Consider inflation, life expectancy and monthly expenses to calculate corpus needed.
Spiralling food prices, rising medical costs and difficult economic times have posed serious questions about most people's retirement plans. Plus, most financial plans assume life expectancy at 80-85 years, but one can easily outlive this. These and other factors could derail one's retirement plan.
A retirement plan should be started early and not relegated to the later years of one’s life. This can have serious repercussions in terms of under-funding the retirement corpus and having to make adjustments in the standard of living, post-retirement.
One of the best remedies is to start a Systematic Investment Plan in a diversified equity scheme (as low as Rs 1,000-1,500 per month), without worrying about the short-term or medium-term fluctuations in the market. Over time, these small savings will grow into a much larger corpus.
A common practice is to invest in traditional insurance policies early in the savings span for retirement. This practice can actually be a vice. Most of these policies fetch returns of four to five per cent only, whereas an individual's standard of living is bound to increase by at least eight to ten per cent yearly till retirement. Stable and fixed returns are one of the considerations for investors looking at traditional policies; the same objective could be achieved by investing in bank recurring deposits. These will not only help in achieving the former objective but also help in maintaining discipline in savings. Pension plans offered by mutual funds are a good alternative for a retirement plan.
PPF
A low rate of return, coupled with a long lock-in of 15 years, dissuades most younger investors from the very traditional Public Provident Fund account. Although the scheme provides for limited withdrawals and loans against balances after a stipulated period, it fails to invoke much investor interest. With better alternative products available, many distributors too shy away from recommending investors to open a PPF account.
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Yet, PPF continues to be a time-tested method for retirement planning. The long lock-in is actually a boon, to prevent withdrawal from your retirement funds for any other purpose. The sovereign guarantee and tax-efficiency of returns act as sweeteners. It makes sense for an investor to open his PPF account almost the same time as he gets the first job. You could start maintaining the account with contributions beginning at Rs 1,000 yearly.
CONSOLIDATION
Retirement being a long-term goal, the investment strategies adopted are typically aggressive. Most people fail to take into account that this aggression has to be consolidated at a particular point in time, well before retirement actually sets in. For instance, if one's retirement is just a year away and the investment is in property and equities, there is can be a problem. Converting these instruments into cash and re-investing in fixed income instruments would be time consuming. Waiting till the last moment to help the investments make that extra buck could prove dangerous. Investors have to provide for at least three years' consolidation time. The earlier they begin providing for their retirement, the earlier should be the consolidation phase. This phase essentially helps the investor to take stock of investments prior to entering the retirement phase.
INFLATION
Calculating the required retirement corpus involves taking into account factors like life expectancy and the expected rate of return the corpus could earn during the retirement phase. Most investors err in assuming a high rate of inflation-adjusted return on their investments during retirement. Currently, bank deposits are yielding around 10 per cent returns and published food inflation is around 9.5 per cent. This means the inflation-adjusted return is hardly 0.5 per cent.
Similarly, underestimating the inflation rates during pre-retirement stages has an undermining effect on the desired corpus. For Rs 50,000 of monthly expenses today, assuming an inflation rate of five per cent over the next 15 years on to retirement, the per month expenses would be about Rs 104,000. However, if the rate is assumed at 10 per cent, it shoots up to Rs 209,000.
It is essential to sit with a planner to understand your expense/investment pattern and adopt the right inflation rates and investment rates. The planner would be able to lay down the right time for consolidation of investments, on the basis of a proper investment strategy. A well-laid retirement plan is key to fighting inflation and providing for financial stability.
The writer is a certified financial planner