How to plan for retirement

'Retire in peace' -- how often have you heard or seen this line before? A lot of life insurance and mutual fund advertisements have this line plastered across their products. You would think retiring was the simplest thing in the world. Come to think of it, it can be. With a little thought and planning, 'retire in peace' can become a reality and not just a line on some billboard.

If retirement to you means lazing on the sofa reading a book without any worries, then that's not very different from how most of us wish to spend our retirement. The difference however, is in the planning and application to achieve that standard of retirement. While some only dream of a blissful life after 60, some actually get down to achieving it. The dream can be a reality for you as well, you just need to outline a plan and be disciplined and patient.

While a lot of people associate retirement planning with men, in our view that is a misconception. Anyone who will retire (and all of us will one day) needs to plan for it. If women are going to retire they need to plan for it too. Working women, of course, do retire, but homemakers retire too.

Many may not associate retirement with homemakers, although they do work like all of us and have as much right to take a break from the drudgery of work at some stage in their lives. Likewise, they are entitled to do things that other retirees do, like read up, spend time with grandchildren or just laze around. There is another reason why homemakers must plan for retirement, it's because they do save money and anyone who has income in any manner, needs to put some amount aside for the proverbial rainy day.

When you think of it, you find that there is more than one reason to save for retirement. The all-important reason is the cost of living, rather, the rising cost of living. We all have heard this before and have probably repeated it often in front of a child -- 'son when I was your age, a litre of petrol used to cost only a few rupees, today its close to fifty rupees' Or 'a packet of sliced bread cost a few annas, today its for ten rupees.' So what explains the rise in prices of these goods? Its called inflation, which simply put, means that purchasing power of money falls over time, so you buy less for the same amount of money or you have to pay more for the same quantity of goods.

Back in the 80s it was a lot cheaper

The reason why the rising cost of living should feature prominently in your retirement plan is because when you consider inflation, the money you want to set aside for retirement suddenly appears very little. An illustration will help you understand this better. Let's assume that your annual expenditure at present is Rs 100,000.

You are 30 years away from retirement. What will be your annual expenditure then, after taking into consideration the increase in cost of living? Our calculation tells us that if you assume a 5 per cent inflation rate for 30 years, the Rs 100,000 annual expenditure will soar to over Rs 432,000 by the time you are ready to retire! And you will need this money every year after you retire. So if you had planned to set aside Rs 100,000 for your retirement, because that is how much you need today, you would have saved for less than 25 per cent of how much you really need (i.e. Rs 432,000).

Another reason why women may have to be a little more prepared to meet the rigours of retirement is because they tend to outlive men. While this is a global trend, it's equally applicable in the Indian context. According to the 1991 survey, the average Indian woman lives for 58.7 years compared to 57.7 years for the average Indian male. Living long is a good thing, but if you outlive your spouse it means that you have to fend for yourself and pay all the bills on your own. Living long could also bring with it the risk of more illnesses and medical problems. Therefore, providing for them becomes imperative.

Put plainly, planning for retirement is a lot more important than you may realise. Your present standard of living is going to be that much more difficult to sustain even 10 years down the line unless your income rises at the same rate as the cost of living. However, when you retire, you may not have an income stream, let alone any increase in income. So how do you bridge the gap?

The good news is that if you start planning for retirement early on, you can bridge the gap between what you have in your hand today and what you would like to have when you retire. The important questions you need to ask yourself are:

• How much should I save for retirement?
• How should I go about saving for retirement?
• What points do I need to keep in mind while I prepare a financial plan?

The first question is best answered sitting across with your investment consultant. He will help you with the calculations. You have a starting point in our illustration on how inflation impacts your annual expenses over time.

The answers to the second and third questions are a little simpler. But even they are best tackled with the help of an informed investment consultant. We would like to highlight a few important points over here. What to keep in mind while saving for retirement depends a lot on your age and how much money you are willing to set aside every month. If you begin saving for retirement early on in your life, you can set aside smaller amounts.

You can also take on more risk by investing in equities; remember over the long term (20-30 years) equity investments can really boost your retirement kitty. If you delay saving for retirement, you will have to invest larger sums of money to save for the same amount; also the share of equity investments as a portion of your retirement savings will have to be lower. This is because while equities can be rewarding over the long-term, they can erode your savings over the short-term.

Perhaps the most important thing that will help you plan for retirement is an early start. If you haven't started already, start right away. Our illustration (refer Table 2) will help you appreciate how an early start can go a long way in accumulating a meaningful sum of money for retirement. Let's say, you want to save Rs 1,000,000 (Rs 10 lakhs) for retirement. If you start early on in your life trying to save for this sum of money, it's relatively easy. But as you delay saving for it, you will notice this sum begins to appear impossible.   

The early bird gets it

(Assumed that  appreciates at 12 per cent compounded growth)

Notice how the sum you need to set aside to save Rs 1,000,000 starts rising sharply over the years. This number nearly doubles every 5 years. For instance, you need to set aside Rs 7,500 every year if you start saving 25 years from retirement. If you postpone saving for it by 5 years, you will need to set aside Rs 13,879 every year. Over a period of just 5 years, your commitment has increased from Rs 7,500 per annum to Rs 13,879 per annum, an 85 per cent increase. If you delay saving for retirement even more, it will become impossible beyond a point.

Tips for saving for retirement