Planned for your retirement yet? Here are some quick thumb rules to start

Heuristic guidelines are a good place to start. Once you get a hold on them, seek professional advice

India is no longer a nation of savers. Instead, we are focusing more on current expenses rather than saving and planning for the future, reveals a survey by PGIM India Mutual Fund.

The survey, titled Retirement Readiness Survey 2020, states that retirement planning ranks low on people’s priorities, even as children, spousal security, fitness and lifestyle rank higher.

Ajit Menon, chief executive officer, PGIM India Mutual Fund, says, “Given the current economic challenges emerging in the wake of the pandemic, the need for future financial security or financial freedom is even more pertinent today. The only financial goal which does not get you a loan is retirement. This puts the onus squarely on each one of us.”

Oddly enough, most Indians underestimate the importance of retirement planning. According to the survey, 89 per cent Indians do not have an alternative source of income, and barely 1 in 5 factors in inflation while planning for superannuation.

There are a few thumb rules to help you get there. Broadly speaking, retirement planning has two basic components. The accumulation phase where you collect the retirement corpus; the distribution phase where you use the corpus after retirement.  

Accumulation

The most common rule of thumb is that families must save 10-15 per cent of their gross (before taxes) pay.  Anuj Shah, chief financial planner of Wealth360, says, “Thumb rules are a good starting point. In today’s scenario, 15 per cent looks more realistic. For those who have waited to the point where they don’t have 40 years to save for retirement, the mathematics alters to 25 per cent.”

The more time you have for retirement, lower is the amount you need to save. Even a small amount works out to a tidy sum in the long run.

Kartik Jhaveri, director, Transcend Consulting (India), agrees. “As a different perspective to this thumb rule, spend 30 per cent towards personal expenses, 40 per cent for EMIs, including home loan. The rest 25-30 per cent for savings and investment.  Fifty per cent of this investment should go towards a retirement corpus,” says Jhaveri.

There are several instruments for retirement planning. It’s important to go beyond Employee and Public Provident Funds. Ranjit Dani, advisor, Think Consultants, says, “Someone with more than 15 years to retire should invest in equity via systematic investment plan in diversified equity multi-cap funds, and National Pension System.”

Late-starters who don’t have a long time frame should lower their equity portion as they approach retirement age.

Distribution

Once you have gathered enough funds, how do you make the retirement savings last?

A thumb rule called the ‘4-per cent rule’ helps. Shah says, “As a rule of thumb, aim to withdraw no more than 4 per cent of your savings in the first year of retirement, then adjust that amount every year for inflation.”

This is a sustainable withdrawal rate which is an estimated percentage of savings that you will be able to withdraw every year throughout retirement without running out of money.

Shah says, “Remember this is a general rule. Your sustainable withdrawal rate could be more or less. There are factors you can’t control, which will come into play like inflation, market returns on your corpus, and the investment mix.’

If we go by the survey, clearly Indians are ignoring their future needs for short-term goals. These thumb rules are a good place to start. Once you have an idea of how things pan out for you, we suggest you take professional advice to ensure stress-free retirement.