Imagine that it is the start of a slow, stress-free weekend where you’re sipping your morning beverage with your life partner and discussing your future. You discuss the lives that both your parents are currently living and eventually, the conversation turns towards your existing lifestyle, your long-term Financial planning, and the kind of life you want to live after both of your retirement.
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You decide that you will prepare a goal-based financial plan for all your life’s financial goals (including retirement) and that you will retire at the age of 60 years. By doing your retirement corpus calculations you estimate that you’ll need to accumulate nearly ₹ 6 crores over the next 30 years to live a comfortable lifestyle of your choice.
By calculating backward from that financial goal you estimate that you’ll have to invest nearly ₹ 17,000 every month for the next 30 years in an instrument that can deliver 12% returns to reach that goal.
Based on your and your spouse’s existing monthly salaries, you seem to have your financial plan for retirement figured out because you have the capacity to save that ₹ 17,000 monthly and accumulate that corpus of ₹ 6 crores by your retirement year.
Now ask yourself the following questions:
– Would you need that ₹ 6 crore all at once in 30 years?
– What would be the taxes associated with it?
– Where would you invest that lump sum amount to generate enough passive income while ensuring that the corpus lasts till your last years?
– Will that generate enough cash flow year after year for you and your dependents to live the lifestyle you desire?
– What if an unforeseen expense (like treatment for a critical illness) arises and severely depletes your corpus?
As you would have realised by now, estimating the retirement corpus and the monthly investment needed to achieve that by your retirement year is just the beginning of your retirement planning process; there are various other factors to consider.
Before we jump into those let’s understand and contrast goal planning and retirement planning a bit more.
What is goal-based financial planning?
It is a well-known financial planning technique that relies on putting together a timeline of your financial goals, and based on the time remaining for each of those goals estimating the total monthly investments that would be required to achieve them and assigning a financial instrument for each goal.
Although these financial planning goals differ from individual to individual, there are some common financial goals that we Indians aspire for, like buying a home, kids’ education, kids’ marriage, and retirement. When planning for the fulfilment of these goals, you need to decide how far along the financial risk spectrum are you willing to go to achieve them.
Generally speaking, the more a goal is far away the more the amount of risk you can take with your money. Like, if your kid’s higher education is around 15 years out then you might choose equity mutual funds as your preferred financial instrument. And if you’re planning to purchase a home in 1 year then you might do a fixed deposit or park your money in a liquid debt fund.
So, your basic goal plan for those two goals would look like –
- invest ₹ 20,000 monthly in X and Y equity mutual funds for 15 years to fund your kid’s higher education and accumulate nearly ₹ 1 crore, assuming an annual return of 12%.
- Invest ₹ 57,000 monthly in recurring deposits for 12 months and put your existing corpus of ₹ 40 lakhs in a 1-year fixed deposit, both fetching nearly 7% annual return, to accumulate nearly ₹ 50 lakhs for your home downpayment in 1 year.
There are many more considerations in a full-fledged goal plan (like your risk appetite, taxation of capital gains, etc.) but to put it simply this is how goal planning is used to achieve point-in-time financial targets by setting up recurring investments in appropriate financial instruments.
Retirement is a pretty long phase; the last leg of your journey
Retirement is the time when most of us desire to live according to our terms, with full control of our time. During your active work life, there would have been moments when you’d have deferred certain lifestyle expenses because you were saving for your financial goals. And when envisioning retirement you’d have imagined living the lifestyle you want to live without having to worry about any future responsibilities, i.e. living a life of financial freedom.
But to design that kind of lifestyle for yourself there are a few things that should be kept in mind:
- You will no longer have an active income but you will still incur expenses every year – like those related to home ownership (maintenance fees, property taxes, and others), leisure, healthcare (regular check-ups and medications), household necessities and miscellaneous (support to family and salaries for domestic help).
- On top of these expenses, there would be unforeseen expenses like medical emergencies as well. So, you need to plan for a comprehensive health insurance policy to protect your downside.
- And then, there’s inflation, to eat away at your savings and reduce your purchasing power. It needs an asset allocation strategy specifically tailored to deliver you the lifestyle that you have worked so hard for and to protect you against your lifestyle inflation.
- To cover these expenses (and the associated inflation), you need your assets to generate enough passive income and have that income go up every year to account for that inflation.
So, retirement is definitely not something that you can fund once, and remain assured that things will turn out rosy. It is a phase of life, spanning multiple years, that needs a more holistic approach including but not limited to:
- Emergency planning – to protect against unexpected expenses;
- Cash flow planning – to ensure that the passive income generated is adequately covering family expenses;
- Tax planning – to ensure that your income taxes and capital gains taxes are not unnecessarily high;
- Investment planning – to have a diversified portfolio that combines stability with growth.
Estate and will planning is not included here because that pillar of holistic financial planning is at least (if not more) as vast as retirement planning.
So, which financial product is best for retirement planning?
Since retirement influences so many people, governments all over the world have promoted financial products that are separately designed for that by giving them favourable tax treatment, both on entry (income deduction) and exit (capital gains exemption), which also improves their return profile. This also encourages investing for the future.
In India, the most famous options include National Pension System (NPS), Employee Provident Fund (EPF), Public Provident Fund (PPF), Atal Pension Yojana (APY), insurance companies’ pension plans, and Senior Citizens Saving Scheme (SCSS). While the majority of these products provide debt-like returns, NPS stands out because of the diverse exposure it offers to different asset classes (equity, debt, and alternatives), flexibility in withdrawal of the lump sum portion of the corpus on retirement, and creation of regular cash inflows (via annuity purchase) after retirement.
What it does is give you a vehicle to –
- park your money consistently until retirement (and get tax benefits);
- withdraw up to 60% of the corpus (tax-free) after retirement from 60 years to 75 years of age on a periodic basis (monthly, quarterly, half-yearly, or annually); and
- purchase an annuity plan for the remaining corpus and receive periodic annuity payments (again monthly, quarterly, half-yearly, or annually), which will be taxable based on the applicable tax slab and the chosen regime.
For those interested in understanding NPS end-to-end, we covered it in a separate article here.
Final thoughts
Don’t let goal planning be your only retirement strategy. While it’s a good starting point, it falls short for the long haul. Estimating the right retirement corpus for you is important to get a ballpark figure, but simply investing in SIP to achieve the target corpus is full of pitfalls.
Also, none of the listed products, including the well-rounded NPS, are a one-stop shop for your golden years.
NPS comes closest but even that is not extensive enough to suffice for your retirement needs.
For that, you have to consider factors like financial planning for health emergencies, income tax, enough passive income to cover your expenses, accounting for expense inflation, and building an asset allocation strategy that ensures the longevity of your financial portfolio, among other things.
Think of NPS as a springboard, not the finish line. Don’t risk an underwhelming retirement filled with lifestyle adjustments and compromises.
To Avoid scrambling later seek a qualified financial advisor to do the retirement planning for you.
Get in touch with us and let our Qualified Financial Advisor craft a personalised plan that aligns with your preferences and aspirations.
We’d be happy to help you map out your dream retirement journey.
Have a happy retirement!
