Don't take your retirement planning lightly
Retirement corpus is a figure that should sustain you during your long years of retired life
Retirement planning could be the trickiest of all goals. This is because the distribution phase lasts anywhere between 10-30 years. In this phase everything - be it interest rates, policy changes, taxation, governments, lifestyle, (sometimes) even goals - can change. That is why retirement requires careful analysis and planning.
In the light of these uncertainties, it becomes imperative to focus on the real return investors make after taxes and inflation on their investments.
Retirement corpus is a figure that should sustain you during your long years of retired life. Indian life expectancy has risen from 59 years in 1995 to 69 years as on 2018. This is an increase of 17 per cent in 23 years. Life expectancy is said to increase by 8% every 10 years. Hence, in 2028 life expectancy would be approximately 79 years of age!
This raises several important queries you need to address during your retired life. Do you think your retirement corpus would be enough to meet the increase in life expectancy? Will the income from the corus be able to keep pace with inflation? Do you have an independent medical corpus to take care of the healthcare expenses that your health insurance may not cover? Many individuals are not covered in any organized social security scheme in the country. That means they need to plan for additional sources of income either through investments or by working to take care of these unknowns.
It is common for our new clients to complain about their investments in Senior Citizens Saving Scheme, made 15 or 20 years ago, not offering sufficient income to meet their ever-increasing living expenses. What can you do to ensure that your retirement income is sufficient to take care of your lifestyle till the end?
First, do not postpone launching your retirement plan. A delay of 10 years can cost them over Rs 60 lakh that could have been added to the retirement corpus. Two, you must carefully understand and evaluate investment options that maximise returns after tax and inflation. You must also constantly monitor (not change) their portfolio every year to ascertain whether it is on the right growth trajectory.
The best way to plan for retirement is through Systematic Investment Plan during the accumulation phase and a Systematic Withdrawal Plan through the distribution phase. The accumulation phase will determine the health of your retirement corpus that will fund your life during the distribution phase.
Factors like long term investing, time in the market rather than timing the market, and the power of compounding will work wonders if the investor keeps investing his savings over the years. If the person increases the investments in the accumulation phase in line with growth of salary every year, it would result in an even larger corpus.
In India, other goals like education funding for children takes priority over retirement. It is an emotional goal and many investors do not pay attention to the importance of creating a healthy retirement corpus due to this. The key is to never utilise retirement investments created for any other goal or need in the accumulation phase.
Systematic Withdrawal Plan works best in distribution phase because of better post-tax returns and safety of corpus. One must also consider a bucket strategy to meet the retirement inflow through a combination of hybrid equity and debt options.
What matters is not the magical figure that you set aside for retirement, but a scenario analysis of retirement options, tested for longevity, health benefits and estate benefits.
(Dilshad Billimoria is Director and Chief Planner at Dilzer Consultants Pvt Ltd)