Financial planning for Retirement fund



Financial planning for Retirement fund

In today’s world everyone is running towards making his or her life more comfortable financially. Be it urban or rural population both save money for their future. In our life we have all sorts of financial goals like children’s education, vacation planning, children’s marriage or buying a new car. But out of this which we don’t consider is the most important task of life which is retirement funding. At particular age individuals will stop earning fresh money but expenses will still be there. Major percentage of individuals starts saving for retirement fund after they cross age of 45 plus. This is actually very difficult to built a decent corpus for retirement at that age as major of liabilities and goals start maturing at that time and which leads to higher expenses and generally individuals are left with no or small corpus of retirement fund.

Retirement is actually a period wherein individual will definitely wish to travel or enjoy as he or she will be having no major obligations in terms of family liabilities on that time. Age expectancy is increasing in India with better health system. But still Health expenses are also increasing. Then what to do and how to built corpus for better retirement life so that individual can enjoy that moment of life without worrying about income source.

Financial planning is very healthy tool for making retirement corpus. In India, about 60% population is below the age of 35 and so they have enough time to plan, execute their plan for retirement funding. With the decision of the government of India to stop defined benefit pensions to all its employees who joined after 1 January 2004, planning for a retirement corpus has become necessity of the time. In private sector jobs, pension is not an option which leads individuals to create their own retirement fund.

Question comes how?

We can understand the criticality of retirement fund accumulation according to age. Below mentioned matrix will help in understanding it effectively.

Headings
Scenario 1
Scenario 2
Scenario 3
Age
30 Years
30 Years
30 Years
Retirement Age
60 Years
60 Years
60 Years
Income
75000
75000
75000
Current Expenses Per Month
40000
40000
40000
Inflation
6%
6%
6%
Future Expenses Per Month After 30 years
230000
230000
230000
Expected Return at Retirement
7%
7%
7%
Fund required at Retirement ( Approx )
4,00,00,000
4,00,00,000
4,00,00,000
Start Savings for Retirement fund at age of
30 years
40 Years
45 Years
Expected Average Return on Investment
15%
15%
15%
Per Month Investment Needed (Inflation adjusted)
24000
63500
110000

   
Form above matrix, we can very understand the criticality of starting investment at early stages. At later stages, it is not only higher amount but it is difficult also as at age of 45 individuals have more social and family liabilities comparing to at age of 30.

There are few major factors which affects retirement corpus:

Inflation: It is not in our hand and being a part of developing economy we will see higher inflation for next 15-20 years.

Lower Interest Rates: Rates are going to fall in longer run. Developing economy cannot have rates around 8-9%.

Higher Medical Expenses: Medical expenses are bound to increase. Yes, health sector is improving in our country but still it will take time and so that medical expense at later stage will always be higher.

Consumption behavior of individuals: In current scenario, we spend a hefty amount on lavish life style and this will continue. Our grandparents or even our parents use to live very normal life but now day’s luxury is new necessity. So after retirement you cannot lower your life style.

We suggest, it is better to start early with small amount rather delaying it for future and then making high amount and high risk investment. 

Disclaimer: Author is Rohit Khandelwal. He is AMFI registered mutual fund adviser.  All views expressed in the article are his own. Moneymatters.co.in or Infomagine consultant LLP doesn’t guarantee any accuracy of data. All shown rate of return are tentative, not guaranteed in nature to anyone.

Mutual funds are subject to market risk, kindly read the scheme related documents before investment.   



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