www.fintoo.inINDEX O01. Introduction — --------+------+--2-2 22° 02. Understanding 9 ---------------- Inflation 03. Why is Retirement 9° =~ Planning Important? 04. How should one 90 -nreeeneeee plan for their retirement? 05. Age-wise Retirement 9}4£©£©°9~—-~ Planning 06. Investment Options 9 = for Retirement Planning 01 02 06 08 12 15Speaking in terms of career, we all are at different stages of life. Some might be just at the beginning or a few years into their work life, whereas others would be halfway through their work life. But, regardless of where you are, you will find something common with everyone. The desire to achieve financial stability for your retirement. One of the most common financial goals is to make sure that you retire with a happy and satisfied life. The fact that you have retired should not block you from living a desired lifestyle, and you should continue to lead a lifestyle you think you deserve. But before taking a view on retirement planning, you need to understand a few things. The first would be inflation. As the cost of living increases with time, you won’t be able to manage your expenses with the same income. Let’s understand what inflation is and how inflation can hugely impact your investment returns while planning your retirement. 01UNDERSTANDING INFLATION fT RE > What is Inflation? Inflation refers to the general upturn in the level of prices over time. It grinds down the purchasing power of money that we have at present. Inflation is the biggest risk that every investor faces. Let’s understand inflation with a simple example. Suppose you have INR 100 with you today, which is enough to buy a plate of masala dosa you wish to eat. If the inflation in one year’s time rises to 10%, then the price of the same dosa will cost you INR 110. Thus the INR 100 that you have with you has lost its purchasing power to the force of inflation. 02In order to maintain the purchasing power of your cash, you need to invest in asset classes or investment options that are expected to grow in value, at least at the rate of inflation every year. Having said that, it is very important to take inflation into account while planning your investments to achieve your retirement goals. After making all the efforts towards savings, investments, and financial planning throughout your working life, the last thing you want is to be caught up in any financial crisis. Besides that, it would hardly be fair to give up on those dreams and goals that you have worked for throughout your pte-retirement life. Hence, to avoid any financial hassle after retirement, you need to bear in mind that inflation is an important accessory in financial planning. } Defining the problem If you are born poor, it’s not your mistake. But if you die poor, it's your mistake. It is very easy to ignore the phrase “Planning for Retitement." Until the age of 45, most people believe they still have enough time to think about retirement and don't need to bother planning it so soon. People in the age bracket 45-60 think they have funds to retire peacefully. However, the reality is far from it. 03Studies say that 62% of retired individuals are still taking up jobs due to instability and lack of financial freedom. Moreover, 76% of people depend on their children to look after them post-retirement or manage their expenses by availing of some government benefits. These facts are indeed quite alarming as today's world functions more on the practical terms and less on the emotional side. While there might be nothing wrong in expecting your own kids to help you financially, it is always better to manage your retirement on your own. Because in the coming years, retirement will pose as the biggest challenge. With the youngest brigade, India will undoubtedly have to face the massive heat of retirement in the future as we lack social security systems or government aid after retirement. This indicates that we have to manage our retirement from our own corpus. We find most people today between the age group of 45-55 carrying the perception that if they have X amount of funds, it will fetch them 7% of risk-free return, and that is enough to retire peacefully. Here’s where most people go wrong. Retirement planning cannot be done without factoring in inflation because the rise in inflation over the years will reduce the value of your real returns. This is why our top advice for people planning their retirement is always to make those investments that will fetch them inflation-adjusted returns. The second common mistake that Indians often make is that they give more weightage to goals that require a lot of funds. For instance, spending on their child’s wedding, Indian wedding ceremonies are known to be lavish and vibrant. They usually take up a week of traditions and celebrations. Naturally, it becomes a costly affair. But since marriage is an important step for any person, parents start walking the emotional road and go overboard with their spending to make sure that there is no compromise on their child’s special day. They even withdraw money from their PF to afford a grand celebration without wor! rying about their own needs. They feel that post-retirement, their kids will take care of their well-being just like they took care of their 04parents. This has always been a common practice in our country, but it is soon bound to change. Kids today grow up and prefer a life of their own and are more inclined to follow the western lifestyle. Even though they might wish to financially support you, certain personal reasons might restrict them. Or even if they provide you with financial help, their professional life might not give them the time to plan enough post-retirement activities for you. It is a difficult fact to accept, but it is rare to find "Ram and Laxman or Shravan Kumar" in today’s young generation. So, you need to take care of your retirement and prioritize it without relying on your kids. Subsequently, if your children are always there for you emotionally and financially after retirement, it would definitely be an added benefit. Retirement Planning is a serious affair, and one should give it adequate time and consider taking assistance from an expert. We need to find the answer to the following questions while doing retirement planning: ry How much retirement Corpus should you have at the time of retirement? How can I diversify and create more than two sources of income post-retirement which are risk-free and will continue for life? 0 3 How much amount should I set aside for my retirement now? 05To lead an active and healthy life when you grow old - Once you have taken care of the finances to plan your post-retirement life, you will be free to focus on other important elements of your life, which are your health, well-being, and your aspirations. To not compromise on the standard of living - Everyone desires to have the best standard of living, which becomes a bit difficult to achieve after retirement because of limited or no regular source of income. But planning for your retirement early on helps you to make the tight financial choices without alteting your quality of life even after retirement. 06No salary post-retirement - 4 out of 5 people in India fear that their savings will not last for their retirement - finds Max Life India Insurance’s India Retirement Index Study. Because your major sources of income will be discontinued after retirement, therefore it is essential to start investing in building your retirement corpus as early as possible. Mote and more emergence of nuclear families - Nearly 68% of the working-age population expect their children to support them in their retirement, perhaps due to their unpreparedness. In reality, only 30% of retirees are actually getting such support. To lead an independent post-retirement life, early retirement planning is important. Increased life expectancy - With the increasing and improved healthcare system in India, the life expectancy of the Indian population may increase, and therefore your post- retirement years might also most likely increase, resulting in the need to build a larger retirement corpus for sustaining your desired lifestyle for the long term. 07HOW SHOULD ONE PLAN FOR THEIR RETIREMENT? Ba Roe yccent AOE Considering all the above-stated importance and need for retirement planning, we require the same disposable income as we would have when we were working. Lesser disposable income wants a compromised post- retirement lifestyle, which none of us wants. One should consider retirement planning from the age of 30 (The earlier, the better); the more you delay this, the more sacrifice you need to make in your retirement. One can easily find the exact amount of saving you need to start for the retirement corpus. The straightforward process to begin retirement planning is as follows: 08Find out how much amount you need every month post-retirement considering inflation, medical expenses, and other. Divide this amount into two or three parts as Different separate income streams. Find the various asset classes where you will put or invest your money to get your desired income at the time of retirement. The ideal three asset classes to give you post- retirement income are your PF corpus, your mutual fund corpus you dedicate for retirement, and one commercial property to get a high monthly rental. Find out the exact amount you need to invest today to create an asset class that can fetch the desired income post-retirement. 09Let’s understand this with a simple illustration: LOntecona GuaEG Aumicl a NTetcontani MioeCAy yatrnc Boo see UG . Saving oe ) Corpus S Expenses Retirement Breit cael 25 6,00,000 33 Lakhs 6.66 Crore 4,480 35 6,00,000 20 Lakhs 4.09 Crore 12,448 40 6,00,000 16 Lakhs 3.20 Crore 21,128 50 6,00,000 10 Lakhs 1.97 Crore 70,565 )} Assumptions Post- Pre- Inflation retirement retirement Rate of Return|| Rate of Return Life Expectancy In the above illustration, taking the current age as 35, the current annual expenses cost Rs. 6 lakhs, and by the time the individual retires, the same expenses will account for approximately Rs. 20 lakhs. Adding to this, if this individual needs to sustain the same level of lifestyle for the post- retirement life, the individual needs a retirement corpus of Rs. 4.09 Crores. This can be achieved if the individual starts investing Rs. 12,448 per month in a mutual funds scheme right from the age of 35 (investment returns assumed here are 15%). 10It can be clearly seen that with the rise in inflation, your annual expenses also increase year on yeat, and since your retirement is years away from your current age, by the time you will retite, you wish to keep the same level of lifestyle, the value of your expenses will also skyrocket with the rise in inflation year on year. In the above illustration, we have assumed pre-retirement investment returns at 15% and inflation at 5%, which means that your inflation-adjusted returns or real returns will be approximately 10% (15% - 5%), Additionally, don’t just consider the average inflation while accounting for inflation. You need to also account for the rise in prices over time of your lifestyle expenses such as fuel, dining out, mobile bills, OTT subscription charges, etc. When you plan for your retirement years, consider life expectancy on the conservative side (as 85 years taken in the above illustration) because the current life expectancy in India is 70.19 years. Therefore, it is recommended that one should start planning and investing for his/her retirement as soon as possible because the earlier you will start, the more time you will have to invest, and such long-term investments will activate the power of compounding that will add magic to your retirement corpus. 11AGE-WISE RETIREMENT PLANNING _ want Planning for your retirement is an ongoing process. It begins with your first paycheck and continues till your retirement. Retitement Planning is not just limited to savings and investments but also calls for monitoring your funds once your retire. Here’s how you can plan your retirement at every age: > In your 20-30s Higher risk tolerance, more time, and fewer responsibilities allow you to benefit from the power of compounding, It makes sense to start investing right when you get your first paycheck so you can accumulate a sizeable retirement corpus over time. Starting to invest in 12SIPs (Systematic Investment Plan) for your medium to long-term financial goals can help, even if it means setting aside only a small portion of your income every month. Consider taking a Life Insurance Policy as earlier as possible because you will lock-in your premium amount at a lower price for the entire tenure of your life insurance plan. > In your 30-40s With time and experience, a considerable increase in income allows you to explore various other options to invest for your retirement. Firstly, as your income rises, step-up your existing SIPs by 5%-10% every year and add new SIPs to your portfolio to cater to your other financial goals. Secondly, start investing in a mix of low-risk and high-tisk investment options such as PPF, NPS, Mutual Funds, and Stocks to benefit from the power of compounding, > In your 40-50s With more responsibilities coming your way, now is the time to balance your retirement planning and other financial goals. At this point in time, you should check your investment portfolio and rebalance it if needed, according to your retirement and other financial goals. Consider taking the assistance of a financial advisor to do the same. Start planning for post-retirement expenses such as daily expenses and healthcare after considering inflation. Additionally, ensure you have a health insurance plan that covers you and your family, as having a medical plan helps you prepare for any medical ontinue investing in PPF, NPS, Mutual Funds, Stocks, and Fixed Deposits. 13> In your 50-60s At this point in life, start repaying your debts, if any, so as to prepare yourself for a stress-free retirement life. As you keep nearing retirement, depart from investing in high-tisk investment options and start parking your funds on low-tisk investment options. Consider adding annuities and pure retirement plans to your portfolio. > Post-retirement This is the time when you stop generating active income every month, and your action plan now should be to invest in such plans that give you regular payouts to meet your monthly expenses. Consider moving funds for your retirement into three buckets. First, move funds into debt mutual funds to cover expenses for the first 5 years. In your second bucket, move funds into hybrid or balanced funds to cover ex- penses for the next 10 years and rest in equity funds for the rest of your life. Also, consider SWP (Systematic Withdrawal Plan), where you can gradually move funds from one fund to another over a period of time. At whatever age you ate, always consider your risk appetite, other financial goals, inflation, and taxation on your investments. 14INVESTMENT OPTIONS FOR RETIREMENT PLANNING ‘The most significant part of Retirement Plan- ning is Investing, and investing for retirement has to be very effective because one can opt to invest in many investment options for retirement. Let us have a look at some most preferred investment options for retirement. National Pension Scheme Started in 2004 for Government employees and later opened for everyone in 2009, National Pension System (NPS) is a government scheme that intends to ptovide an investment option for retirement to the working class. Employees working in the public, government, and private sectors can invest in this scheme. Under this scheme, the employees will invest in a pension account at regular intervals. Under this scheme, investors have two options under which they can open their NPS account, that is, Tier 1 and Tier 2 accounts. The former allows you to invest for retirement with lock-in till your retirement age. Here, age 60 is considered as a retirement age with many tax benefits that would later allow you to invest your money with no lock-in period and no tax benefits. Investors also have the option to choose from Active Choice and Auto Choice options. The Active Choice option allows investors to choose their own asset allocation from the given asset classes, ie., E, C, G, A (Equities, Corporate Securities, Government Securities, and Alternative 15Investments while in the Auto Choice option, the asset allocation of the investor is done as per the age into different asset classes available in the NPS. Once they retire, they can withdraw 60% of the investment corpus, which will be tax-free, while the remaining 40% sum will be paid out as a pension. NPS contributions are covered under Section 80C, where investors can claim deductions up to Rs. 1,50,000, and Section 80 CCD(1B), which allows investors additional deduction of Rs. 50,000 from their annual income. It is advisable to invest in Tier 1 account to get the benefit of all tax benefits and to achieve your retirement goals. Public Provident Fund Public Provident Fund (PPF) is a government savings scheme that is also covered under Section 80C of the Income Tax Act 1961. Investors can save up to Rs 46,800 a year in taxes by investing in PPF. You can invest up to Rs 1,50,000 a year, and these accounts come with a lock-in period of 15 years. Investing in PPF is an excellent way of planning your retirement as it offers an attractive rate of return along with a tax saving option. Mutual Funds Mutual funds are one of the best private schemes to plan your long-term financial goals and retirement. Mutual Funds arecapable of offering returns 16in the range of 12% to 15% a year. These also help to maximize your returns with the power of compounding. Since retirement planning is a long-term goal, you can initially invest aggressively in equity funds and then switch your investments to debt funds which are less risky as you near your retirement. One can start investing in Mutual Funds via the SIP route, where investors can invest month on month with a small amount. SIP allows investors to invest in a disciplined and staggered manner, and investors get the benefit of rupee cost averaging and the power of compounding. Doing this will ensure that you have accumulated a considerable sum on which you can fall back in your retired life. Employee Provident Fund An employee provident fund is created through the contributions made by an employee and employer. Under the EPF scheme, both the employee and the employer must make certain monthly contributions towards the EPF scheme. Employees can withdraw at the time of their retirement or if they discontinue working either temporarily or permanently due to any kind of disability. The EPF is a tax-efficient investment instrument for the salaried class, as interest up to Rs. 2.5 Lakhs is exempt from tax in a financial year. The contributions made by the employee are eligible for tax deductions under Section 80C, and the interest earned on the total investments and the withdrawal is exempt from the purview of taxation, EPF can be utilized as a part of planning your retirement corpus as interest offered on an EPF account is also very optimal and risk-free. 17Annuities Annuities offer lifetime guaranteed monthly or annual income to the investor/retiree until their death. The investors have to make payments in advance, either in lumpsum or through a series of regular payments, and in return, they may get fixed or variable cash flows. Annuities are suitable for investors who require regular cash flows to take care of their expenses post their retirement. CONCLUSION Planning your retirement and investing for it from an early age is a good habit. It is important to also educate your kids on the value of saving and investing. This will teach them to become financially responsible and manage their money well. Retirement planning should be taken seriously by every earning individual as it helps to be financially independent in retired life. When there are many investment options available for the same, it is only wise to make the right use of them to achieve your retirement goals. Hence, it is recommended to consult a financial advisor who can customize a financial plan pertaining to your retirement and other financial goals. This way, you can secure your retirement by making the right investments. 18