| A New Approach to Retirement Planning |
Achieving a comfortable retirement in the 21st Century requires a
new approach to retirement planning. It's not like your father's retirement in which at
age 65 or so we went from working to not working, collected a fat corporate pension and
retired to our family homes.
Retirement in this century is a whole new gig because of some new realities, which have to
be factored in. Firstly, one has to understand that the standard of living we plan to
enjoy in retirement hinges not so much on the largesse of a company pension plan, but on
how skillfully we invest our money. Secondly, we are living longer, staying healthier, and
remaining more active after we retire, so though our money has to last us longer, there
are a lot of other vistas of employment also opening up.
The basic tenets of successful retirement plan are the same, but they need some
fine-tuning. The basis of a retirement plan is the accurate determination of the savings
goal. The only way to know whether you're on track toward a comfortable retirement is to
project your retirement expenses, and then calculate how much you must save to accumulate
a retirement nest egg large enough to supplement pension and other sources of income.
Start with the expense side. You've probably heard the rule of thumb that you need 70
percent of your pre-retirement income to retire comfortably. Well, don't think of that
figure as carved in stone. You could easily get by with less than 70 percent if, say,
you've paid off your loans-children’s education loans, home loan, calling it a day in
your career. Instead of dealing in generalities, get to specifics. Jot down your current
expenses and then cross out items you won't be payingfor in retirement, such as commuting
to work, paying the kids' tuition and, of course, saving for retirement. Keep in mind that
some expenses go up after you retire. You're likely to pay more in medical costs and,
you'll probably spend more on travel, leisure, eating out and other entertainment. Then
factor in the inflation. The idea is to arrive at a realistic estimate -- or range of
estimates using different spending figures and inflation forecasts -- that represents the
amount of money you'll need to live in the style to which you want to become accustomed
once you've retired.
On the income side, first list your future provident fund, gratuity, LIC policies, and
company pension that you expect to receive. Then come to your other sources of income like
fixed deposits, PPF, stocks, bonds etc. Add to this any income that you can expect from a
job post retirement. Make an educated estimate of the future average annual return on your
retirement savings and you have the income side ready.
Then comes the part of deciding the mix of the portfolio to give you the desired return.
How you decide to divvy up your retirement portfolio between stocks and bonds will depend
for the most part on your tolerance for risk and how long you have until you plan to
retire. A reasonable starting point for investors whose retirement is 20 or more years
away is 70 percent stocks and 30 percent bonds. If you feel comfortable shooting for
higher gains despite the risk of short-term losses, you can increase your stock holdings a
bit, or ratchet them back a bit if you're uncomfortable with the prospect of volatile
stock prices. Over long periods of time, stocks have the best track record for boosting
the size of your retirement nest egg. Even more important, stocks are more likely to keep
your retirement savings growing faster than inflation, which will increase the future
purchasing power of the money you sock away today.
Alongwith returns, the tax angle of the returns should also be an important consideration
in a retirement portfolio. One of the surest ways of boosting the value of your retirement
savings is stashing as much as you can in tax exempt government instrument like PPF,
NSC’s, LIC’s. You get an immediate tax deduction as well as tax exemption on
encashment. The less you have to pay in taxes on the money you pull out of your retirement
savings, the longer your money will last. Pulling money from taxable accounts first as
much as possible and letting tax-advantaged accounts continue to compound can stretch the
life of your nest egg by several years.
Another mistake retirees make is to stash most or all of their portfolio in bonds in
search of steady income. Unfortunately, over the course of 10 to 15 years, inflation can
easily erode the purchasing power of bonds' interest payments by a third or more. Even
investors in the seventies and eighties should probably keep 20 percent or more of their
holdings in equities.
With newer opportunities, a lot more retired people plan to work full or part time after
they retire. Working even occasionally during retirement can benefit you in two other
ways: it reduces the amount you have to save before you retire, and income from a job
lowers the amount you must withdraw from your retirement savings, which reduces the
chances that you'll run out of money before you run out of time.
In the new millennium, with lowered returns, and stable to rising inflation, the mix of
the retirement portfolio will be constantly, favoring equities even at older age, and also
with longer and healthier retirements one can increase their income years by working post
retirement.
Aru Srivastava
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