Why Retirement planning is very important
Posted By: Admin
Retirement planning is one of the most ignored financial goals in most Indian households even though it is the one of the most important, if not the most important life-stage goals for most families.
According to SBI Mutual Fund, India is expected to move from a predominantly young population to an aging population in the next 30 years. The elderly population of India will rise from 117 million in 2015 to 317 million in 2050, which is an increase of almost 200 million in just 35 years.
Reasons for Retirement planning:
You may have several dreams for your post retirement life. With very little retirement planning in advance. You can fulfil your post retainment goals while maintaining the same lifestyle.
- The average life expectancy continuous to increase
- You cannot work for Ever
- Your future may have many Financial Obstacles then your past or present
- Plan for your unplanned trips
- Be Independent financially as well as may contribute your family.
Why Retirement planning Important Today?
Today – Not tomorrow.
Starting early while in your career, your funds will accumulate and grow over the time, leaving you with substantial enough fund to fulfil your dreams.
How to plan for your Retirement?
- Decide your retirement age: This depends on your personal needs and circumstances.
- Calculate how much you need after retirement: After retirement your retirement savings will be your only source of cash-flows, apart from cash-flows from other assets. Your expenses will keep increasing after retirement due to inflation. Hence you need to calculate how much you may require after retirement.
- Start saving and invest as early as possible: you need to accumulate a fairly large corpus to be financial independent for the entire length of your retired life. In order to accumulate a large corpus without compromising on your lifestyle, you need to start investing early. By saving and investing early, you can benefit from the power of compounding.
- Along with savings start investing also: Saving money is essential to achieving your financial goals, but savings alone is not enough. You need to invest your money wisely to earn sufficient returns so that you can benefit from the power of compounding.
- Diversify your investments in different segments: Diversification will take a different form over time as you approach retirement age. When you're in your 20s, you may only need to diversify your portfolio among different types of equities, such as large-, mid-, and small-cap stocks and funds, and perhaps real estate. Once you reach your 40s and 50s, however, you will probably need to move some of your holdings into more conservative sectors. Once you're at or near retirement age, your risk tolerance changes, and you need to focus less on growth and more on capital preservation and income.
Post retirement: When one retires and there is a likelihood of the non-earning period extending for another two decades or more, then investing a portion of the retirement funds in equity-backed products assumes importance. Remember, retirement income (through interest, dividends, etc.) will be subject to inflation even during the retired years. Studies have shown that equities deliver higher inflation-adjusted returns than other assets. Depending on the risk profile, one may allocate a certain percent.
Mistakes you should avoid in retirement planning?
- Do not over-extend yourself in debt: You should try to be debt free much before your retirement.
- Do not divert your retirement savings: You need to be disciplined and committed to your goals. Having dedicated funds for different life-stage goals can ensure discipline and commitment.
- Not having adequate risk protection: Life can throw unpleasant surprises and you should be prepared. An unexpected serious illness or unfortunate death can cause financial distress. You should buy sufficient risk protection in form of life and health insurance so that financial security of your family is not jeopardized by unexpected risks.
- Avoid unproductive investments: Return on investment is one of the most important factors in your retirement planning. You should always put your money to work to earn more money on an inflation adjusted basis, net of taxes. Many families commit a lot of investments to low yield or high-cost products like insurance cum savings plans. You should understand the costs and investment characteristics of products you invest in.
Financial independence means that you do not have to be dependent on anyone to meet your expenses, be it your employer or your children. Financial independence essentially implies that cash-flows from your investments will be sufficient to meet all your needs for your entire lifetime. This is essence of retirement planning. It is never too late to begin retirement planning but an early start is hugely beneficial.