.png)
At this point you will lose access to regular income and have to depend on savings or alternate income streams to meet your financial need. This is an inescapable reality of life and all salaried individuals have to face it. Retirement Planning is essential to ensure that your golden years are free of money worries. So read on to know about some key retirement planning tips for salaried individuals.
Start Early, No Matter How Small
When you start your first job, you might not be earning much and retirement seems to be very far away. So, for many, retirement planning often takes a backseat. But, the thought that you should wait to get to a higher salary bracket before you start saving from retirement, can cost you dearly. To understand why, let’s look at how two friends take very different routes on their retirement savings journey.
Ram starts investing ₹5000 per month from the age of 25 years and continues till the age of 60 years. This way, over a period of 35 years he invests ₹21 lakhs. His friend Shyam starts investing ₹10,000 monthly from the age of 35 years and continues his investments till retirement at the age of 60 years. This ensures that Shyam is able to invest a higher amount of ₹30 lakhs during the period.
So, Shyam has invested more than Ram by the time the two friends retire. But how much have they actually managed to save for retirement? This is where things become interesting. Assuming a 12% p.a. average return, Ram’s retirement savings corpus in this case will be around ₹2.8 crore when he retires at 60 years. While Shyam’s retirement corpus will be ₹1.7 crore at the same age.
This is the cost of delaying. This marked difference is corpus size occurs as Shyam starts 10 years late and misses out on the benefit of compounding to some extent. That’s why starting as early as possible is perhaps the single most important retirement planning tip that a salaried individual must keep in mind.
An alternative would be to opt for a Step-up SIP. Assuming Ram start off with the same ₹5000 per month from the age of 25 years, but increases his contributions by 5% annually. This would allow him to invest around ₹54 lakhs over the 35 year period. In this scenario, assuming the same 12% p.a. average rate of returns, Ram’s corpus at the age of 60 years would be around ₹4.31 crore. This way the step-up method allows you to combine the benefit of a low initial amount with gradual increase and the power of long-term compounding.
Consider The Impact of Inflation
Inflation is an inevitable fact of our daily life and it can have a massive impact on how much money you will need post retirement.In order to understand how inflation can be factored into your retirement planning, let’s consider an example.
Suppose your current monthly expenses are around ₹50,000. Let’s assume that inflation increases at a modest rate of 3% p.a. over the next 30 years.This means that to maintain the same lifestyle 30 years down the line, you will have to spend around ₹1.21 lakh monthly. If inflation is higher at 5% p.a. instead, your monthly expenses will increase to ₹2.16 lakh.
Also consider the length of your post-retirement life. If you live till the age of 80 years, then you have to consider a post-retirement life of 20 years, assuming retirement at the age of 60 years. The barest minimum you will need to maintain your current lifestyle during these 20 years will be ₹2.9 crore at 3% inflation and ₹5.18 crore at 5% inflation. So, ensure you factor in inflation within a realistic margin when calculating the appropriate size of your retirement corpus.
Maximise the Benefit of Employer Contribution
As a salaried employee, you might be contributing in retirement-focused schemes such as corporate National Pension System (NPS) and Employees Provident Fund (EPF). These schemes are mandated to include an equivalent i.e. matching contribution by your employer up to a specified limit.
This can effectively double the monthly contributions you make towards retirement-focused investments.Moreover, these employer contributions may also offer tax benefits depending on how your salary is structured. So, maximising self-contributions into these schemes is definitely a win-win and a retirement planning tip that every salaried individual should take to heart.
Proactively Manage Debts
As a salaried employee, you might often be the preferred borrower for many financial institutions. This is often the result of regular income that you receive and also subject to having a clean credit history/high credit score. However, one key tip that every salaried individual saving for retirement must keep in mind is - keep debt at low levels and pay off high interest debts like credit card balances and outstanding personal loans first.
This indirectly influences your ability to save for retirement. Lower debt amount at low interest rates mean that a smaller portion of your salary will be allocated towards paying off existing debts and interest. This means you will have more money available to contribute towards saving for retirement and securing your post-retirement financial future.
Automate Your Retirement Fund Contributions
No matter which retirement-focused investment plan you choose, one key factor to consider is making disciplined investments no matter what. Failure to stick to your retirement savings plan or missing regular contributions is a sure shot way to fall short of your target retirement corpus.
One way to prevent this from happening is to automate the contributions you make towards your retirement plans. By automating your contributions through debit of your salary account, you reduce the possibility of missing planned investments and ensure that you continue saving in a disciplined manner over time. The potential long-term benefits that automation offers make this an important and yet often overlooked retirement savings tip that salaried employees must consider.
Diversify Your Retirement Portfolio
Diversifying your portfolio means that your investments are spread across multiple investment options and asset classes. This is one of the recommended ways to minimise risk and optimise long-term returns. Diversification helps ensure that the under performance of any specific investment has only minimal impact on your overall retirement portfolio. Another aspect to consider in this regard is the potential risk associated with different investments.
Below are key features of some investment options that salaried individuals should consider when investing to create a retirement corpus:
| Investment Option | Risk Level | Key Feature |
|---|---|---|
| EPF | Low | Long lock-in, fixed interest rate and employer co-contributions |
| NPS | Moderate to High | Market linked returns with multi-asset portfolio with employer co-contribution in case of corporate plans |
| PPF | Low | Long lock-in with fixed returns |
| Annuity Plans | Low | Fixed returns and available from different life insurance companies |
| Retirement Plans | Moderate to High | Market-linked returns with multiple fund options and in-built life cover |
| Equities including Equity Funds | High | Potential for inflation-beating long-term returns but prone to volatility |
| Debt Funds | Low to Moderate | Relatively low volatility but subject to market risk, so no guaranteed returns |
| Atal Pension Yojana | Low | Fixed pension up to ₹5000 per month at retirement but primarily for unorganised sector workers |
Note: The above list of retirement-focused investment plans is illustrative, not exhaustive and purely for information purposes.
Rebalance Your Retirement Savings Portfolio
Beyond choosing the appropriate retirement plans to include in your portfolio, there is another factor to keep in mind. As you come closer to your planned retirement age, you should also consider rebalancing your retirement investments portfolio towards less risky asset classes. However, this should ideally be a gradual process.
In practice this might involve moving away from potentially more volatile equity-oriented investments to less volatile debt instruments such as government bonds, corporate bonds, fixed deposits, etc. This is easily achieved in the case of many retirement plans that allow you to freely switch from equity funds to hybrid or debt funds at no additional cost. NPS also features this provision by allowing you to change your asset allocation either automatically via the Auto Choice option or the customised selection allowed under the Active Choice option.
Conclusion
Getting retirement-ready is not an optional requirement, it is a mandate that actually comes into effect the moment you start your first job. So, while planning for retirement might seem like a tough task, the trick is to start early and build bit by bit. This way, over time you will be in a position to ensure adequate financial readiness for your golden years.
