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September 21, 2023

What are the secrets to sound retirement planning? Calculate returns this way!

Retirement planning is crucial to ensure financial security in your golden years. With longer life expectancies and rising costs, having an adequate retirement corpus is more important than ever before. Below are some secrets to smart retirement planning.

Start early

The earlier you start saving and investing for retirement, the more time your money gets to grow. Thanks to the power of compounding, even small investments made regularly in your 20s and 30s can snowball into a sizable nest egg by the time you retire. The longer your investment horizon, the more risk you can take to earn higher returns. Start socking away even small sums in your 20s to get into the discipline of saving.

Save diligently

Consistency and discipline are key in retirement fund planning. Determine a savings rate that you can maintain throughout your working life and stick to it diligently. Set up automatic transfers to your retirement accounts so the money is invested before you spend it. Try to save at least 10-15% of your income towards retirement if you start in your 20s and 30s. As you get closer to retirement, aim for 20-30% if possible.

Choose the right investment mix

Retirement planning is not just about saving, but also investing those savings wisely. Equity investments like stocks and equity mutual funds should form the bulk of your retirement portfolio when you are younger to earn inflation-beating returns. As you near retirement, shift towards less risky fixed income investments like debt funds to protect your capital. Rebalance your portfolio every year to maintain your target asset allocation.

Use tax-advantaged accounts

In India, investing in the Employees’ Provident Fund (EPF) and Public Provident Fund (PPF) allow you to save taxes while building your retirement corpus. The EPF allows salaried individuals to contribute 12% of their basic pay along with matching employer contributions. The PPF offers guaranteed tax-free returns on deposits up to Rs. 1.5 lakhs a year. Opting for the Voluntary Provident Fund allows you to make additional tax-free contributions.

Use equity linked savings schemes

Equity Linked Savings Schemes (ELSS) are diversified equity mutual funds that offer tax deduction u/s 80C. Investing in ELSS allows you to earn market-linked returns of 12-15% on a long-term basis while enjoying tax savings. This boosts your retirement corpus significantly compared to fixed deposits or traditional insurance policies.

Delay withdrawing from retirement accounts

EPF and PPF allow you to continue your accounts even after retirement. Delaying withdrawals allows your money to keep growing tax-free. You can withdraw lumpsums from these accounts during emergencies in retirement instead of opting for systematic withdrawals. This retains the power of compounding for a longer time within these accounts.

Relook at your expenses

As you near retirement, make a list of your expected monthly expenses and review your spending patterns. Cut down on unnecessary discretionary expenses and aim to save more. Consider relocating to a lower cost area or a senior community for added savings. Downsizing your home or paying off debts can also help reduce expenses.

Keep emergency funds

Maintain emergency funds to the tune of 6-12 months worth of expenses even after you retire. This guards you against contingencies like medical emergencies or major repairs without dipping into your retirement savings. Keep these funds in liquid instruments like savings accounts, sweep FDs or liquid mutual funds.

Retirement planning requires diligent efforts over decades to ensure your golden years are comfortable and stress-free. Follow these tips and start early to retire comfortably. Stay invested, review your plan periodically, employ tools like a retirement fund calculator and enjoy peace of mind.

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