Retirement is a financial challenge for most in India. What one saves through working life can seem less than adequate for the ‘peaceful’ years of retirement. Increasing life spans make it critical for people to plan for 25 + years of retirement, inflation continues to erode savings and interest rates continue to moderate as the Indian economy matures. What should you do if you are intent on having a pleasant retirement ?
1. Set your target: It is important to know what amount of money, in today’s terms, you would need at your retirement. For example, if you are 35 years of age and think that Rs 25,000 per month (in today’s terms) is a good sum for retirement, plan to retire at 65 and hope to live till 80, then you can expect to require close to Rs 1,10,000 every month in the 66th year. This is simply because inflation continues to lower the purchasing power of your money. To get to this number, you should plan to have savings of approximately Rs 2 crores (Rs 20 million) by the time you retire. If you want to maintain your lifestyle, this pool needs to be closer to Rs 4 crores (Rs 40 million) in your 80th year !
2. Start young: Only way to do this is to start young. A typical rule of thumb is to save up to 30% of your gross salary through your working life. Compound interest helps the savings pool grow in a healthy way even as your earning and savings power increase over the course of your career.
3. Create a portfolio: Build a balanced portfolio throughout your life. It should have a good mix of real estate, stocks, mutual funds, bonds, deposits and possibly gold. The riskier assets like stocks and and equity based mutual funds could form larger portion of your portfolio when you are younger (say 70%) and move to a more stable portfolio as you arrive into your 50s (deposits, real estate and bonds forming most of your portfolio). Many people forget to create a portfolio and put all their eggs in one basket – typically real estate !
4. Leverage early: Another way to create wealth over the longer term is to take loans wisely. Home loans are an important instrument that one could use from fairly early in life. It has been observed in most developed countries that people build property assets by taking loans and upgrading throughout their life. Home loans also offer tax advantage. While home loans can be useful, excessive debt on credit cards, personal loans or margin lending (against stocks) can be dangerous – use such debt only with care.
5. Manage your portfolio: It is normally wise to take profits along the course of your investment period and reinvest into the lows. While very few can time markets, it is important for investors to remain flexible in terms of liquidating assets, booking profits and waiting to pick new assets at the lower end of price cycles. Being brave is key, especially in turbulent economic times.
6. Plan tax wisely: It is important to plan taxes well. There are approved tax breaks like the ones on home loans and 80c that should be considered carefully. In closing, it must be highlighted that the above ideas are just pointers. It is important that you seek advice on your finances and taxes from professionals early on. Should you find good ones, there may be a chance of getting to the number !