Your Money: Seven best practices for retirement planning

To attain a sizable retirement corpus an individual needs to increase his NPS contribution or invest in other retirement products to bridge the gap.

By Sunil Kadyan

Retirement planning is an investment that can be very easy to delay for the moment. While some people think that it is too early to think about retirement, others think that there are more urgent requirements which need attention. Unfortunately, such excuses can quickly develop into a harmful habit, which can hamper your post-retirement life. With the average life expectancy and the cost of medical attention rising, it is imperative to put a retirement plan in action as soon as possible.

Plan early
Ideally, one should start planning for retirement from the first pay-cheque. The sooner an individual starts off with retirement plans, higher the gains as the invested money has a longer period available to compound. If a person wants to accumulate a corpus of Rs 1 crore at the age of 60, he needs to invest Rs 4,424 per month from the age of 30 assuming 10% returns. And if he starts at 50, then he needs to invest Rs 48,817 every month. To attain a sizable retirement corpus an individual needs to increase his NPS contribution or invest in other retirement products to bridge the gap.

Long term commitments
Due to various options of withdrawals from long-term retirement products such as NPS, EPF or PPF, individuals commit a very big mistake, and this affects the retirement goals. Investors should only exercise these options in emergency situations. This long-term commitment habit will help the corpus to grow. In case of switching jobs, the employee should transfer the EPF account to the new company instead of withdrawing the money as this instrument is risk free, tax-free and gives high interest.

Investment discipline
Many do not invest enough money to build retirement corpus in spite of starting early. The major reason is spending excessively at a young age. Rather, one should start investing in retirement instruments in small sums and enhance investments with every pay hike.

Enhanced life expectancy
Individuals generally plan retirement up to 75 years of age only. With continuous increase in life expectancy, we need to plan up to 85 years of age. A proper health insurance plan that covers upto this advanced age is essential. Create a balanced portfolio even after retirement by investing in Senior Citizens’ Savings Scheme, PM Vaya Vandana Yojana, continuing PPF, RBI bonds, mutual funds (SWP) and senior citizen FDs for steady income.

Keep inflation in mind
Choose a mixed approach of equity and debt while investing for retirement. The corpus you assume is sufficient under present market conditions may not be enough if inflation is factored in. Even 1% increase in return can make a lot of difference in long term investment. The final corpus would be significantly very low if individuals invest long-term in safe debt assets only.

Contingency corpus
Instead of parking funds in bank savings account, invest in liquid mutual fund schemes or bank FDs where the returns can be significantly better.

Thus, an individual should make financially sound decisions by going for smart investments that would yield a sufficient corpus to be used only for retirement.

The writer is assistant professor, Amity School of Insurance Banking & Actuarial Science, Amity University