Plan your retirement corpus for a better future

Retirement corpus or retirement planning is a much-discussed topic among various age groups, from young earners who have just started working to people who are getting closer to retirement age.

Let us answer various questions around retirement planning for those wondering about it. Why should we do retirement planning or build a retirement corpus? How much do we need for a peaceful retirement? When do we start and how to plan a retirement corpus?

What is retirement planning?

In simple words, retirement planning is the process of putting aside amounts from your income during your earning years in a way to ensure it grows over a period of time to take care of your future needs when there will be no income or job.

Why retirement planning?

Retirement planning should be the first goal to plan for. Banks will offer you a loan for every other goal— be it a house or car purchase, children’s education, travel, wedding, shopping, etc., but nobody offers you a loan to fulfil your retirement goal. You can borrow from your future income for everything else whereas retirement is different as there is no future income. Hence, this should be the top priority. Given the hectic work routine, retirement is a time to look forward to pursuing your passions like travel and other interests and hence, a good retirement plan is essential.

Retirement corpus = Me time

You can view retirement corpus as investing a part of the current income to buy yourself time in the future. Most individuals today wish to be able to retire early — some want to retire by 40, some by 45, some 50 and so on. The single most important determinant that gives you a choice of early retirement is the size of the corpus and whether it is sufficient to meet all future commitments and growing retirement expenses. So by building up a retirement corpus, you are trying to buy yourself time.

Do expenses come down post-retirement?

This is the biggest myth that many of us like to believe that expenses come down post-retirement. It was probably true for the previous generations, but for people looking to retire beyond 2030, it may very well mean higher expenses, given the additional time available and the fact that there are many activities in the to-do list that are pending. Hence a well-planned retirement corpus can make life post-retirement worth looking forward to.

When to start building a retirement corpus?

A better name for retirement corpus would be financial freedom corpus. The best time to get started on this corpus is from the first paycheck. Ancient wisdom from the days of Babylon suggests that you should work to pay yourself first before you pay for any other expenses and commitments.

This means putting aside a fixed percentage of your income for your future goals like retirement. Even small amounts saved during the early years add up to sizeable amounts during retirement due to the power of compounding. In the initial years of working, ensure that you put aside money to take advantage of 80C tax benefits and allocate these amounts for the retirement corpus.

How to start with retirement planning?

The first step towards retirement planning would be to arrive at a corpus required and then at an investment plan to achieve the required corpus. A thumb of rule approach would be that an appropriate retirement corpus would be about 30 times the projected annual expenses during retirement. To arrive at monthly or annual expenses during retirement, we must take into consideration that expenses would double every 10 years. So for instance, a 40-year-old spending Rs 25,000 per month today, would have monthly expenses of Rs 50,000 by the age of 50 and almost Rs 1 Lakh per month at the age of 60.

8 important points to keep in mind

1. Inflation will ensure monthly expenses keep going up post-retirement as well, so plan for it.
2. We are moving towards a lower interest economy, so interest rates will continue to move lower over time.
3. Salaried individuals should not touch PF under any circumstance and transfer it to the new organisation in case of change of job.
4. Equity as an asset class should be part of your portfolio during retirement corpus building and post-retirement too.
5. Diversify your investments and do not lock in most of your corpus into illiquid assets.
6. Don’t divert your retirement corpus into children’s education cost. Taking an education loan and making the child responsible for it is better.
7. As far as possible, try to avoid taking loans, except for a home loan if required.
8. It will be even better if you can partner with a good financial planner, who can mentor you through this journey.

(The writer is Founder, Infiniti Investments)