For any objective, there must be a plan in advance i.e. whether for contingencies or payment of school fee for kids or to achieve any dream of life. One of the major financial milestones you should be looking forward is your retirement goal. With the present opportunities you have, it may or may not likely to achieve the goal at 100%, but you should draw a plan in order to reach your retirement goal. Below are some important factors while you plan for your retirement.
As long as the factors affecting retirement goal, it’s required to be familiar with the terminologies to come across during the phases of retirement planning. These are called the phases of retirement planning.
The Three Phases of Retirement Planning
The important factors to be consider while planning, calculating & implementing towards retirement goal are;
Number of Years Left for Retirement: The time duration is the most important factor when you are required to save towards the objective. In simple words when you are long years away from your retirement age (says after 15-20 years from now), the amount of monthly savings required is much lesser than the amount of savings required for next 3-5 years of target. Starting early in investing gives you better breathing space so that you can concentrate towards other plans, such as children future goals, house building, international vacation or clearing loans etc.
Number of Years of Survival: The calculation for retirement corpus should not be just how much you need on your retirement age, but how much it needs if you have to survive till life expectancy (assumed). Without considering this factor you may encounter a risk of living too long :-). Thus, make sure a number should be arrived which is good enough to shell out month on month or year on year for the entire life during the distribution phase. Even this should also factor the life expectancies of those who are depending upon the inflows of retirement fund; for e.g. your spouse.
Pre-Retirement & Post-Retirement Inflation: Concentrating only on the investment returns which you make during the accumulation phase or the rate of interest you will get out of retirement fund wouldn’t be sound enough. It’s not the Return (Gross) you target at, but a Real Rate of Return (Net) to be envisaged which factors inflation. For example, after retirement you get 8.5% per annum as annuity whereas inflation is above 8.5%, say 9%. Then in this case your retirement accumulation wouldn’t be sufficient enough to sustain till end & it will get eroded during mid-way. Then what? So while calculating required target lump sum, first you need to inflate present monthly expenses till retirement year, further you need to factor post retirement inflation affecting monthly inflows to calculate required corpus to achieve. This is same for tax out-go which also required to be adjusted.
Make sure you do not put any unrealistic inflation factor just to play conservative. For example, if you target higher inflation & lower returns, then ultimately, you are required to do more investment to achieve less. That’s nothing, but burdening yourself unnecessarily.
Pre-Retirement & Post-Retirement Expense Structures: Your present living style & the style of expenditure post retirement will certainly be different even after inflation is being factored. For example, today, you pay insurance premiums, loan EMIs, Kids education fees, but these should not be a part of your retirement phase expenses structure. Make sure you follow a different plan/investments to meeting these expenses, but not within retirement goal planning. However some of the present expenses with inflation, you may need to add some extra amount while adding up expected regular expenditures for retirement, for example, health care expenses, travels, charity etc. as these are expected to be higher in future.
Focus on Retirement Goal Planning (Not for Wealth Creation): When you are planning for standalone retirement goal, then you should aim at meeting expenses pertaining to self & dependent’s (like survival expenses), but not additional wealth to be created to buy new investment, start business, or wealth to be left behind. These additional objectives should be the part of other goals with their respective target years, investment returns & inflation etc. In simple, when you need only Rs. 1,00,000 per month for survival then what is the justification of targeting it at Rs. 2,50,000 per month? Here you should set a separate objective for the rest Rs. 2,00,000 as needed. This way the clutters of retirement planning is reduced & you will be more focused towards the prime objective.
Hope this article helps you looking at the important points while you plan for the long term objective. Do share your thoughts & input in comment section.