A 3 step guide to planning your retirement

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This article is an attempt to simplify the process of retirement planning in three basic steps

Step One: Knowing what you will need at retirement and how much to save.

The link given below takes you to a retirement calculator and will help calculate your retirement corpus as well as the amount required to be saved by you to achieve this goal. But before going to the calculator you need to be ready with the following.

1. Retirement Age

2. Your current expenses: Remember to remove expenses related to children's education, EMIs and insurance premiums that you may not pay after retirement.

3. Life Expectancy: Generally financial planners take life expectancy upto 85 years. This is an important input from the point of view of calculating the corpus required at retirement.

4. Pre retirement returns - Based on your past experience with investments or with the help of a financial advisor you could arrive at the returns that you will be able to get from investments during your working life. Remember to incorporate a good asset allocation plan before deciding on a target Pre retirement return

5. Post retirement assets - Post retirement is a time when you will need to start earning returns from your investments. This means that a large part of your savings needs to be in income generating and liquid assets with a higher degree of safely. Asset allocation in the retirement stage may tilt towards larger debt holdings. Return assumptions in this stage must reflect these changes

6. Annual increase in Income - Annual increments, increase in profits, professional income etc mean increased capacity to save as you grow older. When one is young the rate of increase in income is generally very high (sometimes over 25 % annually). This may not last till your retirement age and you may want to take a more conservative figure while inputting this number. Last three years increments could be a good benchmark.

7. Inflation - Your annual money needs are going to increase without a corresponding increase in standard of living thanks to inflation. On an average inflation rate since 1980's have been about 8 %. You can safely assume this to be the rate of increase in expenses.

Input these into the financial calculator link below to arrive at the amount you need to save every year to meet your retirement goals. Note: the amount of savings arrived in the calculator needs to be increased every year by the rate of increase in income.

Financial Calculator

Step 2: Choose your investment vehicles 

Shortlist assets in which you would invest to achieve the target pre retirement return. As always if your retirement is more than ten years from now, a large allocation to equity is always a good idea. I recommend real estate too, provided your savings are large enough to accommodate the extra EMIs. Within asset classes choose the right vehicle, be it mutual funds, portfolio management schemes, bank fds or insurance.

Step 3: Rebalance and review periodically

The probability of achieving your goals is higher if you periodically rebalance your portfolio between debt and equity. Keeping some proportion debt in your portfolio helps you invest in down times and book profits during market highs. Review investments so that you can take timely exits out of the non performing ones and add to ones doing well for you.

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