What should you do for Retirement Goals??

As the saying goes the earlier you start the better for you. So is your retirement planning corpus.
Few Rules you need to abide by (though how many would diligently follow it is still a big question mark?).

1. Save 10 to 12% of your income for retirement
If you are working and have a regular income this one would make sense to you. 12% of your basic salary and an equal contribution by your employer that flows into your PF account is a good way to build a small nest. The best thing about this option is that you cannot avoid it. It is some sort of a forced saving that becomes the default retirement plan for many individuals. (Please note all those who withdraw money post resigning from your job, it’s advisable if they transfer their PF account. Remember this money however big or small it may look is for your retirement age when your active income will stop) it will actually hamper your retirement goals to an extent.

So think twice, Let’s take an example a 25-year-old person who puts in a fixed amount every month, his savings in the first 5 years will account for more than 40% of his total corpus when he turns 60. The later you start, the more will be your monthly contribution each month. Let’s say your monthly expenses are 40k per month then on an yearly basis you would require 4.8 lakhs to maintain your standard of living. This is the bare minimum you would require. Secondly, now calculate the number of years you aspire to live so for example you are 25 year old now and your life span let’s say 80 years (I might be keeping this number high given the fact – to the kind of polluted environment/erratic food style and the kind of sedentary live we have) Then your figure would be 55 years. Lets multiply this it would be 4.8 lakh*55 years which will be 2.64 crores so if you have this much amount today available in your bank account you may retire today itself. This amount will be again reinvested into a traditional saving instrument which say will fetch you 5.5 to 7% interest p.a. basis…

Please note I have not considered your children education/marriage/home buy cost/ a car buy or any other discretionary expenses that you might incur during the course of your life. For such expenses you will have to plan your expenses separately. Also the inflation has been offset by the risk free return on your FDs and RDs. So think before it gets too late.

2 . Your investment amount should keep increasing on a yearly basis
Every year your income might increase by let’s say 5 to 10%. So did you step up your investment amount or not? (Nowadays few mutual funds give you a step up your SIP option.) Most of us believe this is not required. Please note inflation will eat your major corpus. So take a proactive approach. Lets taken an example once again to explain it better – if a 30-year-old with a monthly salary of 50,000 starts saving 10% ( 5,000) for his retirement every month in an option that earn him even a meager return of 9% per year, he would have accumulated 91.5 lakh by the time he is 60 years old. Now, assuming his salary increases by 10% every year and he raises his investment accordingly, it would be 2.76 crore!! Wat say…Liked the idea?. It is important to maintain the retirement savings rate at 10% so that your ultimate corpus value doesn’t fall short of your requirements. The trick is to is to stay committed…

3 : – Don’t dip into corpus amount before you retire

This might sound strange, but every time you change your job, your retirement planning is at a grave risk. Since one is tempted to withdraw one’s PF balance at that time!! Don’t do that to yourself instead transfer your PF account with the new employer. Remember you will have an option to withdraw your PF amount if you need the money for specific purposes in future – including your child’s marriage, buying or building a house, or in medical emergencies.

Dipping into the corpus before you retire prevents your money to gain from the power of compounding. Don’t underestimate what this can do to your retirement savings over the long term. A person with a basic salary of 25,000 a month at the age of 25 can accumulate 1.84 crore in the PF over a period of 35 years. This is based on the assumption that his income will rise by 5% every year. Yet, many people are unable to reach even the 1 crore mark in their PF accounts!! Although the paperwork is minimal, a lot of people prefer to withdraw their PF money when they change jobs or for other purposes.

The sudden flush of liquidity can trigger a spending spree and ill-planned decisions that can cripple your financial planning. Often, the money goes into discretionary spending. So next time think before you act in haste.

Tip: – Transfer it to the new account by filling ‘Form 13’ and submitting it to the new employer.

4 : – 100 minus (-) age = Your allocation to stocks

An investment portfolio’s performance is determined more by its asset allocation than by the returns from individual investments or market timing. Sadly most of us don’t realize this. How much you have when you attend your last day at work will depend on how you have divided your retirement savings between stocks, fixed income and other asset classes. As thumb rule you should have an equity exposure of 100 minus your age. So, at 30, you should have about 70% of your portfolio in equities and so on and so forth. At 55, the exposure to this volatile asset class should have been pared down to 45%. After you retire, your exposure to stocks should not be more than 25-30 % of your portfolio or even lesser. As I said it’s a general view point. This idea will differ depending upon ones requirements and risk bearing appetite.

5 : – Borrow for Children education, save for your retirement.

This might surprise many of you but as I said it’s a view point and you are open to debate on this – we are emotional beings and love to save for our children. Whether it’s for their education or for their marriage – remember before you pour money into a child plan/savings, make sure your retirement savings target has been met accordingly. In an effort to fulfill the needs of the child, Indian parents sometimes sacrifice more than they should. Some even dip into their retirement funds to pay for the child’s education. This is risky because your retirement is going to be very different from that of the previous generations. It will be entirely funded by you.

This doesn’t mean you should compromise on your child’s education. It can still be done through an education loan. U/s Section 80E, income tax deduction is available only if the education loan has been taken for yourself, your spouse or children…..So next time when you think on retirement planning do take these little points under consideration.