Importance of Retirement plan and how to build one

You may have dreams, the bucket list to fulfill after retirement. Whatever your dreams or bucket lists are, you need to plan for them now. Because once you retire, you will no longer earn a regular income, and to sustain your daily expenses. To live your post-retirement years, you will need to build a corpus.

To remain independent, you need to save and invest for your future from now. Keep this in mind, savings in the bank will not be enough. Mainly because of the inflation factor. 

As life expectancy improves, so will the need for retirement planning. Money is important, but time has its own value. Pandemic has caused financial trouble for many and the time lost due to it is considerable, and therefore the need for getting back on track quickly is very important.

We will see importance of Retirement plan and how to build one in this article as this is one of the important aspect of our life.

Why do you need Retirement Planning?

It is easy to bear your expenses as long as you are earning your monthly salary. But post-retirement, you need to have enough money saved to live the rest of your life and maintain the same or better lifestyle.

Monthly expenses: 

All of us have to bear the necessary monthly expenses even after retirement. Many people do not get pensions or gratuities post-retirement as they work in the private sector and even for those who do receive them; the amount is generally not big enough to cover all of their expenses. Of course, EPF (Employee Provident fund) builds some retirement corpus but it's not enough to sustain. By planning and building a respectable retirement corpus, you can ensure that your family's standard of living is not compromised post-retirement.

To cover medical expenses: 

As we get older, the number of health issues and emergencies also increases. We are aware of the fact that how expensive medical expenses these days are. Mediclaim or health insurance policies mostly cover all medical expenses when you get hospitalized but not medicines, tests. Therefore, your retirement corpus must be large enough to cover your and your family's medical expenditure to avoid a financial emergency in post-retirement life.

To deal with inflation: 

Inflation is the rise in the rates of goods and services which we use daily. It reduces the purchasing power or value of your hard-earned money. There has been a constant rise in the price of goods and services and it will continue to be on a rise until you reach the retirement age. This means that you would have to pay more for everything in the future. From grocery to travel, it is all going to cost you relatively more in the future. It would be impossible for you to achieve all your retirement goals without a full-proof retirement plan.

To deal with emergencies: 

Life is unpredictable and uncertain. Some situations have the power to create financial as well as emotional turmoil in your life such as job loss, critical illness, natural calamities, loss of loved ones, financial difficulties in the life of relatives, and so on. Having a respectable corpus to take care of such emergency events can always come to your rescue. It is important while you approach retirement that you have a sufficient emergency fund. This will help manage emergencies better and not hinder your long-term goal of retirement.

To meet your retirement goals: 

Retirement goals are the main objectives that we wish to achieve in our post-retirement years. These could be living a lavish life, traveling and exploring new places, or taking up hobbies that you have always wanted to pursue. However, if you do not plan and save for retirement while you are working, you cannot sustain yourself in your post-retirement years. Hence, it is essential to have a strong Retirement Plan that will make you aware of what is your current financial status, and what steps you need to take to achieve this goal.

With a strong plan, you will be able to handle various factors such as surpluses, shortfalls, and emergencies. You understand how and when you will achieve your retirement goals. You will get control of your cash flows, your earnings and expenses, and what level of risk you need to take to achieve all your goals.

In short, a retirement plan will let you understand your life goals and also define the path to achieve them.

Steps to prepare the Retirement Plan

Step-1: Decide Your Retirement Age

People mostly retire at the age of 60 years, but it may vary from person to person. Some may wish to work beyond 60 years of age, while a few even wish to retire at 45.

Deciding on your retirement age is very important because after this age your regular income will stop or at least reduce considerably (in case you are eligible for pension). You will have to depend on your savings and investments to take care of your expenses post-retirement.

When you start investing and the retirement age is your timeframe you are left with to plan for retirement. For instance, if you are 30 years old and you wish to retire at the age of 55 years, then years to retirement = 55-30=25 years.

One of the important factors while deciding your retirement age is life expectancy. In other words, the estimated number of years you are expected to live is based on age, medical condition, family history, and other demographic factors.

Step-2: Start Early To Retire Peacefully

It's important that plan your retirement as early as possible. With many years in hand, you will have time to correct errors in the financial decision and the power of compounding to help you grow your money.

Never delay retirement planning or else you might have to compromise on your goals. You might have to depend financially on your children or family. Hence, start early, start now.

Most individuals who have recently started earning might think that they have too much time for retirement & planning for retirement at this early age may seem like being overly cautious.

However, you must recognize that being young provides you a benefit that is not available to all, 'time'. 

And if you have just crossed your 30s and haven't even started planning for retirement, then it is still not very late. You still have many years to work, earn and save for your Retirement. But make sure you do it consistently and while spending, be cautious about your needs and wants.

Step-3: Determine Your Retirement Corpus

Retirement corpus is the amount you require post-retirement to meet your expenses and continue with the same lifestyle or even better pursuing your other personal goals.

First, write down monthly expenses in various categories such as household, medical, entertainment, hoteling, travel, Home loan EMIs, Personal loan EMIs and children's school/tuition fees, and so on.

So, you must make an accurate estimate of how much amount you will require, to maintain your present lifestyle after you retire.

Then calculate the value of current expense at the time of retirement considering the inflation rate factor. This is the amount you will need every year to meet your post-retirement expenses.

The ideal way is, to spare a portion of your savings towards retirement. This part of your saving should not be disturbed unless you achieve your financial goals or there is such emergency which is not fulfilled with your emergency fund.

Step-4: Figure in Crores...Is this achievable?

Yes, it is. Generally, the value comes in crores and investors get in shock. You should get this realization of your retirement corpus so that they can start investing seriously. The Financial advisor can help you to set your asset allocation based on risk profile, select appropriate investment avenues within each asset class, help you invest your money with discipline, and regularly monitor the portfolio to make sure that you are on track to accomplish your Retirement goals.

Step-5: Cut Down On Unnecessary Expenses

Minimize your unnecessary expenses if you are unable to save now to reach the target monthly investment amount. Some of the avoidable expenses are movies in multiplex, impulsive purchases, outdoor food,  lavish vacations, Expenses to maintain a rich lifestyle just to show off, etc. Minimizing such expenses can help you invest more and reach closer to your planned corpus. Buy necessary things, Buy assets & not liabilities. You should embrace good financial habits.

Step-6: Plan And Create An Ideal Portfolio Seeking Help of A Financial advisor

Depending on your current age and the risk profile, you should define a standard allocation to each asset class.

It is important to have a diversified investment portfolio across the asset classes. Equities can offer you a better inflation proof returns than fixed-income instruments.

Remember, every asset class may not be suitable for you & you should not be over-exposed to a single asset class. As they say, You should not put all eggs in one basket.

As retirement planning is an exhaustive task, don't hesitate to seek the help of a financial advisor. But take care to opt for an independent, honest, unbiased, and competent financial advisor who will help you in every step to plan your retirement.

Step-7: Risk Profiling

A financial advisor can help you understand your risk profile, whereby the asset allocation can be set and the portfolio can be structured accordingly to achieve your retirement corpus.

Step-8: Invest your money consistently

Invest your money consistently with discipline avoiding common investment mistakes. Invest in Stocks, Mutual Funds, Gold, FDs, Bonds, ETFs, Real estate, etc. Invest your money studying that asset class. If you don't have time to study or monitor your investment then a Financial advisor, Mutual fund Distributor can help you invest and manage your portfolio. Systematic Investment Plans (SIP) can help you invest your money with discipline with benefit of Rupee cost averaging and compounding in long term.

Step-9: Check if you are properly insured

While doing retirement plan, it is also important that check our insurance needs. The purpose of insurance is not to help you achieve your financial goals but rather to ensure that your family & loved ones get financial support after you pass away. You should have minimum two insurance schemes with you, Term insurance & Health insurance. The Term insurance will insure you respectable big life cover in minimum premium on the other hand health insurance will cover you for any medical emergency.

Keep in mind, Don't buy insurance as an investment.

Step-10: Track And Review Your Plan Regularly

It's not the end after you start investing with a good plan. Your retirement plan needs to be reviewed regularly (at least once a year) to make sure you are on target to meet your objectives. Any changes such as increased income, expenses, additional goals, retirement age, etc. need to be incorporated into the retirement plan.