What is Retirement Planning?
Retirement planning involves preparing today for your future life so that you can continue to achieve your goals and fulfil your dreams independently. This process includes setting retirement goals, estimating the amount of money you’ll need, and making investments to grow your retirement savings.
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Each retirement plan is unique, reflecting the personal goals and preferences of the individual. Since everyone has different ideas about how they want to spend their retirement years, it’s crucial to have a plan tailored to meet your specific needs. To enjoy a stress-free retirement, it’s wise to start planning early.
How to Determine the Retirement Corpus Needed to Maintain Your Current Lifestyle?
To calculate the retirement corpus needed to sustain your current lifestyle after retirement, two main factors must be considered: the age at which you plan to retire and the lifestyle you envision post-retirement. Once you have these details, you should also factor in inflation.
For instance, if your current lifestyle costs ₹50,000 per month and you plan to retire in 10 years, maintaining the same lifestyle would require adjusting that ₹50,000 for inflation over the next 10 years, typically at a rate of 5-7%. This adjustment means you would need between ₹85,000 to ₹1 lakh per month, which equates to an annual income of around ₹12 lakh. To achieve this monthly income from your retirement savings, your corpus should be large enough to generate this amount as “interest.” Using the example above, assuming an annual interest rate of 6%, you would need to accumulate a corpus of approximately ₹2 crore to generate an annual income of ₹12 lakh. While this example simplifies the process, it highlights the essential steps in retirement planning: determining the timing of your retirement, estimating your post-retirement income needs, and calculating the necessary retirement corpus to meet those needs.
One effective strategy is the retirement bucket strategy, which involves organising your savings into three “buckets” based on when you’ll need access to the money.
What is the Three Bucket Strategy in Retirement Planning?
The three-bucket strategy divides your savings based on when you’ll need the funds: short-term, medium-term, and long-term. The short-term bucket contains easily accessible cash, the medium-term bucket invests in income-generating assets, and the long-term bucket focuses on growth investments. This approach helps retirees manage market fluctuations while withdrawing money to meet financial needs throughout different stages of retirement. It’s also beneficial to combine this strategy with other asset management techniques, such as asset allocation and rebalancing, to maximise its effectiveness.
1st Bucket: Short-Term Needs
The first bucket is designed to cover everyday expenses and unexpected needs, like medical bills, particularly during the first 3 to 4 years after retirement. Funds in this bucket are typically kept in highly liquid and low-risk assets, such as flexi savings account, fixed deposits, and liquid funds, ensuring they are readily accessible for immediate needs.
2nd Bucket: Medium-Term Goals
The second bucket is intended for medium-term goals, such as travel or hobbies, with a time horizon of about 5 to 10 years. Investments in this bucket generally aim for moderate returns, allowing your savings to grow steadily. Suitable investments for this bucket include short-duration funds and high-quality corporate bond funds, which offer a balanced approach between growth and safety, this bucket is also responsible to generate a regular monthly income which you need at that time for your non-negotiable monthly expenses.
3rd Bucket: Long-Term Investments
The third bucket focuses on long-term investments designed to generate the highest returns, adjusted for inflation. It also serves to replenish the first two buckets whenever necessary. For long-term objectives, it’s important to invest in high-growth potential assets like stocks. Blue-chip funds and multi-asset funds are excellent choices for this part of the retirement strategy.
The Bottom Line
Retirement planning in India is more than just saving money; it involves strategic investing, tax planning, and ensuring a secure and well-managed post-retirement life through proper estate planning. By integrating these elements into your retirement plan, you can ensure financial stability, achieve your post-retirement goals, and leave a lasting legacy for your loved ones. Remember retirement is the longest holiday of your life, make sure to plan it well to make it enjoyable!
