How to go about planning for retirement?

If you are in your early 50s and have not planned for your retirement income yet, it is high time you start your retirement planning seriously. But how does one go about planning for retirement? Here are a few simple steps that will help you to provide adequately post retirement.

First, you need to take into account your average monthly expenses to determine the amount of income that your investments need to generate post retirement. So, if your total expenses are going to be, say, Rs 5 lakh per annum post retirement, then your investments need to generate Rs 6 lakhor more so that you can reinvest the balance amount and generate more income every year. This will help you to beat inflation which erodes the value of your investments.

Second, to make sure that your income is always higher than your expenses post retirement, you need to invest in instruments that will fetch you post tax returns in excessof your expenses plus inflation. So, if the annual inflation rate is, say, 6-7%, then the post-tax returns on your investments will have to be 10% or more. The bank fixed deposits (FDs) fetch around 7% per annum and post-tax the FDs would provide return of around 4.5—5.5%, depending on your tax bracket. Such lowly return willnot even take care of inflation, let alone helping you to take care of your expenses. If your income does not match up with your rising expenditure, you will be forced to spend out of your retirement corpus, which will lead to an erosion of your capital.

Third, you need to invest in retirement plans that offer 10% or higher rate of return. Such plans invest in various asset classes such as equities, bonds, mutual funds, ETFs, etc. The combination of these asset classes help mitigate the risks associated with markets and also provide a rate of return that is higher than debt investments. Some of the retirement plans also provide other benefits such as premium waiver in the case of early demise of the proposer, accident benefitand critical illness benefit, which are additional incentives to invest in these plans.

Lastly, it is important to invest in different asset classes as per your age. Accordingly, if you are in your 40s, you can invest a major chunk (70%-80%) of your savings into equities; when you reach early 50s, you can balance your investments in equities and debt evenly, and when you are nearing your retirement age (55 years or more), you should reduce your exposure to equities and invest majorly in low risk, guaranteed return instruments.