Introduction
Saagar is a 20 year old guy who has just entered the corporate world by joining a MNC company. As part of the induction process Saagar has to attend an investment awareness session on tax planning. At this age thinking about tax planning, investments and retirement planning is the last thing on Saagar's mind as he has just started earning.
To most of us retirement is going for vacations, spending time with grand children, playing golf, visit to pilgrimage places like Haridwar or to some it may mean relaxing on a beach with nothing on mind etc. This is the rosy part of it. But the big question we need to ask ourselves is whether we have made enough provisions to enjoy that kind of lifestyle post retirement??? What lot of us fail to realise is that retirement has a dark side also. Retirement along with it brings no income phase, rising cost of living (inflation) and soaring health care costs. Does this scenario leave you worried? Don't worry there is help at hand. Little bit of prudent and disciplined financial planning can ensure that you can leave aside your worries and enjoy retirement playing golf, a sport which is believed to be meant only for the higher class.
Retirement planning helps a person maintain the same standard of living that he was enjoying before retirement. Even though the person himself stops working, the corpus accumulated by him in his pre-retirement years continues to work for him and earns decent returns to sustain his expenses during his retirement years.
Need for retirement planning
Financial Independence: With the concept of nuclear families gaining popularity, people are fast realising that they can't be financially dependent on their children during their retirement years.
Combat Inflation: Today Saagar's expenses are INR 84,000 p.a. (INR 7000 a month). If Saagar's expenses grow @ 5% (inflation) every year then by the he retires, 40 years down the line his expenses will increase to INR 5,91,359 p.a.
Meet Healthcare Costs: With every passing year healthcare costs are soaring. Senior citizens are either denied medical insurance or the premium charged is exorbitant.
Lack of proper social security schemes and pension: We still don't have a proper social security system in place like the developed countries.
Stepping Stones towards the Ladder of Retirement Planning Planning: A person should take a systematic approach towards retirement planning.
- Based on his present expenses a person should calculate how much money he needs to accumulate in his retirement kitty so that he can maintain the same lifestyle post retirement.
- Based on this amount the person needs to calculate how much he should start investing from today on a monthly basis to achieve his retirement goal.
- Start implementing the plan and review it regularly.
- With time on your hand you can enjoy the power of compounding.
- A retirement plan should make use of investment products on which tax benefits are available so that the person can make use of the maximum tax benefits available.
Asset allocation according to Life Cycle Stages: A person should consult a good financial planner to plan his investments for his retirement nest. Let us continue with the example of Saagar. The asset allocation (where investments should be made) depends on age, risk appetite, investment amount, return expected etc. The various asset classes that a person can invest in for retirement are equity mutual funds, fixed income securities, commodities, real estate etc. The various life cycle stages in a person's life are as follows:
Single: At this stage Saagar is single and at the early stage of his career. His expenses are limited as he doesn't have too many liabilities on him. Saagar can contribute a high proportion (80%) of his surplus income in equities for long term capital appreciation and the remaining portion of surplus income (20%) in debt for any contingency requirements. Saagar should buy a term insurance policy which covers the forward income of his working career.
DINK: At this stage Saagar is married. If the spouse is also earning, the surplus income increases. Such DINK (Double Income No Kids) couples can look at buying their own residential property on a home loan. The asset allocation can be revised. The equity portion can be reduced to accommodate real estate and some investment in gold. The debt portion can be maintained. Saagar should review his retirement plan on an annual basis to make sure that he is not over exposed to any one asset class.
Married with Kids: At this stage Saagar can start tilting his retirement portfolio in favour of debt instruments by gradually reducing his equity exposure as his age goes on increasing. With increase in liabilities Saagar should review his insurance cover to make sure that the insurance plan covers all his liabilities in case of untimely death.
Old Age: At this stage beyond 50 years of age, Saagar should start looking at clearing his liabilities like home loans and any other loans that he might have taken. Maybe 5 years before retirement the person should starting winding down his equity exposure in favour of fixed income securities which can give him monthly income post retirement.
Post Retirement: At this stage Saagar should have maximum exposure to securities like Post Office Monthly Income Scheme (POMIS), Senior Citizen Savings Scheme (SCSS), Pension Plans and other Monthly Income Plans (MIP) which can give him regular monthly income in the absence of his monthly salary income.
Conclusion: By the end of the session Saagar is an informed investor and has realised the importance of starting investments early. He has realised that the right time to start planning for retirement is today.
It is rightly said with proper prudent retirement planning a person can only retire from work, not from life.
Sample portfolio of Saagar at the DINK Life Cycle Stage can be as below
| Asset Class Name | Percentage Allocation |
| Equity | 35% |
| Real Estate | 30% |
| Debt | 20% |
| Gold | 10% |
| Cash Balance | 5% |
| Total | 100% |
Please Note: This is a sample portfolio and individual portfolios are different for person to person.
If the above portfolio is represented in the form of a pie diagram is will look as below:
