Retirement planning: Golden Door to Stress-free Life
Do you wish for a cozy white house surrounded by serene sky, temperate air where the silver orb of the moon reflects right back at you among the most beautiful garden where your grandkids while you are sipping on a cup of Hot Tea? Well, these look to be happy “Retirement wishes.”
RETIREMENT is that time of life when a turbulent waterfall adjoins a calm river of stillness when you bid farewell to your 9-5 hustling life behind to enjoy your newfound passion and check out the boxes off your bucket list. With the increased life expectancy, which has prominently risen from 60 yrs. from 2000 to 70 yrs. in 2020 there has also been a rise in the Per Capita income (with only a small blip due to the unprecedented aftermath of the pandemic) of increasing simultaneously. As India continues to progress at a robust pace, the life expectancy is further expected to be rising.
India GDP Per Capita 1960-2022
Source:https://www.macrotrends.net/countries/IND/india/gdp-per-capita
With the increased life expectancy, there are more years to accommodate for, and it is important for Retirees to equip themselves financially to ensure their money outlasts them. Nothing is scarier than running out of money when you are no longer in a position to earn in old age. With the lack of funds, one might have to constrain the lifestyle.
Post-retirement and this can only be prevented only by ensuring that you don’t eat out your retirement corpus. Keeping your Retirement corpus intact is a tough nut to crack as it needs a strategic approach to maintain it. With Inflation and falling interest rates, this becomes even more difficult to achieve. Hence proper planning for Retirement through judicious asset allocation is the need of the hour.
Why do most of us fail to do Proper Retirement Planning?
All our lives, we strive to keep our families happy and content. For the maximum part of our lives, we strive to fulfill goals that will secure the future of our family and loved ones. Saving money for one's home, children's future education, children’s marriage, etc., are all life goals for the happiness of our immediate family. However, the only goal that we keep for ourselves is Retirement which is often overlooked. And by the time you are on the verge of Retirement the need to accommodate the expenses of retired life comes up. Only a handsome retirement corpus that is generated keeping in mind the needs of the retired life can support Retirement years without making any changes in the lifestyle. Let’s take a case study.
Case Study
So it will be wise to say, the likelihood of your retirement dreams coming true depends on the efforts you make in your younger years that ensure a steady stream of income post-retirement after you have said au revoir to your nine to five endless juggling hours. And this is possible only through proper retirement planning. Let’s see how?
What is Retirement Planning?
Retirement planning is defined as the process of planning one’s post-retirement income goals and accomplishing them with required prompt actions and decisions. It also includes analyzing your financial requirements, objectives, the current financial state, and the anticipated future cash flows to develop and harness a comprehensive road map to a secure, jolly and calm period of time coined as “RETIREMENT”.
A judicious retirement plan is the best-support one can have for a relaxed post-retirement life as it helps you plan and provide for the following:
1. Provide for monthly cash flows to meet living expenses
3. Shields you from Inflation
4. Protection from falling interest rates on Bank Deposits
6. Investment in schemes that are best for Retirees i.e., Government-backed funds.
1. Provide for monthly cash flows to meet living expenses: Unlike developed countries, private-sector employees in India do not have the cushion of a state-sponsored pension, meaning that an individual is basically on his own post-retirement.
Retirement Planning helps you save, invest and build an adequate corpus in your working life and then invest it diligently after Retirement so that it provides you with the necessary cash flows to lead a financially relaxing post-retirement life.
2. Tax -Savings: Tax and Inflation are the two mammoth enemies that can curtail financial health. With the constant rise in age comes the need for regular health check-ups, preventive health programs, or that requires the attention of the best medical facilities. The mere thought of spending on such expensive treatment can make a person overwhelmed; however, catering to these expenses is a necessity. That’s why everybody needs to plan their Retirement accordingly so that such unforeseen expenses do not put a strain on their financial chart post-retirement.
3. Shields you from Inflation: Today's scenario in Global politics is shaping the world in a way that is putting a strain on everybody's pocket. Be it the Afghanistan Crisis or Russia- the Ukrainian war, or the Sri Lankan economic crisis, each of these global adversities has brought a tremble in the world economy and, as a butterfly effect, has increased the prices of common commodities drastically. The annual inflation rate in India increased to 6.95% in March of 2022, the highest since October of 2020, and above market forecasts of 6.35%. Food inflation accelerated for a 6th straight month to 7.68%, a new high since November of 2020, with the cost of oils and fats (18.79%), vegetables (11.64%), and meat and fish (9.63%) recording the biggest rises again.
Source: Ministry of Statistics and Programme Implementation (MOSPI).
4. Protection from falling interest rates on Bank Deposits:
The interest rates offered by banks have been unpredictable and might not give returns as they would have done earlier. For instance, the interest rate offered by a popular bank for bank FD fell from a high 9 % to a medicore 5% in the present day scenario, which makes investment in these as not the best way to increase money. Thus not relying on one source while Investments are done prudently, keeping in mind the needs, time horizon and risk appetite of the retiree is the way to earn stable returns.
5. Medical expenses: With the inevitable rise in age, there comes a time when every human is subject to illness, health care routines, preventive health check-ups, etc. As a result, in the years post 60, there are often increased visits to the doctor, and the need for medical treatments might also increase due to the declining age. This again puts a burden on the Retirement corpus as frequent visits to doctors will put pressure on the Retirement Corpus. With the rise in medical Inflation the amount of expenditure on healthcare automatically rises, hence the need for a Proper Retirement Plan.
Rise of private health expenditure per person in India 2000- 2018.
Source: OurWorldinData.com
https://ourworldindata.org/grapher/private-health-expenditure-per-person?tab=chart&country=~IND
6. Investment in schemes that are best for Retirees i.e. Government-backed funds-
While there is a small cushion of regular income post-retirement for the government employees in the form of Pension, there is no comfort for the people in the private sector or running their businesses to accommodate expenses post they stop working. Even the pension fund is mostly insufficient to cater to all post-retirement expenses. It is only through a properly planned Retirement Plan devised as per the Retirement needs of an individual can these requirements be fulfilled. Proper Retirement Planning also allows for choosing the best investment options for retirees, i.e., Government Backed funds to take care of this requirement.
Ways to achieve your desired Retirement Corpus through Prudent Investment options
Investment in Debt Mutual Funds and opting a SWP
Another great investment option for short to medium duration is an investment in Debt Mutual Funds while choosing a Systematic Withdrawal Plan ( SWP) to enable regular cash flow for the retirement years. A Systematic Withdrawal Plan ( SWP) is a convenient facility by which an investor can withdraw a pre-decided sum from the existing investments in mutual funds at a pre-decided interval ( i.e., on a weekly, monthly, quarterly, semi-annually, or on a yearly basis).
Moreover, mutual funds investments provide two options to withdraw money- the Dividend Option or the SWP option. The dividend earned from mutual funds investments were made taxable in Union Budget 2020, and this has lost its sheen. On the other hand, SWP option provides several benefits to the investor, such as:
Gives Predictable Cash Flows- The Dividends are paid out of actual returns by the fund and not from the capital. At the same time, SWP is similar to regular redemption i.e., withdrawal of principal plus profits. An Investor can ask the AMC to allocate and redeem a particular amount periodically to him on a fixed date; this continues until the Investor instructs the AMC to stop this.
Tax Efficiency- SWPs are much more tax-efficient than the Dividend option. Dividends from mutual funds are taxable, while for SWP, tax is paid only for the Capital gains portion and not on the principal amount. When the Capital gains portion increases, the gains will be treated as Long Term Capital Gains are taxed at a very marginal rate.
Flexible- SWPs give great flexibility to start and stop as per the choice of the Investor and also choose the interval to receive withdrawals.
Other great schemes for retirees are PMVVY, SCSS, RBI floating rate bonds, etc. While timely Retirement Planning is the right stance to secure the golden years, choosing the right tools by way of right investment options for retirees is the tool that is needed to give the right shape to it.
“The joy of retirement comes in those everyday pursuits that embrace the joy of life; to experience daily the freedom to invest one’s life-long knowledge for the betterment of others; and, to allocate time to pursuits that only received, in years of working, a fleeting moment.”
– Byron Pulsipher
