Many urban Indians now look to retire earlier compared with the previous generations. There are some who might be able to do so as early as their 40s, if they plan well. Life after hanging up your boots needs space to pursue interests that may even turn out to be profitable. These are mostly cases of entrepreneurs exiting their ventures, having come into large inflows.
Planning for retirement takes a conscious and disciplined effort, say experts. One is trying to build an alternative source of income to meet the current lifestyle, while not being bound by the shackles of earning a living. Also, now retired people don't need to bank on their children. They can develop their own corpus with some smart planning.
There are two stages of retirement planning: accumulation phase and spending phase. The accumulation phase begins when the person starts earning and spending phase starts at the time of retirement. Planning and keeping aside certain sums for retirement is not new. Over the years, people have saved for retirement without proper planning, but now it requires a change, given that there is no fixed rate of return. Everything depends on market conditions, including international developments. Earlier, it was possible to maintain an income after retirement by selecting various debt instruments. There were a few such instruments where rates were fixed and high, hence asset allocation planning wasn't required much. Now things have changed.
There are various factors to be considered while planning retirement. The first one is inflation. The person will have to factor in inflation for the next 30 years after retirement. Living with inflation is not easy. For example, with 8 per cent inflation, the cost will double every nine years, go up by four times in 18 years and eight times in 27 years and so on. A person needs additional money to buy the same goods at a later date, which needs to be factored in. Also, with life expectancy going up with improved facilities, medical costs have also gone up.
To retire early, one needs to start saving early. If one decides at age 23 to retire by 40, then the person has 17 years to achieve the aim of a desired sum. The best approach when you are young is to invest in equity or equity-linked mutual funds. Since its inception, NIFTY comprising large caps has given a compounded return of 18 per cent. Small caps have given a return of 25 per cent during the same period. If one is regular with a Systematic Investment Plan, this can give good returns. A businessman who finds it difficult to have a monthly SIP running should plan a lump-sum investment every year.
Once the main cash requirements are planned, the investor can consider putting the balance into growth avenues, like new business ventures, angel investing in portfolio companies, private equity investments through pooled vehicles and also listed equity through multiple vehicles. As he enters his 50s and 60s, the proportion of such risk assets can be moderated in favour of stable debt investments.
Unlike those who plan to retire in their 40s, those hanging up their boots in the 50s and their 60s, may have other priorities. They probably seek to live life after having toiled for decades and would like to make their investments work hard and sustain them till the end. Thus, for such people, regular income requirements and cost escalation in expenses (especially for health care) are key aspects to consider.
These sub-segments are also likely to be the majority and have typically bought a house, provided for insurance and fulfilled children's education requirements. Conventional instruments like term insurance covers, pension plans and systematic investments in a portfolio of debt and equity funds/ products can help achieve this objective. Starting early in life, preferably in the mid/ late-20s is ideal.
Some post-retirement solutions that have come up recently include retirement communities mushrooming in various pockets in India. These operate as support systems for retirees who do not want to fall back on their children.
Similarly, those in their 60s attempting to bridge the gap between rising expenditure and steady/ falling income can also consider reverse mortgages where owned properties help pay for meeting regular cash flow requirements.
Those retiring late have more time to save. At the same time, they should revisit their portfolio and reallocate to debt instruments once they turn 45. Financial planners advise 100 minus the current age per cent in equity and the rest in debt instruments, but this has been changing in recent years with a shift towards debt. For any retirement planner it is also important to take a term plan and medical insurance early in life.
Hena nagpal (managing director, Quantum Leap Wealth Advisors), Shankar Raman, (CIO, Third Party Products, Centrum Wealth Management Ltd), Priyam Alok (vice president, Kotak Mahindra Bank Ltd), Pramod Bajaj (independent wealth management consultant) and Kanika Singhal (independent finance and retail consultant)
POINTS TO PONDER
* The amount of corpus required:
Seek the help of an expert. Develop an investment plan with proper asset allocation for the target along with the other goals. Ensure that during your retirement phase, the assets generate income and liquidity.
Working professionals should avoid using their provident fund for routine expenses or assets purchases. During job changes get the PF transferred. The PF should be used only for retirement plans.
In case of a small business, opt for a PPF investment in your name and your spouse's name. Retirement planning will vary for different businesses. After retirement, you can either retain your stake or sell it to generate income. Apart from investments in your own business, invest in equity mutual funds to diversify risks.
* The sooner you start, the better the chances of an early retirement:
If you were to invest, say, Rs.20,000 per month from age 30 at a compounding rate of 15 per cent per annum, you would get Rs.9.67 lakh when you turn 40. This figure jumps to Rs.33.39 lakh if you start the same investment at age 20. This is the ‘power of compounding’, which is an important point.
* Be disciplined:
Investments are a ‘plan’ which must be executed over a period of time. It is not an ad hoc measure. Make a plan with a professional financial planner and stick to it. Do not keep changing your asset allocation in response to markets.
* Inflation erodes:
The purchasing power of money declines if it doesn’t beat inflation. Ten years from now, you will need Rs.2.06 lakh to buy goods worth Rs 1 lakh today, assuming an inflation rate of 7.5 per cent. A corpus of Rs.10 crore at 8 per cent will yield Rs.80 lakh per annum. Remember you will be using the 8 per cent return to maintain your lifestyle and hence your corpus of Rs.10 crore is growing at zero per cent. Inflation at 7 per cent would shrink your corpus by a similar percentage every year. Ensure that you plan for the residual life in case of a younger spouse.
Diversify: Spread money across various asset classes. Arrive at proportionate amounts after consultation with your planner. However, you could invest in equities with a time horizon of seven years and beyond, equities is the best asset class to beat inflation and plan your taxes and avail of instruments that qualify under section 80C of the Income Tax Act.
THROUGH THE DECADES
For the 40s:
* Use online calculators to check if you have enough to retire
* Get health insurance. Invest in your health with good habits
* Get a system in place for monthly cash flows without touching the principal
* Continue building on skills, you never know when life changes
* Financial portfolio restructuring: split it as risk capital, everyday capital and rainy day capital. Risk capital is what you don't care if you lose. Everyday capital can be used to support everyday living, without touching the principal. Rainy day capital can be put in a low-risk growth plan, which is not to be touched, unless you really need it
* Retire at 40 if you have enough to cover liabilities and have support for another 40 years
* Retirement at 40 could mean stop working for money, but you could continue to earn in some way
Make and register a will
* You might have to invest for your children and pay EMIs. However, don't lose sight of your own goals. Try trade-offs. If the retirement goal is stiff, then for your children's higher education, opt for loans to be repaid by them
* At this stage, higher allocations, say 60-75 per cent, can be made for equity
For the 50s:
* You are possibly looking at an empty nest, finishing off liabilities. Keep money aside for handling medical issues that might arise now
* Create a bucket list of lifestyle requirements and a wish list of what you want to do in life now and set aside amounts you need for each. Add another 10 per cent on top for inflation. This is the liquidity amount you would need to enjoy life after 50
* Start shifting focus to work for fun and money, something that's stimulating and gets you around the community
Make a will
Equity allocation should be reduced to 45 per cent from 65 per cent
For the 60s:
* Health might start becoming a major issue. Move to a place with good health facilities. Children may not have time for you or may expect you to be caretakers for their kids. It's ok to say no and find a community of like-minded people. This is important for mental health
* Financially, be as independent as possible. Start tapping into pensions and PF. Use your insurance cover. Get one if you don't have one. It will be difficult at 60+, but some companies do offer plans
* Do things that make you happy. These are the golden years
* Have another look at your will
* Now is the time to derive income from assets. Debt allocation should be increased to 75-80 per cent. It's still important to retain equity allocation to beat inflation. During this stage, avoid giving into your children's demand for money which they may ask to fund their business/ asset purchases