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Are YOU Prepared for Retirement? Retirement Planning Adviser - Cornerstone Wealth Management in India |
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Rattan Chugh
ExpressMoney
Monday , April 09, 2007 at 1025 IST
Find out how much money you need to retire in comfort. And if you don’t have it yet, find out how much you need to save every month to have it.
Retirement planning is a topic of much debate in the US, as the 77 million Americans born between 1946 and 1964, popularly known as Baby Boomers, slowly approach retirement. On the one hand, medical advances mean they will live longer than all previous generations most |
of them will spend upwards of 30 years in retirement. On the other, not many of them are financially prepared to put their feet up. A survey conducted by the Employee Benefit Research Institute of the US reported that just 25 per cent of workers are “very confident” about having adequate funds for a comfortable retirement. |
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| Why you need to plan |
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It’s a different situation in India. With 58 per cent of our population below 25, retirement planning is not a topic of discussion here. Moreover, traditionally, after retirement, the elderly have been supported by their children. Their lifestyle has been simple and expenses modest. But there are shifts happening that might throw up the same issues in retirement as the Baby Boomers in the US face today.
The current working generation is enjoying the fruits of a vibrant economy. Incomes have spiralled, but so have expenses and lifestyle spending, as it happened with the post-war generation in the US. Our needs in retirement will be different from that of our parents. Also, social structures and values are changing fast, with nuclear families being a norm. By the time the current working population retires, chances are, they will support themselves through their retired life. Life expectancy will keep improving with medical advances, even as healthcare and medical insurance costs rise. |
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Retirement planning may not be the most pressing need for young India, but by being proactive, we can be better prepared for it than the Baby Boomers. Retirement planning is a process to estimate how much money you need to save each month in order to have a comfortable retirement. You will need an income to support yourself, pay for your medical insurance, maintain a place to live and service the other financial goals you might have. |
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An early start helps you knock down the big numbers into small, monthly actions and cruise home |
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| How to plan |
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The starting point of any such exercise is to estimate how much income would you like in your retirement, in today’s value. Take your current annual expenses, factor in those that will go down (like housing and fuel), and those that will go up (medical insurance and travel) to arrive at a figure. Most experts say you will need 70-80 per cent of your current annual expenses in retirement.
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Once you know what you would like your income to be, estimate your current savings towards retirement. Your employer may be providing you PF and superannuation schemes. Your payroll department can help you get your account balances under these schemes. Add any other investment that you have earmarked for retirement.
The difference between your need and savings is the gap you need to fill through further savings and investments. The following are a few aspects that play an important role in your retirement planning equation:
• How much return will your savings earn before and during retirement? Generally, you should use more aggressive investments like equity or equity-based mutual funds before retirement to help your money grow faster; subsequently, approaching and in retirement, you should switch to safer investments like bonds, debt-based mutual funds or annuities from insurers.
• What inflation rate will affect your purchasing power and salary? By the time you retire, inflation will increase cost of living. It will also increase your income during the accumulation phase. So, if you have many years to go and you can’t fill the gap right way, you can make a start now and keep increasing your savings as your salary increases over time.
• When do you want to retire? You can retire early if you can save more to fill the gap. |
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How much you need
Let’s now collapse all these questions and issues into an indicative number through an example. Bharat, who is 35, wants to retire at 60. He estimates he will need Rs 4 lakh a year (in today’s value) during his retirement years. Assuming an average rate of inflation at 4 per cent, his expenses on turning 60 will be around Rs 10.7 lakh a year. At a rate of return of 10 per cent per annum post-retirement, he needs a corpus of about Rs 1.8 crore to fetch him sufficient returns to meet his annual expenses. Given that he has not started saving towards his retirement, he needs to save Rs 5,412 a month for the next 25 years, assuming an annual rate of return of 15 per cent during accumulation. Given your projected annual expenses in retirement and years to retirement, you can work out how much you need to save in the remaining years (See table: How Much You Need to Save).
Retirement can seem daunting if you don’t have a plan. By taking out the time now, you can knock down those big numbers into smaller, monthly actions and cruise home. |
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