyond the age of 60. Since an increase in the retirement age is perhaps inevitable, it may be worthwhile signaling this change well in advance – perhaps a decade before the anticipated shift – so that the workforce can be prepared for it. 

Here are the five golden rules of preparing for retirement. You can try them at any age and, if you’re lucky, you can start your retirement early.

Rule No. 1 – Start saving early and save often

The first rule of retirement planning is the easiest to follow. Firstly, you can start by setting aside at least 10 – 15% of your income annually to your retirement in order to have enough income during retirement. 

Secondly, it’s okay if you start your retirement planning in your 30s. However, to ensure a stress-free retirement period, due planning has to be done much earlier. Planning for retirement early in your career allows you to build up a corpus large enough to give you a regular income post-retirement. Choosing a pension plan with the required features allows you to enjoy retirement coverage with the benefits involved. This is where the new age Whole life ULIP can help you. Let us see how they work. 

Let’s say you start investing at age 30 at a rate of Rs 10,000 per year for 30 years. At the rate of 8%, your corpus will be around Rs 1.5 Cr. And your friend starts at age 45 and invests Rs 20,000 each year for 15 years, his corpus will be only Rs 70 lacs. Even though your friend invested double the amount you did, because you started sooner, you could have over twice as much money when it comes time to retire thanks to the power of compounding interest.

Thanks to the power of compounding interest, a little money saved now can go a long way at retirement time. But to get the most benefit, you’ll want to start saving as early as possible.

Rule No. 2 – Plan your post-retirement needs 

According to experts, you will require at least 70% of your pre-retirement income to maintain the your standard of living when your employment stops. The only solution to overcome this situation is planning ahead. 

Based on a sound understanding of your financial situation, you may be able to identify your short-, medium- and long-term financial goals. Make a list of all your needs and goals. Remember, managing your day-to-day expenses should come first. The key thing is to set realistic goals and priorities; you must know how much money you will need to fulfil all that you desire to do as a retiree. Whether you are planning to explore the world or planning to spend the rest of your life with your family, you must have a clear idea about your life post-retirement. 

Rule no. 3 – Keep inflation in mind while planning for retirement 

Inflation is the biggest culprit that will eat away the value of your savings. In its simplest terms, means that your money will not buy as much next year as it does this year. So, you would be able to buy a lesser number of products or goods with a given amount of money as time goes by. Your retirement investments need to account for this inflation factor. Also, inflation will continue even in your retirement years. Think about that!

Rule no. 4 – Plan for Healthcare costs

Apart from working towards building a strong corpus for your retirement, also keep in mind the healthcare costs that pop with age. With the onset of old age, health problems are bound to arise, and medical bills can eat into your retirement savings. Thus, Health Insurance plays a big role when you are planning for retirement. Depending upon the coverage and other services, one can choose a Health Insurance policy that suits their needs the best from a plethora of options in the market. Both health and finances are equally critical for a comfortable retirement. So, make sure you have a way to pay for medical emergencies – whether through insurance or other funds.

Rule no. 5 – Don’t dip into corpus before you retire

Usually, individuals tend to dip into this corpus to pay for various other expenditures such as buying a house, marriage of children or even medical emergencies. When money is withdrawn, it reduces the power of compounding. If your pension account is untouched, a person with an average salary of Rs 25,000 can gather a corpus of around Rs 1.65 crore over a period of 35 years. Thus, it is advised to never withdraw your retirement savings because if you withdraw now, you may lose principal and the interest rate.

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