Five steps for healthy retirement

Retirement planning is about leading a comfortable financially independent life post employment.

This is even more important in the backdrop of increased life expectancy, inflated health cost and growing ambition for an early retirement. Assuming 5% inflation over next 25 years, the value of Rs 50,000 would be Rs 1,69,000. Hence, if a family has expenses of Rs 50,000 per month, they would require Rs 1,69,000 per month 25 years from now till one’s lifetime (say at least 20 years).

So the moot question remains, when should you start planning for retirement? Well, it’s never too early to start planning for retirement.

For a significant retirement corpus, it is essential to start early as you allow the magic of compounding to work in your favour. Here’s a list of five must-do steps for a healthy retirement kitty.

Leverage the power of compounding To quote Einstein, “Compound interest is the eighth wonder of the world. He, who understands it, earns it. He, who doesn't, pays it.”

 To put it into layman’s language — Compounding turns a small amount invested regularly into a monumental fortune over period of years. Starting early makes all the difference.

For example, if you start investing Rs 5,000 per month at the age of 20, earn compounding interest of 12% your regular savings turn into Rs 5.93 crore when you retire at 60. But if you start with the same amount at the age of 30, the sum accumulated at 60 would be just Rs 1.75 crore.

Disciplined investment

Do not save what’s left after spending, but spend what’s left after saving. No matter what happens, one should set aside an assured amount every month for retirement throughout his working life.

This small investment made regularly yields handsome returns over a long-term horizon due to the magic of compounding.

This is called Systematic Investment Plan (SIP). SIP-ing should be done in direct equities or mutual funds tilted towards equity which offers sufficient returns to beat the inflation.

Focus on equity as preferred asset class The prime target of the investment is to beat the inflation by a wider margin, so that the corpus available is sufficient enough to take care of the retired life.

Equities have given consistently superior returns over inflation in the long-term when compared with any other asset classes.

The average annual return of the stock market over the period of last 16 years (2001 till date), considering Nifty index as the benchmark to compute the returns, has been around 15%.

Moreover, equity investments brings with it a) ease of transaction and highly liquid asset class as one can make an investment or exit instantly, and b) very low cost of transaction and ease of storage using the dematerialised format.

The exposure to equities should be significantly higher in the initial years and with age one can gradually shift to more stable asset class viz., the debt funds, EPF, PPF.

This strategy will ensure a growth oriented portfolio along with the comfort and certainty about the amount available in hand post retirement. As retirement planning involves understanding of various asset classes, one should take help of expert to design the same.

Balance your portfolio

One should regularly review the performance of the investments made and ascertain that the investments are offering the requisite returns.

One must have a re-look at the investment if it fails to meet a certain laid down course.

Also, one must try step up the investments periodically with the passage of time. Instead of committing an absolute amount per month, try to allocate a certain percentage of monthly income towards retirement planning.

Plan for healthcare

Healthcare is of utmost importance post retirement. On average, one has to spend around 20% of the monthly expenses on health-related issues after retirement.

Hence, one should also subscribe for an adequately comprehensive health insurance having coverage of medical ailments as wide as possible with limited exclusions.

Over and above, one should buy health insurance policy early as it not only reduces the burden of premium paid but it also covers you against illness/treatments that require you to serve several waiting periods.

Finally, as one approaches retirement, one should ascertain the regular cash flows needed and should have a Systematic Withdrawal Plan (SWP) that allows withdrawal of money at predetermined intervals.

As withdrawal attracts income tax, it is wiser to have investments in equity as it makes a tax efficient strategy given the fact that there is no capital gain tax on investments above one year.

Must-do steps

 Start early and take help of a financial advisor
 Make use of Systematic Investment plans (SIP) to build the portfolio
 Ensure higher allocation to equity for a growth-oriented portfolio
 Regularly monitor the performance and step up your investments
Get a health insurance early

(The writer is MD and CEO at Axis Securities)