Keep an eye on your retirement plan

Pension | admin | July 1, 2011 at 7:12 am

A growing priority for each of us is to ensure that our savings provide us with a comfortable retirement. Among other factors, the need stems from the fact that prices across industries, commodities and services are rising; and continued rises are probable. The inflation rate in India has risen to 8.98% as of March. Add to this the advancements in medicine and changes in lifestyle and you have a burgeoning need for income later in life.

In a research on retirement trends that we carried out in late 2010, we found that a large number of Indians desired early retirement but were concerned about their ability to sustain their standard of living post retirement. The common recourse to that, according to them, was to work longer, even beyond the legal retirement age. On the contrary, if you start planning for retirement early — say at age 30, which is considered ideal — the power of compounding would work wonders.

Those with robust retirement saving plans do not have to worry about working longer. To start planning for your retirement, you must consider two aspects. First, you must set the target corpus that you would require at your planned retirement date. To do this, you need to forecast your monthly expenses, factor in inflation (which eats into your savings year on year) and make some allowance for one-off expenses like medical emergencies. Remember, life expectancy is improving every year due to medical advances, better diet, early treatment of illnesses and better access to quality medical care.

Your monthly living expenses may be lower than what you spend today due to lesser needs and responsibilities. However, the amount needed to maintain a similar lifestyle would increase in line with inflation rates. For eg, if the inflation rate is 7% per annum, your monthly expenses would double in 10 years. With this knowledge, you can estimate the corpus required at the date of retirement to fund this income, or you can use the help of a financial planner or your insurance advisor.

Secondly, once you know the amount you need at retirement, you must decide which financial instrument would suit you better, given your risk appetite and expected returns. Since it is retirement we are talking about, it is advisable to not put all your eggs in one basket. It is important to spread your risk by investing in various instruments, exposing yourself to different asset classes. Every financial instrument has its strengths and weaknesses. Public Provident Fund and employee provident fund will give you guaranteed returns but they may not be your best bet to combat inflation.

Equity-oriented instruments, on the other hand, may give returns in excess of inflation in the long term, but exhibit short-term volatility and carry some risk. While the stock market is a good option for long-term investment, the frequent ups and downs may be disconcerting to many investors as they approach retirement. Hence, it is advisable to invest in such a manner that a minimum guaranteed corpus is available to you at retirement.

A traditional retirement savings plan ideally provides a higher level of financial security because of a guaranteed amount at retirement. It is also less volatile, more predictable and may also offer higher non-guaranteed benefits over the long-term due to some exposure to long-term instruments.

You can also avail of additional protection that is built into the retirement savings instrument. Finally, as a thumb rule, you should revisit your plan at least once a year and check whether your retirement savings are accumulating at the rate you need for your planned retirement. If your lifestyle has increased, and you wish to maintain it, then you may consider investing more money to help the retirement corpus grow.