Best Way for Retirement Planning:Retirement is that golden phase of one’s life, where one does not have to go to office and work to earn money. After retirement, while responsibilities are less, one gets more time and freedom. This phase of a person’s life can be very beautiful and exciting, but the condition is that they are financially secure. If you also want to make the days after retirement your golden years, then how should you prepare for it, what financial resources do you need and how should you be prepared for this, all these things are discussed in the article by Baroda BNP Paribas Mutual Fund. Detailed information has been given by CEO, Suresh Soni.
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Support after retirement
Globally, there is an average of 3.4 working people to support one retired person. This number is expected to reduce to 2 by 2050. Japan is already in this situation and in the next two decades, more than 35 other countries will join Japan’s ranks, where only two working people can support one elderly person. Countries with aging populations are already on their way to mitigating this challenge by improving financial literacy, raising the retirement age, providing comprehensive sponsored medical care, and even creating “care robots” to assist senior citizens.
What are the main risks on retirement?
But what is the condition of a young country like India? The average age of India is currently 30 years, while the country will undergo major demographic changes in the next 20 to 30 years. Due to the development of science and technology, people in India are now living longer. Additionally, people’s working years are decreasing as people are studying longer and joining the workforce late. Thus, the main risk now in retirement is that we may not be fully prepared for financial freedom at that time. Therefore it is important to keep this risk in mind.
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Pillars of retirement income
There are 4 pillars of retirement income. Social Security, employment-based plans, personal retirement assets, and family/social structure. Social security in India is not as developed or comprehensive as it is in advanced countries. Only those working in the organized sector and the government are eligible for employment-based pension schemes. At the same time, social structures are changing, and people are moving from combined family system to nuclear family system, in such a situation no one can depend on family support for income after retirement. Therefore, personal retirement assets, i.e. how much property you have after retirement, is the most reliable retirement income pillar for Indians.
Inflation silently creates challenges
Inflation is continuously increasing. From groceries to electricity costs, taxi fares to medical costs, inflation affects the prices of all goods and services. For example, a monthly expenditure of just Rs 30,000 will increase to Rs 1.40 lakh in the next 30 years (assuming inflation rate of 5.3%). That too when we continue to adopt the same lifestyle. If lifestyle inflation is added, one’s monthly budget will increase even more.
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How much are we investing?
A study conducted by the Indian Institute of Retirement in collaboration with CFA Institute and the University of Pennsylvania found that the average retirement savings rate in India is only 8 percent of the annual income. Suppose the average annual salary of 30 people is Rs 10 lakh. So, on an average, they save Rs 80,000 every year for retirement. If someone continues this for the next 30 years, he will accumulate a fund of Rs 1.75 crore. Is this fund sufficient?
How much fund is needed for retirement?
If we assume a monthly expenditure of Rs 30,000. With the inflation rate of 5.3 percent, this Rs 30,000 will reach Rs 1.40 lakh in the next 30 years. That means, the work which currently costs Rs 30,000 will require Rs 1.40 crore after 30 years. Assuming that the life expectancy is 90 years, one would need a retirement fund of Rs 5.1 crore to maintain the same lifestyle. That means there is a big difference of Rs 3.5 crore between the retirement we want and the one we are preparing for.
Focus on retirement goals
Many people focus only on meeting current needs instead of setting long-term goals. This thinking gives tension after retirement. We prioritize immediate needs and wants, which leads to less savings for retirement. Many people think that retirement is far away, so they do not understand its importance.
Start Investing Early, Retire Peacefully
If you want to create a fund of Rs 5.3 crore in 30 years, then assuming an annual return of 11.50 percent, you will have to invest Rs 17,000 every month.
(Note- Returns have been calculated considering 10-year rolling returns for Sensex and Nifty between 01/06/13 and 30/05/23, rate of return determined by AMFI for SIP examples.)
Consistent and disciplined investment helps in building long term wealth. Therefore investment (financial planning)start early. Starting early and investing consistently over the long term gives investors the opportunity to take advantage of the power of compounding. Delaying investment will reduce your retirement fund.
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where to invest
SIP for Retirement Planning (sip investment,There is a better option. SIP in a solution-oriented retirement fund is a better way to increase your retirement income. SIP helps in creating discipline in your investments. In this, you can also benefit from rupee cost averaging, that is, you can buy mutual fund units at different prices, which reduces the average cost.
Don’t invest all your money in one place
Retirement is a long term investment product. Depending on the risk appetite of investors, one should allocate a good portion of their investments to equities. However, equities are as volatile as any other asset class. To balance the volatility, you can also invest some part of your investment in fixed income options. Alternatively, one can also invest in a retirement fund, which allocates at least 65 to 70 per cent of the portfolio to equities and the remaining amount to fixed income options. The objective of equity is wealth creation through higher returns, while the objective of fixed income is to bring stability in the portfolio.
Additionally, retirement funds also come with Auto-SWP (Systematic Withdrawal Plan), which helps investors receive regular cash flow at retirement age in a tax efficient manner.
