Keep corpus ready before you retire

06-Jun-2011
Source : The Financial Express

By Ritu Kant Ojha,
Retirement is a reality that everyone has to accept at one stage in life. It is the time when you would want to do things that you could not do through the years working up the ladder of professional life and raising kids. It is the most important financial goal and you must do your calculations well to make sure you have a corpus ready before you retire.
Calculate the gap
To maintain current standard of living post retirement, you need to estimate the annual retirement expenses. Use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire. Remember to take inflation into account. A realistic estimate of your expenses will tell you about how much yearly income you will need to live comfortably. For example, health related expenses would increase in your later retirement years.
Once you have estimated your retirement income needs, take stock of your estimated future assets and income. These may come from your PPF, EPF, a part-time job, mutual funds, bank savings etc. If estimates show that your future assets and income will fall short of what you need, the rest will have to come from the additional personal retirement savings.
Prepare a retirement nest egg
By the time you retire, you would need a nest egg that will provide you with enough income to fill the gap left by your other income sources. For the exact amount you need to ask yourself following questions:
* At what age do you plan to retire?
* What is your life expectancy? The more you live, the more retirement years you will have to fund.
* What is the rate of growth you can expect from your investments? Be conservative when projecting rates of return.
* Do you expect to dip into your principal amount? If yes, it may deplete your savings faster. Build in a cushion to guard against such risks.
Build your retirement corpus
When you know roughly how much money you will need, your next goal is to save that amount. For this you should map out a plan that will work for you. Always take a conservative estimate of return on investments. Once the plan is ready, you are ready for the implementation of plan.
It is never too early to get started. For a good retirement corpus, one must ideally start in his/her 20s. Work on the concept of “pay yourself first” which means that before you take out money for your expenses, the contribution towards investment must be diverted. This will help you avoid some impulsive expenses during the month.
Understand various investment options
With so many financial products being launched each day, it may be difficult to decide which is the best. You need to understand the various options available to you. If you do not have the time, energy or inclination to do it yourself, you must hire a financial planner to do this job for you. You do not want to get stuck in a financial product and realise ten years later that you made a big mistake by investing in it. Do not forget that retirement planning is an enormous task and unlike child education planning or planning to buy a house, this requires much bigger corpus and is a much serious affair than providing for other financial goals. At the age of 70-75, you may not have much options of funding your expenses other than your own savings. You must have understanding of at least 3 asset classes equity, debt and real estate.
Equity
Equity as an asset class is known to give much higher return than others. You can invest directly into stocks or do it through equity mutual funds. Over long term it will help you create a corpus, big enough to let you sail through the retirement years. However, it is a risky asset class and towards retirement some part of it must be liquidated and moved to debt instruments.
Debt
Debt is known for steady returns. Exposure to debt brings in stability to the overall portfolio and plays an important role when you have a short term horizon or there is a need of capital in short term. Debt must be restricted to minimum for any long term goal. Monthly income plans from mutual funds give option of about 20 per cent exposure in equity and 80 per cent in debt.
Real Estate
The investment in real estate is a necessity because when you retire you would want to have a permanent roof on your head. However, realty is an illiquid asset and should be used for self usage. Though real estate can boost your net-worth quite a bit, over exposure to real estate may be dangerous for your portfolio.
An investment once selected is not the end of the retirement planning process. It is a planning which involves 20-30 years and there would be lot of changes in your financial situation as time passes by. This would require portfolio re-structuring from time to time. PV Subramanyam, retirement planning experts says, “You cannot retire when you are ready but only when your retirement corpus is ready.” So if you want to retire at the time when you want, you would have to start investing now.