Friday, June 4, 2010

Start planning early for your retirement

Retirement planning is a process of establishing retirement goals and working out allocation of finances to achieve these goals. This process, if properly followed, can go a long way in ensuring the right level of preparedness required for a dream retired life.
While it is a well known fact that we need to save to build a retirement nest egg, many of us fail to do so. No wonder, we often get overwhelmed by the thought of retirement and end up wondering how we will ever generate the huge amount of money required to lead a happy retired life.
Many of us face this dilemma because we consider retirement planning as a single event rather than considering it as a life long process. If we save and invest regularly over the years, even a small sum of money can suffice for this purpose. The key, however, is to start investing early as the real power of compounding comes with time. Unfortunately, few young people look that far ahead.
Another challenging aspect of retirement planning is to calculate how much we will need to support ourselves and our dependants. As a thumb rule, one requires around 75- 80% of one’s current income to maintain the similar standard of living. Of course, this amount will increase with inflation. Though it is a proven fact that starting early is an important aspect of retirement planning, it is extremely difficult to decide how much one will need after retirement. A professional advisor can make things easy and hence it is always prudent to go for professional advice to ensure success in the process of retirement planning.
One can also enhance the chances of success by making retirement planning an integral part of overall investment planning. Hence, it is crucial to examine one’s current situation and the attitude towards risk. Remember, investing without a clear picture can be too risky. The key to success is to adopt a disciplined savings programme as well as have the flexibility of multi-stage approach to investing.
The road to success for this all important and a long-term goal can at times be bumpy. Therefore, having patience and discipline can go a long way in achieving the desired results. While it is impossible to anticipate every obstacle, knowing some of the common mistakes can help in avoiding them. The important ones are not having a plan as well as a backup plan in place, making frequent changes in the portfolio and investing too conservatively.
Investing to beat inflation is an important aspect of retirement planning. To understand as to how inflation can impact our future requirements, let us take an example of someone who is 30 years away from retirement. If we assume a 5% inflation rate, the Rs. 100,000 annual expenditure will increase to over Rs. 435,000 by the time he retires. Therefore, if he plans for Rs. 100,000 per annum for his retirement, he would be having less than 25% of what he would really require.
Therefore, a retirement plan and the strategy to implement it should cover the following:
• Begin investing early• Invest to beat inflation• Invest regularly• Know your risk tolerance• Evaluate your insurance and investment needs• Follow a “buy and hold” strategy• Invest in tax efficient instruments like mutual funds.
Investing regularly is another key ingredient of retirement planning. Broadly speaking, we need to save a certain percentage of our annual income and invest in instruments that have the potential to give the desired results over different time horizons. The following can act as a guideline:
Ages: 25 to 40- Depending on the age, 15 to 25% of the annual income should be saved. The portfolio should be dominated by equities and/or equity funds. These should comprise 70 to 80 percent of the investments. To balance out the portfolio, one could rely on stable yet tax efficient investments such as PF, PPF and debt and debt-oriented mutual funds.
Ages 41 to 50- In this age group, one should save around 25 to 35% of the annual income. As the time horizon to retirement is still long enough, equity and/or equity funds should continue to be a crucial part of the portfolio i.e. around 60% or more. The balance can be invested in PF, PPF and other debt and debt related mutual funds.
Ages 51 to 60- At this stage of one’s life, the time horizon for retirement starts shrinking. Therefore, the prudent thing to do would be to follow a slightly conservative approach. However, it is important to remember that it may only be a few years before one retires, but one may need to depend on retirement funds for many more years. Therefore, the key is to maintain a portfolio that will continue to grow for many years after one retires. Equity and/or equity funds should still be a part of the portfolio, though in a moderate percentage.
If you haven’t started planning for your retirement yet, you need to do it now. Remember, for every 10 years of delay in the process, you will need to save three times as much each month to catch up for the lost time.
-Hemant Rustagi..

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