Insurance knowledge Centre Retirement Planning Importance of pension planning
by Ankita G. protect your lifeTo ensure that we live our retired life comfortably, the way
we are living today, it’s important that we plan our financial goals prudently
during our working life. That’s the key to a happy retired life.
And they lived happily ever after... This is something we
often hear in the movies, or in the early days of one’s married life. But, as a
matter of fact, one shouldn’t accustom oneself to hearing or thinking about
these words just at those instances, but rather strive to ensure that one’s
financial goals work out in such a manner that these fond memories continue
into their retired life. And as we have said, to ensure that, one needs to have
a financially secured retired life and, accordingly, plan for it during one’s
work life.
THE REAL DANGER
Life expectancy is on the rise and this means that the
non-earning period after your retirement will put that much more strain on your
monthly expenses. The danger that lies ahead is obvious and cannot be brushed
under the carpet. Your monthly expenses of `50,000 now would balloon to `1.32
lakh in 20 years time at an inflation of 5 per cent a year. The rise in income
can offset this inflationary impact, but, maybe, not to that extent.
THE SOLUTION
The solution to having adequate funds in our retired life
lies in our present and this also decides the shape of our future. As such,
retirement planning becomes an important part of our financial planning during
our working life.
STARTING EARLY
Being an early beginner is a good recipe for success in all
walks of life, even in investing for our future needs. The bottom line is the
time horizon—the longer one remains invested in equities, the better is the
return. Thus, if someone has to benefit from investments, one has to make an
investment pretty early in life and remain invested long enough so that the
investment generates enough funds to meet the goals at the right juncture in
life. When it comes to savings, too, the early birds have an advantage over
those who are off the blocks late. They manage to save a decent pile for all
their requirements with much less fuss. Ironically, when one is young, the
reason to save is largely ignored and the focus is always on spending. The
general attitude is investing can wait for now and, as such, saving is not top
priority. It’s a different matter though that having a clear-cut financial path
helps. If you start saving from the age of 25, you can begin with saving 10 per
cent of your net income till the age of 30, by when you are likely to be
married. Here, even if your savings dip a bit, the head start from your early
savings gives you an extra edge.
Power of compounding:
The earlier you start investing, the more time your money gets to grow. If you
start saving early, even in small amounts, it will help you build a sizeable
savings portfolio. The rule is to invest regularly and keep reinvesting the
returns. Thus, your Retirement Pension Plan earnings will also
participate in getting more returns. Take the example of A and B (both aged 25
years). While A invests `2,500 every month, B does not. After 10 years, B
begins saving `5,000 each month. When both A and B turn 45, on a realistic 12
per cent per annum return, A’s kitty is a sizeable `22.78 lakh, while B’s is
nearly half at `11.09 lakh, despite having invested more than A. Thus, to avoid
B’s predicament, start investing early on in life.
Arriving at your
pension needs: Consider your monthly expenses at current costs. Assuming an
inflation rate of about 5 per cent a year, inflate them for the number of years
left for you to retire. This gives you the amount of inflated monthly expenses
you would need to survive through your retired years. Estimate how much you
need to start saving from now till your retirement age to amass a corpus that
will provide you with an inflated monthly amount. Without exactly knowing the
monthly savings required, one should not venture into planning and savings for
one’s retirement. Illustratively, say someone wishing to retire after 20 years
has an annual expense of `6 lakh at current costs. Assuming an inflation of 5
per cent, in order to meet his current expenses, he would need about `16 lakh
in the first year after his retirement. And this amount will also keep
increasing at 5 per cent per annum for every subsequent year. To meet this figure,
he will have to save approximately `25,000 each month from now on assuming the
investments grow at 12 per cent a year.
The approach: One
may invest in a lump sum at regular intervals. Alternatively, one may even
choose to invest through a systematic investment plan (SIP). The latter
involves investing a certain fixed amount of money at regular intervals rather
than investing a larger lump sum amount in one go. This form of investing is
largely suitable for an investor who doesn’t have a lump sum to invest, but
wants to regularly keep investing in the stock market. By investing through
SIP, you are not attempting to capture the highs and lows of the stock market
but rather averaging the cost of your investment over a period of time. The
essence of SIPs is that when the stock market falls, investors automatically
acquire more units, and vice-versa. In other words, the investor buys fewer
units when prices are high and more units when the prices are low. Hence, the
average cost per unit drops down over a period of time.
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