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Life after employment

Source : BUSINESS_STANDARD
Last Updated: Sun, Dec 16, 2012 23:02 hrs
Pensioners play dominoes at a bar in Ronda

How would you like to live your life after retirement? While being away from the daily grind might be a welcome change, the downside is you will not get a pay cheque at the end of the month. The implications can be serious, if you don't take precautions.

Gone are the days when retirement meant putting your feet up and living off your monthly pension. Today, pensionable jobs are scarce (even in government jobs, you have to contribute towards a pension) and living costs are higher. Therefore, you need to plan your finances well in advance for your life after retirement. The earlier, the better. The first step is to calculate the amount you want in the given time. This will be your retirement corpus. This will depend on your current lifestyle and the number of years for which you want an income after retirement. Start on a monthly basis, by setting aside whatever you can from your income. However, make sure that once you start the process, it remains a priority, above all other goals.

Be an early bird
This mantra is worth repeating. An early start also gives you the freedom to take risks. For example, equities are a riskier asset class compared with, say, debt and gold. However, in the long run, equities will give you good returns.

Sample this: In the past 30 years, the Sensex provided a compounded annual growth rate (CAGR) much higher than other asset classes.

Since building a retirement corpus is a long-term goal, your investments will vary accordingly. Amar Pandit, founder and CEO of My Financial Advisor, says if you are starting at the age of 30, you will have a long time to build a corpus. "So, it is advisable to have a majority of your allocation to equity. It can be in the form of mutual funds and stocks. One should look at balanced equity funds and large-cap funds," he says.

If you start at 30, you can invest up to 80 per cent allocation in equity, 10 per cent in gold and the remaining in debt instruments. If you have crossed 30 and haven't started yet, don't worry, you can still catch the bus. Only, your yearly contribution will go up. The later you begin to build your retirement corpus, the larger should be your allocation to debt. Correspondingly, you should reduce your allocation to equity to reduce the risk in the portfolio.

For instance, if you are starting at 40, you should have at least 50 per cent of your portfolios in debt-related instruments. If you start building your corpus when you hit 50, then your maximum exposure to equity should not exceed 40 per cent.

While choosing instruments in the debt space, you can invest in fixed deposits of long maturity, along with debt mutual fund schemes. Also, remember to put aside some money for public provident funds (PPF).

If you were to start saving for your retirement at the age of 30, to reach a corpus of Rs 3 crore by 60 years of age, you should invest Rs 1.78 lakh a year (see table). In this, 60 per cent is invested in equity, 35 per cent in debt and the rest in gold.

If you start late, say, at the age of 50, you will need to invest Rs 19.65 lakh a year. In this case, 55 per cent should be invested in debt, 45 per cent in equity and the remaining in gold.

FUTURE BUFFER
Retirement savings to reach a corpus of Rs 3 crore by age of 60
  Long-term 
returns, post-tax
Starting age (years)
30 40 50
Equity (%) 12 60 50 40
Debt (%) 7 35 45 55
Gold (%) 9 5 5 5
Weighted average returns (%)   10.1 9.6 9.1
Retirement age (years)   60    
Assuming they continue to invest like this till retirement,
the amount they need to save every year is:
Number of years to save 30 20 10
Amount of saving per year (Rs ) 1,78,955 5,48,074 1,96,5199

The prep guide
There are certain things to keep in mind while building your retirement corpus. Do remember to pay back all debts. So, if you have taken a home loan, make sure you repay the entire amount, even if it means paying a higher EMI to reduce the tenure. In the case of insurance, a few policies will be compulsory after retirement. Car insurance, for instance. However, make sure you buy a health insurance policy early, because the older you are, the higher the premium you pay.

Calculating the required retirement corpus involves taking into account factors such as life expectancy and the expected rate of return from the corpus during the retirement phase.

Last, but not the least, you need to understand the impact of inflation on your corpus. Many investors make the mistake of not factoring this in inflation while planning.

If you plan to save Rs 1 lakh a year for your retirement, you will end up with much less than you actually require if you don't consider inflation.

Another mistake you need to avoid is withdrawing money while building the corpus. It might be necessary at times but remember if you keep withdrawing from the corpus, it will eventually negatively impact your goal. If you plan early enough and wisely, too, you can still put your feet up and enjoy retirement life.


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