This article has been written by Sunil Kumar Pathak pursuing an Executive Certificate Course in Corporate Governance for Directors and CXOs from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Introduction

Retirement planning is for a period when one prepares for life after paid work career ends.  Retirement planning is a strategy of evaluating and building a future fund corpus over a period of time, encompassing future goals, and taking all actions and decisions that are imperative to the achievement of that goal. Retirement planning is also about maintaining, safeguarding dreams and aspirations nurtured throughout the life cycle.

These days, younger people are planning retirement very early in their careers, so they should have a good corpus of financial stability after their retirement from service. The benefit of retirement planning is that it guards against any future challenges and provides a comfortable lifestyle.  

Why retirement planning 

In Indian society, family ties are interconnected, but societal safety coverage for a retired person is limited due to the changing dynamics of societal norms. In our traditional family system, children cared for their parents, but with changes in family ties, structure, and urbanisation, the dynamics have metamorphosed.

In this scenario, retirement planning becomes imperative because earning avenues for a person are constrained due to their advanced age. Most employees in corporate and government jobs retire in their 60s. So, here, the earning potential dries up at this stage of life. Then finding a solution for a dignified life becomes essential. Then, retirement planning works as a panacea for an independent and dignified financial life.

Imagine Sri Parasnath, a government school teacher who dedicated his life to teaching and is now retired from service at age 60. Now his pension will not be sufficient to cover the cost of his financial independence and dignified living. 

Significance of retirement planning

There is no perfect time to start with retirement planning. We should keep in mind that every individual journey is unique, so risk tolerance and financial goals should be customised accordingly. This mapping of target retirement income and future cash flows helps ensure the secure future of an individual after retirement. Retirement planning envisages evaluating expenses, estimating sources of income, developing a savings strategy, and controlling risk and assets.

Imagine the case of Sri Ramesh, a corporate employee who began investing in a systematic investment plan (SIP) in a mutual fund. After his retirement, he found a good corpus in his kitty due to his disciplined approach.

Retirement is a significant chapter in an individual’s life, as it marks the culmination of hard work during life. The journey towards retirement requires meticulous planning and perspicacity. Dr. Teresa Ghilarducci, an esteemed scholar in retirement security, emphasises, “Retirement planning is not an option; it’s a necessity.” This perception stresses a visionary approach towards safeguarding one’s financial stability in the golden years of life. Retirement planning is an integral part of a sound financial plan at an early age. When you are preparing for your future retirement, there is always a sufficient corpus of funds to tackle any unprecedented challenges and lead a comfortable life.

Typically, retirement planning includes three phases:

1. Investment
2. Accumulation, and
3. Withdrawal.

The first phase should start at the age of 30-50 when you can afford to save or invest a fair amount.

In the modern world, prioritising retirement planning has become imperative due to volatile market conditions, rising costs of living, and the and the lack of a pension system in certain jobs. As Dr. Alicia H. Munnell, a renowned economist, observes, the traditional pillars of retirement security are crumbling. “Due to the rise in the ageing population and the lack of social security measures, retirement planning boosts income in old age. Although pensions and employee provident funds do exist, they may not be sufficient to cover all individuals and their expenses.

Financial independence

Retirement planning enables individuals to achieve financial independence and self-sufficiency during retirement. It allows them to maintain their desired lifestyle without relying on external sources of income, such as employment or government assistance. By saving and investing consistently throughout their working years, individuals can accumulate a nest egg that will provide them with a steady stream of income during retirement. This financial independence gives retirees the freedom and flexibility to enjoy their leisure time, pursue their passions, and live life on their own terms.

Inflation protection

Retirement planning helps protect individuals from the impact of inflation. Inflation is the gradual increase in prices over time, which erodes the purchasing power of money. By investing in assets that appreciate over time, such as stocks and real estate, retirees can preserve the value of their savings and ensure their purchasing power remains strong in the future. This is particularly important given that retirement can span several decades, and inflation can significantly reduce the value of a fixed income stream.

Healthcare expenses

Healthcare costs tend to increase with age, and retirement planning allows individuals to set aside funds specifically for medical expenses during retirement. This ensures they have access to quality healthcare services without straining their budget. Healthcare expenses can be unpredictable and substantial, and having a dedicated fund for these costs can provide peace of mind and prevent retirees from having to compromise on their medical care.

Unexpected expenses

Retirement planning helps individuals prepare for unexpected expenses that may arise, such as major home repairs or emergencies. Having a financial cushion can prevent these expenses from derailing their retirement plans. Unexpected expenses can be financially devastating, especially for retirees on a fixed income. Retirement planning allows individuals to set aside funds for these contingencies, ensuring they can handle unexpected expenses without having to dip into their savings or rely on debt.

Rationale for having a retirement plan

Lack of a social retirement benefit

India has not built a robust social security plan encompassing retirement benefits for its senior citizens. Though there are pensions and employee provident funds, they may not be sufficient to cover all expenses. Apart from corporate employees, they are bereft of above mentioned schemes to make them live a dignified life. This is why creating a diversified retirement fund with a mix of investment strategies is important.

Financial independence

A joint family system provided care for the older generation, but due to the shifting dynamics of modern day lifestyles, this has become a thing of the past. Retirement planning provides not only financial independence but a dignified way of living. Since generations, older Indians have depended on their children for retirement support.

Rising costs

Retirement planning accounts for rising costs and inflation. A consideration of inflation is taken into account, which is a vital element to consider when planning your retirement. A rising cost of living may impede your standard of living. If you are unable to keep up with rising costs, you may have to compromise on your standard of living.

Medical emergencies

Healthcare costs are very critical and pivotal in understanding the importance and dynamics of retirement planning. Health care can erode entire savings Due to inflation, retail expenses continue to rise steadily, and healthcare inflation is growing at an alarming rate. During even normal medical care, the costs of medicines and doctor fees put ample pressure on funds. Though some other financial goals may be compromised, health cannot be compromised.  

What should be the medical inflation one should keep for post-retirement planning:

Medical and healthcare costs form a critical element of post-retirement living expenses. Medical expenses, which entail almost 12%-15% of expenses after retirement, could be for normal healthcare. Inflation in healthcare in India is approximately 14%. Therefore, having a specific fund for medical expenses that is invested sensibly to keep up with inflation is crucial when making retirement plans. Ideally, one should set aside a set amount of money each month for a considerable amount of time and begin saving early.

Strategies for long-term financial security

Harness the power of compounding by starting early

According to financial expert Warren Buffet, starting early for retirement planning is the key. Investments increase exponentially over time due to compound interest, resulting in large returns and protecting the investor from market turmoil.

Clear goals and a budget

To be in an effective retirement, one envisages setting up a clear goal by aligning retirement lifestyles and financial strategies accordingly. To start with, one needs to build a detailed budget that accounts for savings, expenses, and investment contributions for long term financial security coverage. 

Portfolio diversification:

Harry Markowitz pioneered modern portfolio theory and advocated diversification as a key to minimising investment risk. By spreading investment in different baskets such as stocks, ETFs, bonds, real estate, mutual funds, and gold, one can leverage the risk exposure of volatile market conditions. One also needs to periodically rebalance their portfolio in alignment with financial goals and risk tolerance.

Embracing best of your tax advantages 

By embracing proper tax planning, a good corpus can be harnessed in the long term. Dr. Richard Thaler, a leading economist, underscores the importance of exploiting tax-efficient vehicles to maximise savings and optimise retirement outcomes.

The tax avenues:

• Public Provident Fund (PPF): A long-term savings scheme that offers tax benefits and interest rates. Contributions are tax-deductible under Section 80C, and the interest earned is tax-free. A long-term savings scheme with a tax-free  interest rate. 
• Employee Provident Fund (EPF): A government-backed savings scheme that offers benefits to employees and employers.
• National Pension System (NPS): is a traditional option that offers tax benefits and stable returns.
• Equity-linked savings schemes (ELSS): Provide higher returns over the long term, but with higher risk.
• Tax-saving fixed deposits and recurring deposits: a tax-saving investment option.
• Tax-free bonds: a tax-saving investment option.
• Pradhan Mantri Vaya Vandana Yojana: A tax-saving investment option.
• Sukanya Samriddhi Yojana (SSY): A government-backed scheme that saves taxes while yielding returns.
• Senior Citizen Savings Scheme (SCSS): A government-backed scheme that saves taxes while yielding returns.
• National Savings Certificate (NSC): A government-backed scheme that saves taxes while yielding returns. 

One should explore these retirement savings plans and choose the ones that align with their financial goals and risk tolerance.

Knowledge is power

As Benjamin Franklin famously said, “An investment in knowledge pays the best interest.” One should try to broaden their knowledge to stay afloat in the financial market. This helps in keeping abreast of investment strategies, regulatory changes, and retirement trends. One should always seek advice from good investment advisors.

Peace of mind 

When you see a good corpus of funds taking care of your retirement needs, its fulfilment is a good achievement. Then peace of mind is invaluable. The stress of managing money to meet your long-term and short-term expenses can be dreadful. Paucity of money may even cause health-related issues such as hypertension and other unfortunate illnesses. It is more important to shield yourself from such problems at an older age.

Investment allocation

Effective retirement planning encompasses more than simply accumulating assets. It requires strategic allocation of investments to optimise potential returns while mitigating risk. A well-diversified retirement portfolio should incorporate a mix of stocks, bonds, and other investments to enable individuals to navigate market fluctuations and achieve their long-term financial goals.

Stocks:

• Stocks represent ownership in companies and offer the potential for substantial growth over the long term. However, they also carry higher risk due to market volatility.
• Within stock allocation, diversification is crucial. Investors should consider including a mix of large-cap, mid-cap, and small-cap stocks to spread risk and capture growth opportunities across different market segments.
• Sectors and industries also play a role in stock selection. Investors should aim for a balanced mix of sectors and industries to reduce exposure to specific economic downturns.

Bonds:

• Bonds provide stability and income in a retirement portfolio. They are less volatile than stocks and offer regular interest payments.
• Government bonds, such as Treasury bonds, carry lower risk but also lower potential returns. Corporate bonds, on the other hand, offer higher yield but come with greater credit risk.
• Bond duration is another important consideration. Longer-duration bonds are more sensitive to interest rate changes but provide higher potential returns. Shorter-duration bonds offer lower risk but may have lower returns.

Other investments:

• Alternative investments, such as real estate, commodities, and hedge funds, can provide diversification benefits and potentially enhance returns. However, these investments often carry higher risk and require   knowledge.
• Real estate investment trusts (REITs) offer exposure to real estate without the need for direct property ownership.
• Commodities, such as gold and oil, can serve as inflation hedges and provide diversification.
• Hedge funds employ complex strategies and aim to generate absolute returns regardless of market direction.

Estate planning

Estate planning is an essential component of retirement planning that ensures your assets are distributed according to your wishes after your passing and that your beneficiaries are financially secure. Here’s how estate planning fits into retirement planning:

1. Asset distribution:
   Estate planning allows you to specify how your assets, such as property, investments, and personal belongings, will be distributed after your death. This includes designating beneficiaries and ensuring that your assets are transferred to them smoothly and efficiently.
2. Beneficiary designation:
   Through estate planning, you can name beneficiaries who will receive your assets upon your death. This designation is essential to ensuring that your wishes are respected and that your assets are not distributed according to state laws. You can also designate alternate beneficiaries in case your primary beneficiaries are unable or unwilling to receive your assets.
3. Tax minimisation:
   Estate planning can help minimise taxes on your assets after your death. By utilising strategies such as trusts, charitable giving, and life insurance, you can reduce the estate tax burden and maximise the value of your assets for your beneficiaries.
4. Legacy planning:
   Estate planning allows you to leave a lasting legacy and have an impact on future generations. You can establish trusts to provide financial support for your children’s education, grandchildren’s futures, or charitable causes that are close to your heart.
5. Guardianship and minors:
   If you have minor children, estate planning allows you to designate a guardian who will assume responsibility for their care and upbringing in the event of your death. This ensures that your children are well-protected and their needs are met.
6. Healthcare directives:
   Estate planning documents can include healthcare directives such as living wills and durable powers of attorney for healthcare. These directives allow you to make decisions about your medical care in advance and appoint someone to make decisions on your behalf if you are unable to do so.
7. Avoiding probate:
   Probate is the legal process of distributing a deceased person’s assets. By creating a trust or utilising other estate planning strategies, you can avoid probate, which can be time-consuming, costly, and public.

By incorporating these strategies into their retirement planning, individuals can enhance their chances of achieving long-term financial security and enjoying a comfortable and fulfilling retirement.

Conclusion

The process of retirement planning requires active participation, thoughtful consideration, and continuous assessment. As Dr. Ghilarducci aptly states, “Retirement security is not a destination; it’s a lifelong pursuit. People can go towards a financially secure and satisfying retirement by following good financial rules, utilising the knowledge of distinguished academics, and remaining flexible in the face of unpredictability. Planning carefully and being resilient will help you stay on the path to long-term financial security.  Maya Angelou: “We may encounter many defeats, but we must not be defeated.” With diligent planning and resilience, the path to long-term financial security remains within reach.

References

• https://www.covenantwealthadvisors.com/post/9-reasons-why-retirement-planning-is-important
• https://www.franklintempletonindia.com/investor-education/planning-for-retirement/article/head-start-15/what-is-the-importance-of-retirement-planning