Retirement Planning Done Right

Life's greatest freedom comes with financial independence. A person who does not need to worry about her/his financial status will always have more things to do, greater choices to make and certain basic necessities of life shall be taken care of.

Financial independence is especially important when one is retiring or is nearing retirement. Retirement and old age bring along higher medical costs, reduced income and a greater risk from any adversities.

Around 9-10% of India's population is above 65 years of age, hence it is imperative for these individuals to be financially independent to ensure a safe, secure and happy retired life. The first step towards Financial Independence is identify your current stage of Financial Independence and then work your way towards a higher degree of Financial Independence. The chart below will help identify your current stage and steps mentioned below will help you move towards greater Financial Independence.

Moving towards greater Financial Independence:

A. Identify A Number

It is important to identify what your post-tax income will be so that you can decide how much you can save. A lot of retirement planning is based on number crunching while you are young. Retirement calculators are available online for this purpose. Typically, if you wish to retire in 5 year's time, you must save about 82% of your income. If you have more time, like say retiring in 10 years, the saving ratio comes down to 66.5%. If you have a long, long time to go before you hang your boots, like about 20 years, you can save about 43% of your income to retire easily. So ensure you plan as per your current income and saving ability.

B. Maintain Discipline

Discipline is always essential to maintaining a good investment portfolio and savings. If you lack financial discipline, you will never be able to meet your aim or stick to a schedule that discourages indulgences.

  a. You may save small amounts, but save regularly

How much you save isn't as important as saving regularly, without fail. Take control of your spending, plan your vacations in advance, look for deals and eliminate all costs except those that are absolutely necessary and watch as your savings go up over a period of time. Financial discipline may not be easy, especially with a lower income, but every penny counts. In a period of financial uncertainty in the global markets, it's important to have a stable income and another on the side to help tide over uncertainties.

  b. Save First Spend Later

A common mistake we all make is that we save whatever money is left of our earnings after we are done spending. Set a standard amount aside before you start spending and watch your savings grow and your investments make bank. If you think your income is too low to make savings, increase your income, lower your expenses or both. Set budgets and hold yourself accountable. Be honest; write down your financial goals realistically and start the process of saving.

C. Aim to Reduce Current Expenses

Current expenses must factor inflation costs at about 6% according to our current markets. Key factors that will contribute to your current costs will be necessary costs, lifestyle costs, inflation costs.

D. Start Early

A golden rule of managing savings is starting early to maximise returns due to compounding. A compound interest investment with a large initial principal and a lot of time to build, can lead to a great amount of wealth generation. It is especially beneficial if there are more periods of compounding like monthly or quarterly. It helps you earn interest on the interest you've already earned.

E. Start by Clearing Existing Liabilities

Liabilities are not expenses. Don't make that mistake of categorising both together. Get rid of your liabilities as soon as you can, especially if they are interest bearing ones. Loans and repayments must be cleared off as soon as possible. Insurance policies, particularly life and health insurance policies might take up a chunk of your monthly budget, but they protect you against future uncertainties.

After all of this, it is important to decide the kind of retirement plan that you need to opt for depending upon your net worth, savings rate, expected returns, average retiring age, and more. Retirement Plans help you gain financial security, eventually when your professional income will decline, you will still need finances to maintain your existing standard of living without compromise. There are different kinds of retirement plans like deferred annuity plans, immediate annuity plans, pension plans with and without life cover and traditional and non-traditional plans. These days, immediate annuity plans are the most popular retirement plans. So based on your current financial situation, decide on a suitable plan and steadily work towards financial freedom.