A guide to creating a retirement budget -Business Standard

Retirement means taking things easy. But in order to have a happy one it is never a good idea to be complacent about the planning. Finance institutions like HDFC Life offer tailor-made innovative pension plans to provide financial security for a happy retired life without compromising on living standards. 

Experts, in fact, recommend that retirement planning should start from the day you start earning. Presenting six steps to help retire in comfort. 

1. Budget for retirement

Knowing post-retirement expenses is crucial to retirement planning.

Two ways to do it: 

a. Estimate the retirement fund

Every individual needs roughly about 70% to 80% of pre-retirement gross income. Sooner one starts, the better it is. That way even after the paychecks stop coming, life doesn’t. 

It’s a good idea to consult a financial advisor on how to create a monthly budget. Many reputed financial firms, like HDFC Life, have formulated retirement expense worksheets, so the help needed to pencil out a budget for retirement is just a click away. 

b. Create a detailed monthly budget for retirement

Some expenses, such as those on clothing and entertainment, come down. Others, such as transportation, medicine and insurance, go up. Typically, during the initial retirement years, people spend more on travel and leisure activities, and later, more on health. It is important to note that everyone’s situation is different, so what works for one individual may not work for another. 

How to come up with an estimate?

Start with your current spending pattern: Use your monthly take-home pay as a starting point, and then ask a few questions. 

• What amount gets currently deposited to your account after all deductions for taxes, retirement plans, insurance, etc. are done?

One must carefully deliberate, evaluate and add up all the expenses you’re likely to incur after retirement, especially during the first year of retirement. Then, adjust it to reach an affordable and yet comfortable retirement lifestyle.

2. Start an SIP 

The first rule of retirement planning is to save 10% of your income for retirement. It is the easiest to follow. Start a Systematic Investment Plan (SIP), invest in mutual funds and automate the process by giving an Electronic Clearing Service (ECS) mandate to the bank. 

While an investment portfolio's performance is determined more by its asset allocation than by the returns from individual investments or market timing, it is important to have a tailor-made plan to distribute the corpus instead of a generic one. To take that first step, a hesitant investor can just get a reputed investment organization and request for a personal advisor. HDFC Life has a Call Me Now option available for guiding the investor.

3. Get a life insurance 

Many think that retirement planning and life insurance are two separate things; former for self and later for beneficiaries. But contrary to popular perception, life insurance is an important aspect of your retirement plan. It is, as many advisors would say, a minimum investment risk plan with long-term benefits, especially when started young. 

Term insurance is the best and least expensive security that one can offer dependents. It provides the basic financial protection in case of untimely death. So the family has enough to live off on even when the investor has not accumulated adequate savings.

With the average lifespan of an individual seeing an increase, there is another risk that retirees will be exposed to—longevity. In such a scenario low, fixed price of a term insurance frees up more disposable income to create an additional fund. And in case of emergencies, the term insurance can also double up as a contingency fund, so the investor doesn’t have to break into the retirement kitty.

4. Allocate a sizeable portion of any raise to saving

Increase investment as your income grows. Some portion of the raise can be enjoyed, while the rest goes to create an egg’s nest for the future. As a rule, allocate half or more of it to savings. Whenever an individual gets a windfall, such as a tax refund or a lump-sum payment in the form of bonus or variable pay, it should be treated as periodic booster for retirement corpus. 

5. Factor in inflation and surprise expenses 

Rising inflation, high cost of living and increase in life expectancy has made retirement planning a challenge. To ensure availability of funds in your old age, every individual needs to chart a plan. 

People frequently leave out some expenses in their retirement budget including vacations funds, home and auto repairs, gifts, charity, etc. The best way to budget for these items is to set aside a monthly amount into a savings account that can be dipped into for such “unexpected” expenses.  

6. Don't dip into corpus before you retire

Instead of withdrawing Employees’ Provident Fund (EPF) and Provident Fund (PF) balance when changing jobs, it can be transferred to the new account by filling 'Form 13' and submitting it to the new employer. The sudden flush of liquidity can trigger a spending spree and can cripple the retirement planning.

Indian parents often dip into their retirement funds to pay for the child's education. This is risky because their retirement is going to be entirely self-funded. Under Section 80E, income tax deduction is available only if the education loan has been taken for oneself, spouse or children. So borrow for education, and save for retirement

Lastly and most importantly, retirement planning is not a one-time thing. Apart from inherent changes in investment vehicles, investors need to align to the changes in personal life, goals, expenses, and so on a yearly basis.