How to Plan Your Post Retirement funding
Understanding the importance of retirement funding:Most people do not give retirement the importance it deserves. In fact, it is not a priority in many cases till they are in their mid-forties.
Today, the retirement corpus required is likely to be quite large. Inflation in the past four years has been alarming. The latest (November 2013) Consumer Price Index (CPI) was more than 11 per cent. The effect of inflation is pervasive and overwhelming, sapping spending power.
The figures are daunting. Assuming that one spends Rs 20,000 a month now, expenses on retirement in about 20 years are likely to be more than Rs 77,300, assuming 7 per cent inflation. Normally, expenses in retirement shrink. Assuming 25 per cent lower expenses during retirement, they would still amount to Rs 58,000 in the first month after retiring. Assuming 7 per cent inflation throughout and that one is able to generate a real return of 1 per cent over inflation in retirement, the corpus required would be Rs 1.5 crore (further assuming survival for 25 years after retiring). Remember, this corpus would be completely exhausted in those 25 years, with nothing left. For other tenures and expense levels, refer to the table.
This shows that the amounts involved are large and one needs to save for them for a long, long time. If not, the amount to be saved at the end would be immense. For instance, for a corpus of Rs 2.5 crore, one needs to save more than Rs 60,000 a month over 15 years. If one has 30 years for such saving, the amount to be saved each month becomes a far more manageable Rs 11,000. Hence, starting early to save for retirement is imperative if one wishes to pace it properly and not be overwhelmed in later years.
First, retirement funding is an important goal, not to be compromised. Since retirement is a long way off in most cases, the seriousness of disciplined funding for retirement is not realised. Normally, retirement funding is subservient to other goals such as children’s education, their marriages, vacations and such. Second, some such goals can be funded through loans. For instance, education can be funded through a loan, which can be paid back by the student, instead of utilising a part of the retirement kitty. Retirement cannot be funded by any other means except savings. Third, regular funding for retirement starts much later in life, say when a person is in his/her forties. As seen earlier, the longer the tenure of contribution, the lower the amount required. For instance, if a person is going to contribute to the retirement corpus for 35 years for a target amount of Rs 2.5 crore, s/he needs to contribute just Rs 6,500 a month.
Saving for the twilight years
Those in their twenties and early thirties should put savings into equity or equity funds as these assets have sound potential for long-term returns. For instance, people in this age group can have as much as 75 per cent in equity assets. Besides, they could invest in PPF. If employed and with anEPF, so much the better. They should not withdraw it when they change jobs. They should instead transfer the amount to the new account. The other sound investment option would be the National Pension Scheme. For those between 35-50 years, equity assets should be between 55 per cent and 70 per cent, depending on the number of years to retirement. They could also contribute to PPF, NPS and long-term debt funds. Those above 50 years are nearing retirement. Their asset allocation should be rebalanced to between 40 per cent and 50 per cent in equity assets. They should now have substantial assets in debt instruments of all types. They should have good amounts in PPF, an EPF if they are employed, FDs, debt funds, NCDs, and so on.
An income during retirement
Nearer retirement, their corpus should have about 40 per cent in equity. Also, nearer retirement one should set up avenues for regular (monthly, quarterly, half-yearly) cash-flows. Depending on which tax slab one falls into, investments need to be structured. For instance, the Senior Citizens Savings Scheme would be good for someone who is not going to pay tax. For someone in the 30 per cent tax bracket, getting a little more than 6 per cent after tax is not very exciting.
Debt funds could work well for those in the higher tax brackets. One could invest in growth and set up systematic withdrawal plans for the amounts required looking at sustainability based on corpus size and returns of the debt fund. This could be a wise strategy as the effective tax on debt funds could amount to just 5-6 per cent due to capital-gains tax treatment after a year. Depending on the tax slab one is in, one could also look at the desirability of setting up an immediate annuity for a part of the corpus. This would ensure sustained income, though that would be taxable. This is however expected to change in future. Tax-free bonds also offer annual income on a sustained basis for 10 to 20 years and could be a good income planning tool.
Retirement is a goal which needs to be addressed on priority. One must take this seriously and start saving for a comfortable retirement.