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 a 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 the age of 45 plus. This is actually very difficult to build 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 an individual will definitely wish to travel or enjoy as he or she will be having no major obligations in terms of family liabilities at that time. Age expectancy is increasing in India with a 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 an individual can enjoy that moment of life without worrying about income sources.

Financial planning is a 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 a 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 the 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

   

From the above matrix, we can very understand the criticality of starting investment in the early stages. At later stages, it is not the 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 a few major factors which affects retirement corpus:

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

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

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

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

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

Disclaimer: The author is Rohit Khandelwal. He is an 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 rates of return are tentative, not guaranteed in nature to anyone.

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