An individual may need a few crores of rupees to see an him through his retirement days, but that doesnâ€™t mean he needs to save huge amounts when an individual is working not yet retired.
This appears to be an impossible task but a slow and steady approach in savings and investments may give the necessary savings and income post retirement. â€˜Sâ€™ is a 50 year-old working individual and he has hired a financial advisor five years ago to chalk out a financial plan so that his daughter could study abroad. He also wanted to take the voluntary retirement scheme offered by the bank where he worked, and return to his hometown as he and his wife did not want to live in Mumbai alone after their daughter went off abroad to study. Now she has flown, and itâ€™s time for her parents to move. But theyâ€™ve run into unexpected problems.
S had to have an emergency surgery and because of that, he could start investing program only a year later than the original schedule. Then he had to make an extra provision for his daughterâ€™s studies. Because of these factors it will be risky for S to take voluntary retirement as his finances are not in order to meet his present demands.
People who start thinking in their late forties or early fifties about retirement suffer a rude shock. Most people donâ€™t give a whole lot of thought to the cost of living. They donâ€™t realize that they would require three to four times their current cost of living for their retirement. They are disturbed when a financial advisor tells them that they will require Rs 5 to 10 crore to retire.
Unlike previous generations individuals now can not depend on children or relatives to fall back on in old age.
Most professionals in their thirties are very serious about retirement planning. The lack of security is driving them to take a serious look at future planning. They know the lack of a proper plan will cost them dearly later on in life.
Retirement planning is a lot easier if an individual take small steps towards it in the first few years of his career. When an individual is far away from retirement, he only needs to invest small amounts. Secondly, at that early stage, an individual can invest in relatively risky instruments like stocks, and benefit from the higher returns without being unduly threatened by the risks. Thirdly, a compounding rate of return is a powerful tool that can add zeroes after an individualâ€™s corpus amount.
Late starters will find it increasingly difficult with each advancing year to catch up with someone who started earlier. A small amount invested early in life can yield a corpus in tens of lakhs. An individual would not have the same corpus even if an individual puts in double or triple the amount of money as someone who started 10 years earlier.
Let us look at the arithmetic. An individual starts investing Rs 500 per month at the age of 20 and go on investing for the next 40 years. With an 8% annual return, an individual would have built a corpus of Rs 17.45 lakh by the time an individual is 60 years old. Now letâ€™s assume an individual start investing at 30, and the amount is double, that is, Rs 1,000 per month. When an individual is 60, he would have only Rs 14.90 lakh. If an individual wait till age 40 to start investing, even if an individual put in Rs 2,500 per month for the next 20 years, he will have only Rs 14.72 lakh at age 60, not a very safe situation. And if an individual started the process merely five years before turning 60, with Rs 20,000 per month, he would build a corpus of only Rs 14.69 lakh.
When an individual have less than 10 years to plan, he has to eschew many risky investment avenues that could yield high returns. If an individual donâ€™t have assets that can be liquidated after retirement, the process is even trickier.
Itâ€™s not as if people donâ€™t have any plan at all for their retirement. The problem is that some people prioritize retirement wrongly. They may feel family responsibilities take precedence, so, for example, they may put their retirement below their childrenâ€™s education on the priority list. This means they would pay out of their savings for the education, rather than taking a student loan.
If an individual has not given a serious thought of post retirement and lack the financial skills to do it he should take the help of consulting a professional. A professional will work with realistic numbers, which would make sure that there are no negative surprises in store.
If an individual has more than two decades to go before retirement, all an individual needs to do is earmark a small amount every month and do it unfailingly. It doesnâ€™t matter if canâ€™t spare a large amount. Start small, and start at the earliest. As his income grows, he can always increase his allocation for savings.