DO
Have an investment goal
To determine the amount of income you’ll need after retirement, you need to objectively assess the following factors. Consider the age at which you are planning to retire, your current monthly expenses, annual income and also the age at which you plan to retire.
Once you have a clear picture of all these points, you can start to identify the best investment avenues for investing.
Start Planning Early-
Use the power of compounding to your advantage by investing for retirement at an early stage. In simple terms, compounding refers to earning interest on accrued interest. If you cannot set aside a large amount of money on a monthly basis, you can consider other options. With Systematic Investment Plans, you can start investing with as little as Rs. 500. It will also help you in building a disciplined savings habit.
Diversify your investment-
Investing in only one financial instrument should be avoided. In addition to fixed income instruments such as fixed deposits, Public Provident Fund and National Savings Certificate (NSC), you can also consider Mutual Funds and stocks depending on your risk appetite. These offer inflations beating returns and can compensate for lower than expected returns from traditional bank investments.
DONT
Don’t retire with debts/ loans
Pay off existing loans or debts before you retire. Interest payments on loans can eat into your retirement savings and impact your lifestyle choices. Your health and wellbeing may be compromised in the event of a medical or family emergency without adequate financial backup.
Don’t delay your retirement planning
The earlier you start investing for retirement, the easier things will be when you retire. While financial contingencies may arise at any moment, by investing in a disciplined manner you can secure your retirement income.
If you have long term obligations such as home loan EMIs, you can consult an investment planner to chart a suitable course of action in terms of retirement planning.
Financial discipline
Retirement funds must be protected as it is an investment for the long term. Having a separate reserve fund which can cater to emergency situations helps you maintain redundancy. Also, the benefits of long-term investing will accrue to you in terms of rate of return.
The 4% Thumb Rule
The accumulation phase in retirement planning is essential, but so is the spending phase. What if you spend too much in the initial years and run out of funds?
The 4% thumb rule can solve this problem. If you withdraw 4% of your portfolio each year after retirement, the kitty can last you at least 30 years.
For example, on retirement at 60, you have an investment of ₹5 crore. If you withdraw ₹20 lakh every year, or 4% of your portfolio, your money can last you until you turn 90.
A US-based financial advisor William P. Bengen first articulated the 4% withdrawal rate. He looked at historical data of stock and bond markets. He realized that if an individual withdraws 4% every year from the portfolio after retirement, the corpus will last for a minimum of 30 years, irrespective of market conditions.
It is a conservative approach towards making sure your retirement corpus doesn't get exhausted prematurely. When you're saving for retirement, there is also a lot of uncertainty about life expectancy, market performance, and inflation.
All of these have a direct impact on your investments. You need to be careful about how much you withdraw from it every year to meet your expenses.
The 4% rule tries to protect your savings from such factors by inhibiting retirees from withdrawing beyond a certain percentage from their corpus.
There are times when the thumb rule may not work. For example, a severe market downturn can significantly erode the value of equities in a person's portfolio. It may also not work if the retiree is not loyal to the rule every year.
It is a conservative approach towards making sure your retirement corpus doesn't get exhausted prematurely. When you're saving for retirement, there is also a lot of uncertainty about life expectancy, market performance, and inflation.
All of these have a direct impact on your investments. You need to be careful about how much you withdraw from it every year to meet your expenses.
The 4% rule tries to protect your savings from such factors by inhibiting retirees from withdrawing beyond a certain percentage from their corpus.
There are times when the thumb rule may not work. For example, a severe market downturn can significantly erode the value of equities in a person's portfolio. It may also not work if the retiree is not loyal to the rule every year.
A lot also depends on your asset allocation and investment avenues. If you are 100% in debt products, the rule may not work. When researching, Bengen looked at a portfolio of 50% equity and 50% bonds.
Equity, typically, offers a higher return than debt. If a person's retirement portfolio is not in equities, the withdrawal rate will need to be below 4%.
Use thumb rules as guiding principles and adjust things based on what works for you.
