What you dream of doing after retirement is often extremely personal — maybe you want to spend more time with family, or perhaps pack up and move to the mountains, or do nothing at all. In any case, you need to plan your finances for the self-sufficient life you want to live post-retirement. This involves taking a closer look at your income sources, expenses and investments.
It’s easy to confuse retirement with achieving financial freedom. While retirement implies the end of formal work done for money, financial freedom is a state in which you’ve earned enough to meet your needs in the long run and choose to continue working purely for your own fulfilment. The latter could precede the former, but you may choose to continue working even after achieving financial freedom.
Although retirement planning is widely marketed in India, not many Indians actively pursue it — In 2022, Outlook reported on a survey by Max Life Insurance, which found that 59% of respondents were concerned that they would exhaust their funds before retirement. A large part of people’s ignorance towards retirement planning comes from the failure to consider life expectancy, which has steadily been increasing over the past few decades (a study by The Lancet journal, as quoted by Business Standard, found that life expectancy in India had increased from 59.6 years in 1990 to 70.8 years in 2019), and will likely continue to do so.
What this means in practice is that you might live longer than 85 years, so even if you retire at the age of 60, you still have at least 25 years to live without a regular income. Financial preparedness is crucial. Here’s how you can break it down:
Set Clear Goals
Your short-term goals change over time — they look different for everyone and need to be managed simultaneously alongside long-term goals like retiring with enough funds to dip into. Knowing your milestones — buying real estate, starting a family, setting up an emergency fund, etc. — will help you determine when you want to start actively working on your retirement plan. Once you’ve set these goals, you can prioritise them and accordingly start planning for retirement.
Determine Your Retirement Age
Before assessing your finances, you should put a realistic number to the age at which you want to, or will have to, retire. This is mostly subjective, based on your future goals and milestones, but it is also essential to factor in life expectancy.
Estimate Your Corpus
Depending on when you want to retire and what your goals are, you should calculate the amount of money you will need to sustain the lifestyle you’re accustomed to. This involves assessing your assets, liabilities, savings, etc. A financial advisor can help you arrive at an achievable amount that will help you sustain your post-retirement needs.
Consider Factors Outside Your Control
There are a few things that you cannot manipulate but will need to make adjustments for — like how much time you have until you retire, and the rate of inflation. For the former, while your retirement plan need not top your list of financial goals and milestones, it always helps to start early so you have more time to compound your returns. In terms of inflation — which impacts interest rates on investments or liabilities, and the cost of living — you need to factor this in while estimating the amount you will need to live comfortably after retiring.
Over the course of your productive years, as your earnings increase and your basic needs are ticked off, you should start using your disposable income to build assets that will benefit you once you’ve retired. This can include buying a property to generate rental income, putting money in mutual funds, starting an SIP, etc. Your investments should match your financial behaviour.
For instance, if you are risk-averse, you might not want to invest in volatile asset classes. Also, if you fall within a certain income bracket where your finances are heavily impacted by taxes, including tax-saving investment products could serve your retirement corpus well. There are also schemes like the National Pension Scheme (NPS), Employee Provident Fund (EPF), Public Provident Fund (PPF), etc. that help you plan for retirement. Besides looking into these, you can purchase annuity products to build your corpus. However, it is important to be well-informed before investing in these schemes or products.
Planning for retirement might seem like a daunting process, or something that you can delay, but it is essential if you want to live your ideal life after retiring. Carefully assessing your finances, setting realistic goals and of course, seeking help from a financial advisor will make the process a lot easier and more streamlined.