HOW TO CREATE A RETIREMENT PLAN WHICH WORKS

Some of the top questions we get from people in our financial planning sessions are as follow

1.       Why do i need a retirement plan, i have enough savings

2.       How much money do I require to live a comfortable life once i retire

3.       How do i retire as early as possible

4.       How do i retire at the age of 40

5.       I save 10 K per month, is it enough for my retirement plan

6.       What is the best way to save money and retire early in India

7.       How much money i require to maintain the same lifestyle as today once i retire

8.       What is the best retirement plan

This is first in series of posts through which I will try to  answer some of these questions , most of the advice here is tailored for Indian users

So before we get started , lets get some basic definitions out of the way

What is a retirement plan

Simply put Retirement plan is set of financial planning activities/steps you undertake to ensure financial security and a comfortable after retirement life, A good retirement plan should have all of the following

·         How much do i need for retirement

·         Where will the money come from

·         Where do i invest to get to what i need

So how do i start building a great retirement plan

·         Start right away , Its never too late , early you start you get more time to grow your money

·         Ensure you have other key financial obligations checked in your financial plan, these include but not limited to following: Emergency funds, Health Insurance, Other key goals house, Marriage, kids education , kids marriage etc.

·         Find your monthly expenses if you are not married, try to forecast your expenses post marriage

·         Take a premium on the monthly expense of around 20 %, generally you will under-estimate expenses

·         Provision for Inflation , this is the biggest elephant in the room, and the unknown devil you need to provision against, here take inflation on higher side from CPI inflation numbers you see in newspapers, thats because inflation that might impact you can be different like health, travel, leisure can have higher inflation.

·         Figure out the right asset portfolio for your retirement so that you get the best possible return, with reasonable risk

Creating a sample plan

Let say your current age is 30 years, current monthly expenses are  Rs 50,000 per month, you plan to retire at 60 years, and average life expectancy is 80 years ( so you will live till 80)

So number of working years you have are 30 , now assume that you have separately taken care of all other financial obligations like children marriage, children education, contingency etc, we will go ahead and calculate your retirement  corpus , for simplicity we will assume that inflation is 7 %, we will also assume that your annual expenses will be 80 % of your expenses today.

6 big mistake to avoid while creating a Retirement plan

·         Underestimating impact of Inflation

·         Underestimating impact of compounding, hence starting late

·         Under estimating health insurance required resulting in unplanned health related costs

·         Getting debt/equity ratio right in your retirement portfolio , right mix can take you far

·         Getting contingency funds right

·         Underestimating other financial obligations

·         Never rebalancing the plan you made, its always good to periodically review your plan

·         For more details on things to avoid in a Retirement Pension Planread my post here

So where do we go from here, well you can start with getting help on retirement planning , by creating a custom plan for your self-created by our proprietary algorithm here.

Be Financially Secure In your Old Age

The theory of evolution revolves around the cycle which consists   of various stages of life. Right from the initial stage of childhood to the last leg of old age; people tend to complete a full cycle of life. Childhood is considered to be the most carefree years of life where all your needs are catered by your family. It’s a stage of life when a person is completely dependent on others even for routine work. The next phase is the adolescent stage of life where a person pursues education and aspires to be successful in life. Then comes the final stage of life which is the old age. Old age usually tends to weaken the health and drop regular energy levels of a human. Often people tend to worry about their old age a lot. Trying to figure out their way through the old age phase, both physically and financially. If you are one of them, who usually gets worried about your old age, here is your getaway.

Invest well for your future. If you want to know how? This is your answer. Invest in pension plans for a much secure future. While in your professional employment , you can invest for a longer goal. Pension plans benefits are intangible and provided when you need them the most i.e. after your retirement. Retirement plans are simply an investment which you make through payment of fixed amount of money on fixed amount of time. These monetary transactions are known as premiums and the benefits are provided after the maturity of the policy. Best pension plans provided by insurance providers have drafted to provide maximum benefits with minimal amount of cost.

Pension plans are not just investments for the future but also a way to be financial independent at an age which demands dependency. In order to opt for the best insurance policy its important you have a detailed data of various plans available in the market. This can be done by comparing insurance plans online. Compare best pension plans in India using various insurance comparing websites such as not only provides you the detailed information about a particular pension plan but also helps in brief pension plans comparison. Comparing Pension plans online helps in providing the right direction in taking a financial investment decision. We believe when it comes to investments, think and think hard.

How Do We Make Retirement Decisions? The Psychology Behind Our Choices

We all like to think we understand why we take certain actions, but that’s not necessarily the case because of the psychology behind our decisions. Frequently, we choose actions that are based on emotion rather than facts, or we respond to even more subtle suggestions that guide our behavior. The field of behavioral finance investigates why people don’t always make the best financial decisions, like how much to save for retirement. That’s particularly important for retirement plan sponsors who want employees to make better decisions about their future. So, what does influence your employees’ decisions? Here are some of the factors:

Inertia . We often expect and even want things to continue the way they always have in the past. This inertia keeps us from making decisions that could improve our lives or even change previous decisions. For example, employees may avoid enrolling in a 401(k) plan because they never have done it before, so why start now? One way to overcome inertia is through automatic enrollment, in which employees are enrolled in the plan unless they opt out. That puts inertia on your side, since once employees are enrolled, they are less likely to make the effort to opt out.

Default bias. Many people automatically accept things that are presented to them “authoritatively.” For example, employees who enroll in a 401(k) plan might find that their employer has chosen a default contribution level of three percent. Many will simply accept that default, assuming that their employer has selected the “right” number for them. In fact, most retirement experts agree that people need to save about 15 percent of their income for retirement, so accepting the “default” can seriously impact their future. Similarly, people may react the same to employer-matching rates. If the employer matches three percent of contributions, they will “default” to that contribution. Employers should be aware of this bias and use to it help employees. Setting higher defaults for contributions and matching will encourage employees to increase those amounts.

Indecision . Too many options can paralyze people. After all, people struggle to pick from a dinner menu, and choosing investments is much more important than choosing appetizers. Trying to select from 20 or more investment options in a Retirement Plan Company confuses people, who choose poorly or refuse to choose at all. For example, a participant who is forced to choose among a large number of options may simply elect to put his or her contributions into Investment A, which may not offer enough growth to meet retirement needs. Retirement plan sponsors can address this by limiting the number of investment options.

Build your strategy around your participants’ behaviors

As retirement plan sponsors, we rely on behavioral finance to understand why your participants make certain decisions and how you can structure your plan to turn these psychological weaknesses (and many others) into strengths. We’d be happy to review your plan and suggest changes you can make to help your employees reach a successful retirement.

Give your retirement a priority

Most of us push back the very thought of retirement and give it the least preference in one’s scheme of things in life. A retirement survey shows nearly 78 percent of Indians haven’t planned their retirement. But then, ignore it at your own peril. With increasing life expectancy and rising cost of living, can you expect to maintain the same lifestyle you are used to now, leave aside enhancing it? Act now, before its too late. Sit down and design your retired years with lots of traveling, spending, and relaxing in mountains and beaches, all through your retired years. You should plan in a way that you are never short of funds even during the retired years and certainly not dependent on anyone including your children.

 Start Early, Start Now

 And to achieve that comfortably, you need money. If you are one of those who haven’t started saving towards retirement, planning it is simple especially if you start early. The earlier one begins to save for retirement, the lesser is what is required. See, how Radhika had to save considerably less than others to create same corpus in “Starting Early: Compounding at its Best”.

 Small Start to Big Corpus

 Small amounts, if invested wisely and with discipline, could end up as a healthy sum when you retire. There are fund houses with schemes that ask for as low as Rs. 500 to start with. Start now, as it helps building a financial discipline. Start with a smaller amount and over time when income rises, increase your savings. Saving a few thousand rupees every month doesn’t require much of an effort, so devise a plan and stick to it. Putting aside 10 per cent of take-home cheque in a retirement basket shouldn’t hurt. It’s seen that launching a retirement program when you are 55 is 18 times more expensive than when you are 25.

Compounding Magic

Even if you are starting late, you probably need to re-look the magic of compounding. Simply put, under compounding, your savings would multiply exponentially as interest earns interest over long term.  If you start investing early, the time you give your earnings to earn further is more.

The Vehicle

 Once you decide to make regular investments towards your Retirement Pension Plan, be sure to exploit the full potential of equities as it has delivered the most among all asset classes in the past. Equity mutual funds have proved to be the ideal vehicle for retail investors to take advantage of the excellent long-term growth of stock markets.

Many of us procrastinate and do not give importance to retirement until they are 40 plus. They have a misplaced confidence that they could manage from a late start. Their perception is that a little extra amount of savings would be enough. The reality is, starting late could make you invest more than double than someone starting early. More the number of years to retirement, more is the boost to your retirement corpus!

Source: http://www.bajajcapital.com/blog/Give-your-retirement-a-priority.aspx     

How to choose an effective retirement insurance company

Life is all about racing hard. Whether it is day-to-day activity, schooling, career, job, married life responsibility or even old age; we all want to win the competition in the end. It is a never ending race. But over the period of time as we gradually grow old at some point we all are going to retire from the working life phase. A break will be put on our race and it might directly shift into the first gear of life where things have to be taken care off in more relaxed and conscious manner. Be it a business man or a salaried professional our regular flow of income will come to a halt and we will have to look back at the savings that we have build over the years. So, everyone needs a sufficient retirement plan that will help them survive their old age and fulfill their incomplete dreams in life.

Each one has its own way of securing their olden days; the best way to create a qualified retirement plan is to approach the professional financial planners. A qualified professional have loads of knowledge and experience over the years and they can guide you properly for creating a well-balanced plan. It is the lack of knowledge due to which most of the people fail to formulate a good retirement plan.

Today, markets are pooled with loads of retirement products catering to the clients across the nation, but the one plan which allows you to save systematically and build up the much needed lump sum to provide yourself a regular income after your retirement is “retirement insurance plans”. In these plans, a person pays fixed amount, known as the premium, to the insurance company over a pre-determined period of time, known as the term of the policy. While part of it goes for insurance cover the rest is invested in various instruments to earn returns and build a corpus over the term of the policy. Investors who would like to maximize their returns can consider using a combination of aggressive, debt-oriented and hybrid funds along with the plans of insurers for the purposes of earning a pension. 

Now that you aware of retirement insurance concept you must be looking out for the best company to finalize a retirement plan? It is advisable when you search for a retirement insurance company or a professional to finalize your plan first make sure that the company or the person has healthy experience in planning retirement. You should try to know how they strategize, finance for your retirement and on what equity, debt or balanced funds do they recommend to invest. They should be well-versed with financial knowledge and counter the losses if any, in your funds to give you balanced results in the end.

A well reputed retirement insurance company will do everything on right note, but still you need to look into certain aspects of the company. The first thing you should look is the client base of the company and how good is the relationship with their client. If possible try to get feedback from the existing clients or try calling up customer service and understand how friendly and proactive the team is. Are they able to mitigate your concern on time? Apart, from this you should also look into the general suggestion they make on the issues like financial planning, planning for set interval of time and more.

Once you finalize the company or the individual you should make sure that they formulate a clear strategy and are putting out plan that will maximize the return on your investment. Keep a regular updated on the entire move Retirement Fund makes and the planning they do on maximizing your investment. Before finalizing the plan make them aware of your personal financial commitment towards your family and the financial strength or capacity that you can invest for. This will help them formulate a financial plan in a way that it does not affect your present situation and also helps you to invest in your future, this kind of balanced investments are very much important.

To get a basic idea you can also use a bit of internet too. Today, online sites are a great place to start as they help you easily to compare the cost of insurance and also let you get a glimpse on retirement insurance company reputation in the markets. If you can’t afford to devote your valuable time on research then you can entrust the job to a well known insurance agents. It is one of the reliable ways to ensure that you get best insurance quotes in less time without having to go through the hassle and tedious task calculations. 

A Quick Thumb Rule for Retirement Planning

1.      

Total Financial Savings Required at the time of Retirement

With this saving, you should be able to deal with your income needs after retirement

Note that, with average life expectancy expanding, you may need to plan for a good 30-40 years after retirement

The objective is to ensure you have sufficient savings not only at the point of retirement, but also to maintain your future standard of living adjusting for inflation

Financial savings does not include the house that you live in, but all other form of savings including Debt, Equities, any real estate beyond the house that you stay, PF, etc

2.       Current Annual Expenses

This is your current household expenses and assumes you own the house that you stay in

Therefore, do not include your EMI towards your house in this

This would not include ‘goal based’ expense planning like Child’s college education or marriage – which needs to be planned separately

Objective is to simply ensure the family – husband and wife – have sufficient income available to maintain their life on retirement plans

Note that this is a quick thumb rule to ensure same standard of living. Child’s education expense at the age of 40 will be replaced by medical or ‘travel’ related expenses at the age of 60.

3.       1.07 ^ Number of years to retirement

Here we try to project expenses at a future point in time, assuming a 7% rate of inflation

Though inflation has been higher in the past few years, it should settle at about 7% for the next few years. This rate is closer to the zone for comfort for the RBI.

4.       X 25

It is important one understand why you need to have 25 times your annual expense at the time of retirement

This assumes that your portfolio makes close to 10% pa at the time of retirement – therefore assumes you have a reasonable mix of equity, debt and real estate at the time of retirement – as debt alone cannot generate real inflation adjusted returns

Of the 10% that your portfolio makes, you can use 4% for your annual needs. The balance 6% needs to be invested back in the portfolio to maintain your income for future inflation protection.

We hope this is useful. This is a quick thumb rule and you specific life situation may have unique needs. But as long as your planned financial savings is at least 25 times your inflation adjusted expense requirement, retired life should be fun.

Source: https://scripbox.com/blog/a-quick-thumb-rule-for-retirement-planning   

Top 6 Reasons Explaining the Importance of Retirement Planning

The concept of retirement in India has undergone a paradigm shift in the last couple of years. Retirement opens a whole new chapter for many individuals, when they pursue the ‘work they love to do’ and convert their hobbies to professions. There’s an increasing trend of individuals opting for voluntary retirement as they reach the other side of 40s and live for over 85 years.

Earlier this year, a survey titled Life Value Notes Life Freedom Index was conducted in 11 tier 1 and tier 2 cities to understand the current state of financial planning in urban India. The survey revealed that consumers are skeptical about the adequacy of their financial plans to meet their desired standard of living throughout their lifetime. In fact, only 13% of youth and women are extremely confident that they have adequate retirement planning in place. Though the wisdom investor segment (45 years and above) scored better in the level of confidence, their percentage stood at only 24%.

There are many reasons why planning for retirement is important like any other goals:

1.       Increase in life expectancy: Our generation will live longer than previous ones due to improved medical and healthcare, implying the need to gather enough funds that can sustain longer life. This also implies that the healthcare needs and expenses are likely to haunt us.

2.       Shortfall in Employer Funded Pension/Pension Funds : The employer or government funded pension schemes are less likely to sustain the income needs post retirement. The pension that one may receive from these schemes will not be sufficient to maintain the lifestyle. This is the reason many individuals worldwide supplement their state or employer funded retirement plans with self-funding- i.e. pension plans.

3.       Change of social structures: In spite of family support, many retirees don’t prefer depending on the relatives or children for meeting post retirement expenses. Maintaining independent lifestyle is sustainable only when backed with a financial cushion.

4.       Lack of social security system: There is no social security system in our country. Hence one has to plan to build the entire corpus to help meet the regular income or any contingency post retirement.

5.       Desire to remain contributor: The want to contribute to the family by providing and supporting the kids or grand kids at milestones of their life remains even after retirement is inevitable. Starting an independent venture is also an emerging trend. These can be fulfilled only when one is financially self-reliant.

6.       Rest and relaxation: After fulfilling all your responsibilities, you may want to build a retirement corpus to go on holidays, to pursue a hobby etc.

Keeping these key points in mind, it’s advisable to seek guidance from a financial planner for his expert views on your financial plan. Retirement is not just about age, it’s highly dependent on the kind of lifestyle you’re living and wish to continue living.