Importance & Methods Followed In Retirement Planning

 While we all have a lot of hopes, dreams, and ambitions growing up, retiring on a quiet beach or in a cozy hill-station is the ultimate happy ending to whatever your life story has been up until now. Unlike in most fairy tales and movies where people grow old and automatically live happily ever after, retirement in real life takes proper planning and a lot of discipline.

Retirement Planning

Keeping in mind the fact that India has no social security schemes or any other kind of government-sponsored elderly care, you’re basically left with three to four choices at best. While option one is to plan and invest for your retirement right now, the alternatives range from compulsory work post the age of 60, depending on your daughter or son, and in extreme circumstances, even living on charity. While the obvious choice here is option one, we have to factor in a number of elements such as your present age, no of years to retire, present income, expenses, and more. 

Other variable factors may include family members who are dependent on your income as well as your risk-taking ability with regards to investments. Further complications include life expectancy on the rise due to advancement in medicine, as well as technology, healthcare services, and expenses taking a similar curve. This means that if the plan is to be completely self-reliant, not only do we need to account for a longer period post-retirement, we also need to account for inflation that could easily see expenses go up by 3-4 times exponentially during our retirement phase.

So how do people plan for a dignified and independent retirement while also factoring in the inconsistencies of life? Well, there are two methods followed globally, they are the replacement ratio method and the expense method.

Replacement Ratio Method

The replacement ratio method is quite simple and similar to how a government pension is calculated. For example, a person who is 45 years of age earning five lakhs a month right now, and set to retire in 15 years would earn 10 lakhs a month by the time he is 60. This is calculated keeping in mind a 5% increase in income year on year. Using this replacement ratio method, he can then choose between a replacement income of 50% (5 Lakhs), 75% (7.5 Lakhs), or 100% (10 Lakhs) for the rest of his life.

Expense Method

As the name suggests, the expense method is all about calculating expenses. As a more customized approach that’s tailor-made to each individual, the expense method helps plan for retirement by calculating all the expenses of the entire family while also factoring in future expenses taking inflation into consideration.  For example, a person aged 40 with a monthly expenditure of about Rs.1 lakh, would have a monthly expenditure of about Rs. 2.25 lakh by the time he retires based on a 4% inflation, year on year. Similarly, expenses need to be calculated for every year that we’re retired, while accounting for inflation, all the way up to the age of 85, 90, or even 100. The tricky part, and this is where planning comes in, finding the present cost of investment to meet our forecasted future expenses.

As the saying goes, “the early bird gets the worm,” and this is no more evident than in our daily lives commuting to work. It’s when we’re late that we tend to make mistakes, break rules, jump traffic signals, or generally indulge in risky behavior. The same concept applies to retirement planning and it’s when we start investing early that we can afford to reach our targets by predetermined milestones, safely and without taking any risks. Think of your bank balance as correlating to your time left on this earth, if you have enough money left, you have enough time left, and you can even afford to stop and smell the roses.

In conclusion, the benefits of retirement planning are:

  1. Dignity post-retirement.

  2. Independence, freedom, self-reliance.

  3. More options as to where you would like to retire (The Bahamas, Cabo Beach, Bali etc.)

  4. The ability to be an asset to your family rather than a liability in your old age.

  5. The ability to pay for expensive medical treatments or procedures without help.

  6. Peace of mind not only for yourself, but for your spouse and children as well.

  7. Last but not least, guaranteed quality of life post-retirement.

With rising inflation, reducing interest rates in our country, and the current situation in the world being the way it is, unless you plan to inherit a fortune or pull off a money heist, it’s time to start planning and investing. Like we mentioned earlier, the replacement ratio method is a great first stepping stone and gives you a good idea of where you’re at and where you need to be. Please remember, keeping a track of your expenses and being aware of how much you need to save is half the battle won, the rest as we already mentioned, is just discipline.

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