Retirement is starting for a new life: Plan for it accordingly
“Retirement, a time to enjoy all the things you never had time to do when you worked.” – Catherine Pulsifer
➛ Have you ever thought about your post retirement life?
➛ How would you want to enjoy your life during post retirement phase?
➛ How would you like to spend time with your family, as you’re not giving quality of time to them during your busy schedule now?
➛ Do you want to fulfill your hobbies, while you couldn’t during your working days?
➛ Are you dreaming of national and international trips after retirement at a predetermined interval?
➛ Do you like to spend your time at your second home – on hill station or seaside?
If you really want to fulfill your wish list during retirement, you need to invest and manage your investments prudently from now on. You must be looking for carefree post retirement life. You’ll not work for money, rather your money will work for you.
Structured approach towards retirement shall allow you to lead a worry-free life.
Financial plan & effective implementation of financial plan with periodical reviews make you wealthy. As you’re wealthy, you will never think for re-employment out of obligation.
Why do you think of a vacation? It’s definitely for relaxation. Retirement is like a long vacation. Vacation without penny makes your life uncertain and miserable.
Have you painted the pictures of retirement in your mind? You think further whether you want to retire. If so, you think of when you want to retire and how you want to enjoy his retirement days. Retirement means, you have come out of the rat race, to live a relaxed life. For financial wellness, you need to go through retirement planning processes. If you fail to plan, you may get bread but not butter.
Financial freedom is represented through your finances, your self-worth, your personal values and security. The moment you retire for the rest of your life, think about your income flow. Will that justify your standard of living? Can you compromise with your household, lifestyle and medical expenses during your post-productive years? If you want to keep money away from your soul due to your innocence, hardly you get time to heal up your financial injury. Both time and money are important factors. If you have time but you don’t have money, you can’t fulfill your dreams. Consider compound effect of interest, time is also an equally important factor. Compound interest is incredibly powerful.
“An unproductive consumer is too old to work but too young to die.” – Uttam Kumar Sen
Important issues that retirees face today
Retirees face many challenges in their day to day life like health deterioration with age, lack of peaceful shelter, malnutrition, feeling of insecurity (both monetary & social), homogeneous life, sky rocketing medical expenses, isolation and illiteracy due to age & diseases, third-act-career etc. Nevertheless, they have to manage households. It’s better to think for a moment- we have to partially or wholly experience these invisible experiences too. In today’s scenario, children move out for job. It may be within the country or abroad whereby parents become alone. Children will also have their own family. Although they try to give supports to their parents financially, emotionally and physically, sometimes they fail to do so due to complexities of life. They have their own commitments to their spouse and children.
Imagine the life you would like to lead after retirement. Plan for it to give it a shape.
Due to longevity, a retiree outlives retirement fund. Notable causes are inflation, income tax, interest rate risk, medical expenses, etc. Financial planning processes resolve these issues.
Those who are working in an organized sector, they have either defined benefit or defined contribution pension plan; both are employer sponsored retirement plan.
Earlier Government of India and other organized sectors used to provide defined benefit pension to employees, which was based on employee’s length of service and average of emoluments (Basic Pay+ Dearness Pay + Stagnation Increment + Non-practicing Allowance). Defined benefit pension plans are gradually losing their dominance in the pension system in India; as a result employees are deprived of the following benefits:
➛ Assurance of fixed pension immediate after retirement
➛ A retiree/nominee has no investment risk
➛ Indexed to inflation due to DA
From 1 Jan 2004, Government made it mandatory for new government employees (except armed forces) to contribute to National Pension Scheme with matching contribution by government. This is a move from a defined benefit pension to a defined contribution pension scheme.
Do you have any idea how much will you get your monthly pension during retirement, if you have joined in service after 1995?
➤ Pension amount= (Pensionable salary* Period of service)/70
➤ Pensionable salary means: Employer’s share of Rs. 1800 to EPF will be split as 8.33% of Rs 15,000 i.e. Rs 1,250 to the pension scheme and balance Rs. 550 as employer’s share to the PF (the average salary of preceding 60 months).
➤ Only Basic, DA and retaining salary if any is considered as salary.
➤ If an employee has completed more than 20 years in service then add two years bonus in above equation.
➤ According to new rules your pension can’t be less than 1000 per month.
An employee is eligible for pension after the 10 years in the service.
Example:
➤ Your date of joining is 01/10/2014
➤ Your projected date of retirement is 01/10/2034
➤ Projected monthly Salary on separation of service Rs. 50,000 or even more.
➤ How much monthly pension (approx) you may get on retirement?
(Rs. 15,000*20)/70= Rs. 4,286 per month. The person who used to get Rs. 50,000 per month or even more, immediate after retirement s/he gets Rs. 4,286 per month.
Disclaimer: The above illustrations are based on current scenario, may or may not change in future.
Eye opener: You know that you’ll get pension, but the question is how much?
How much Money do You need to Retire?
If you a take a closer look at how much monthly income you need in retirement. You need to determine, you can’t avoid your retirement. This example illustrates a monthly cash flow you need in retirement of about 75% of your pre-retirement expenses.
Let us consider a situation; I’m certain which helps you to realize:
“How did it get so late so soon? It’s night before it’s afternoon. December is here before it’s June. My goodness how the time has flew. How did it get so late so soon?” ― Dr. Seuss
Total Monthly expenses as on today are Rs. 76,050, i.e. Yearly it comes to Rs. 9,12,600;
If we consider inflation is 5.5%, when s/he retires after 20 years, considering 75% of last annual expenses come around Rs. 19,97,059.
Assumptions in retirement
If your marginal tax bracket is 10% during retirement period;
If earn an interest rate is 6.5% p.a.
You can’t afford to ignore income tax & inflation. If you ignore both, you’re basically sabotaging your own nest egg.
So, both income tax & inflation adjusted return is 0.38%;
Where, you earn 6.5% interest, but 0.33% is your usable income, 5.5% should be kept aside for reinvestment to offset inflation and 10% is kept aside for income tax.
Calculation on assumed figures for retirement
Some of you buy pension products and still want to depend on interest income; you need to accumulate Rs. 60,19,70,641 (nearly 60.20 Crores).
On the other hand, some of you think for using principal & interest both, and then you need Rs. 3,87,11,078 (nearly 3.87 Crores).
To conclude, if you depend on Interest/Pension Income only or both, considering income tax and inflation, then you’ll be needing Rs. 60.20 Crores; whereas, when you withdraw both principal and interest, you need Rs. 3.87 Crores. While you consider only post tax interest, you keep your principal intact which helps you to create a legacy for your heirs. On the other hand, if you use both principal plus interest your entire fund, i.e. Rs. 3.87 Crores will be eroded over 20 years. Later is less stressful than the first option. Planning for comfortable retirement is an ongoing process and not one time.
Still do you think pension plan or interest income are retirement solutions? Insurance companies are selling you pension products and you’re not buying solutions. You’re bearing hidden costs like exorbitant costs towards agent’s commission, transaction fees and extortionate management charges etc.
If you find pension/interest income is a solution, it may become your next problem. Think of Rs. 60.20 Crores and Rs. 3.87 Crores. Choice is with you.
