Retirement planning is a tough process, but the benefits of this investment are a boon to us during our old age. The process of identifying retirement income objectives and the actions and decisions required to meet those goals is known as retirement planning. It also involves estimating your expenses, identifying various sources of income, and maintaining financial stability.
Let us find out what is retirement planning, why is it necessary for retirement planning, how to plan for retirement, and how much to save.
What is Retirement Planning?
Retirement planning allows you to plan out your long-term financial goals and estimate future cash flows to make the right investment decisions.
Retirement planning is mainly preparing yourselves for life after you quit working. It does not necessarily depend on just financial aspects. It also considers non-financial features like lifestyle, decisions about living and even determines when it is the right time to quit. Retirement planning is an investment made midway through your life to set aside money for post-retirement.
Many reasons and events may arise in the future that may compel you to spend a significant sum of money. Additional medical bills, treatment expenditures resulting from illnesses, and other uncertain financial needs could cause. A retirement plan can help you overcome these situations.
How to Build a Retirement Corpus?
Retirement corpus is the fund you'll need to set aside and have saved towards the end of your working life. It is the first and foremost thing to consider before beginning with a retirement plan. Retirement corpus can be obtained using the formula:
Size of corpus = Annual income requirement/Investment yield.
4 Factors for Calculating Retirement Corpus
Retirement planning can help you make the right decisions related to financial or career aspects. Retirement plans allow you to make effective financial decisions. Retirement plans have tax exemption benefits. Section 80C of the Income Tax Act allows tax exemptions up to 1.5 lakh rupees annually.
1. Number of years until retirement
The ideal retirement age is 60 years. However, it is important to make plans post-retirement. Those who plan to retire early must be aware of the consequences in the future. Your post-retirement life will be longer if you desire to retire sooner. As a result, you will need to set aside a larger retirement corpus. However, this is not a feasible option as the time available is less in such cases.
2. Inflation rates
One of the most neglected factors when it comes to retirement planning is the inflation rate. Future planning involves a lot of aspects. One of them is unpredictable inflation rates. Your savings must be stable to meet these higher expenses in the future. Experts suggest that a 6 percent rate is the bare minimum. Calculating your inflation adjustments can be done using the following formula.
C(n) = C(t) * (1 + 6%) ^n
- where C(n) = Corpus after a few years,
- and C(t) = Corpus required today
- n = number of years
- 6% = Average inflation rate
3. Estimation of monthly expenses
Regular income that you receive post-retirement is the money that you save up over the years of your paid life. To enjoy more income post-retirement involves saving up more money. Setting your income criterion too low only makes it harder for you because it turns out to be inadequate. Calculate your monthly expenses using the following formula:
E = e*(1+r)^n
- Where 'E' is the monthly expense at retirement time,
- 'e' is the current monthly expenses,
- 'r' is the rate of inflation during the accumulation phase,
- and 'n' number of years left to retire.
Estimating your monthly expenses involves all those costs that go into home utility, health care, income tax, vacations, and emergencies. Consider all such factors to determine and calculate your monthly expenses.
4. Expected rate of return
During the accumulation period, you can afford to accept more risk in exchange for a larger return because you'll have more time to make up for any losses by increasing your earnings, delaying retirement, and so on. You can devote a larger portion of your investments in equities directly, through mutual funds, or through the National Pension System to increase your returns on investment.
However, it is advisable to go for other investment plans such as fixed deposits, the Senior Citizen Savings Scheme (SCSS), the Pradhan Mantri Vaya Vandana Yojana (PMVVY), and the Monthly Income Scheme (MIS). These are backed by the government and provide guaranteed regular income.
Retirement plans are important for managing and balancing out your expenditures and income and saving adequate amounts for the future. Apart from that, it also has multiple benefits, such as tax benefits. The first thing to do is calculate your retirement corpus and figure out how much savings must be done through your paid life to compensate for income post-retirement.
Canara HSBC Oriental Bank of Commerce Life Insurance offers assured loyalty additions through schemes such as Pension4life. They have the best retirement plans with limited premium pay to save you from a burden in the future. They can guide you to build a perfect retirement plan and provide you the best plan benefits. Figuring out where to reside post-retirement and investing in assets can help you save a lot of money later in the future. Renting out your properties can serve as an asset. Retirement plans allow you to figure out financial issues as a whole rather than individually. Consider your financial choices as a series of competing interests, each of which is influenced by the others. It will allow you to make better decisions. Peace of mind is one of the benefits of investing in a retirement plan in advance and figuring out all about it. They automatically relieve you of stress regarding future decisions.