Though people understand the importance of retirement, they are clueless about the planning. Here is the simple yet effective guide to retirement planning.
Even though over years the mechanics of retirement planning haven’t changed, where people work, save and then finally retire, people today are facing some challenges while saving their income, which the older generation never worried about.
The life expectancy is getting longer when compared to previous generations. Hence, now your money needs to last longer. Presently, the average life expectancy in India is 70 years. Moreover, with lower yields on bonds, it is difficult for you to just buy a few fixed-income investments and get double-digit returns. Also, with no proper social security system in place that would provide you with the privileges of retirement, it is crucial on your part to plan for retirement well in advance. However, with rising marketing gimmicks of the products that pretend to take care of your retirement, people are confused as to how should they go about planning their retirement?
Planning your retirement
Here we would discuss how one can plan retirement in the easiest way. So, let’s get begin!
- Calculating retirement corpus
While planning for your retirement, this is one of the most critical things that you need to do. This is because unless you calculate retirement corpus, you won’t be able to understand how much you need during retirement. Here is an easy way to calculate your retirement number.
Computing retirement corpus
Even before we begin to calculate retirement corpus, you need to understand how much you might require in the retirement phase. To make your task even simpler we have listed below a few things that you might need during retirement.
1. Expenses on housing including rent and maintenance.
2. Expenses to cover day-to-day living such as food, clothing, commuting, etc.
3. Expenses on health care.
4. Expenses on entertainment, including restaurants, movies, amusement parks, etc.
5. Short trips.
6. Financial goals such as world tour, philanthropy, etc.
Once you have understood who much you are going to spend on a monthly basis during retirement, the very next step is to calculate your retirement corpus. Thinking that you need to be a mathematician to do that? Calm down and just open Microsoft excel and enter the below formula (it also works in google sheets and open office).
Rate = Inflation-adjusted rate of return/12 – Calculation: [((1+expected rate of return)/1+inflation rate))-1]
Nper = (Your current age – Retirement age) x 12
Pmt = Your calculated monthly expense (do put a minus sign before the figure)
FV = 0
Type = 1
And you are done. Once you input the things as directed above, you will get your retirement corpus.
By now you might have calculated your retirement corpus as directed above. But now achieving the same is another task. A well-diversified mutual fund can help you achieve your retirement corpus. However, before building a well thought mutual fund portfolio, it is important that you assess your risk profile. When you assess your risk profile, it makes your asset class and fund selection task easier. Having said that, do not forget to rebalance your mutual fund portfolio at least annually.