The Golden Rules Of Retirement

Experts contend that retirement planning should start from the day you start earning. Sound advice indeed, but one that is seldom followed.

Finally, in this last section of our module, we will learn the golden rules of retirement planning that will surely help you retire in comfort. The following rules are:

a. Save 10% of your income for retirement

The first rule of retirement planning is also the easiest to follow. If you have a regular job, then 12% of your basic salary and an equal contribution by your employer that flows into your Provident Fund account is a good way to build a nest egg. The best thing about this option is that you cannot avoid it. EPF rules require all employees to contribute 12% of their basic income to retirement savings, which include the Employee Provident Fund and the Family Pension Fund. It is a forced saving that becomes the default retirement plan for many individuals. The 10% rule is crucial for self-employed professionals and others who are not covered by the EPF umbrella. They can opt for mutual funds, choosing the ones that suit their risk appetite and age profile. However, you need to have the discipline to put away the given sum on a regular basis.

b. Increase investment as your income grows

It is important to maintain the retirement savings rate at 10% so that your nest egg doesn't fall short of your requirements. The icing on the cake can be periodic boosters whenever you get a windfall, such as a tax refund or a lump-sum payment in the form of, say, an annual bonus. The trick is to commit yourself to save more in the future. Whenever you get a raise, allocate half of it to savings. You might not notice the change since you will be enjoying the other half of the raise.

c. Don't dip into corpus before you retire

This might sound weird, but every time you change jobs, your retirement planning is at a grave risk. This is because you have the option to withdraw your PF balance at that time or transfer it to the account with the new employer. Your money will not reap the benefit of compounding if you dip into the corpus before retiring. Don't underestimate what this can do to your retirement savings over the long term.

For example, A person with a basic salary of ₹25,000 a month at the age of 25 can accumulate ₹1.65 crore in the PF over a period of 35 years. This is based on the assumption that his income will rise by 10% every year.

d. Withdraw 5% a year initially, then step up

One of the biggest challenges for tomorrow's retirees is to ensure that they don't outlive their savings. To ensure that you don't run out of money in your old age, you must have a drawdown plan in place. The thumb rule is not to withdraw more than 5% of the corpus in the first five years of retirement. This can be progressively increased to 10% by the time the retiree is 70. At 80, even a 20% annual drawdown rate would be considered safe.

e. 100 - Age = your allocation to stocks

An investment portfolio's performance is determined more by its asset allocation than by the returns from individual investments or market timing. How much you have when you attend your last day at work will depend on how you allocate your retirement savings between stocks, fixed income and other asset classes. Experts recommend that you should have an equity exposure of 100 minus your age. So, at 30, you should have about 70% of your portfolio in equities. After you retire, your exposure to stocks should not be more than 25-30 % of your portfolio. This isn't a hard and fast rule, though.

f. Borrow for education, save for retirement

Before you pour money into your child's plan, make sure your retirement savings target has been met. In an effort to fulfill the needs of the child, Indian parents sometimes sacrifice more than they should. Some even dip into their retirement funds to pay for the child's education. This is risky because your retirement will be entirely funded by you and won't have the cushion of defined benefits. This doesn't mean you should compromise on your child's education. It can still be done through an education loan. An education loan helps inculcate financial discipline in the child. In addition, if the child is responsible for repayment, it establishes a habit of savings from an early age.

g. Save 20 times your annual expense

This rule is different from others because it is based on how much you spend, not on how much your investments earn. Knowing your post-retirement expenses is crucial to retirement planning. Some expenses, such as those on clothing and entertainment, come down. Others, such as transportation, medicine and insurance, go up. Add up all the expenses you are likely to incur after retirement to know how much you will need per month. Then, multiply this amount by 20 to know how much should be your retirement corpus.

However, this calculation is based on a number of assumptions -