Retirement, whether at the age of 45 or 60, is the most awaited phase of your life because it means freedom from your everyday mundane and monotonous 9-5 jobs. The crucial questions that loom over your retirement goal could be:
How do you want to see yourself when you retire?
Do you see yourself 11 years down the line, at the age of 36, owning a business that you always wanted?
Or do you imagine yourself travelling extensively to the places you always wanted to explore?
Your investment plan for retirement should offer acceptable answers to these questions for you. Following are the crucial factors you must consider while selecting your retirement plan, to ensure the retired life you are looking for:
1st Does the plan offer tax benefits?
For a financial goal as large, unpredictable and as crucial as retirement, you need to eliminate as many costs as possible on the investment. Tax is one such cost. Thus, it becomes the most basic condition all your investment towards retirement should follow.
Most retirement investment plans offer tax exemption on the investment amount and maturity value. But you must check the nature of deductions before committing your money to a plan.
Unless you have already used your limit of tax saving under section 80C, there’s no point investing in a plan which does not offer immediate tax benefit.
2nd When You are a Fan of DIY?
If you are a fan of ‘do it yourself’ when it comes to investing, you’ll love the challenge of saving for the retirement. The challenges in retirement goal are as follows:
- Imagine and estimate the cost of living post-retirement
- Use online financial calculators or excel spreadsheet to estimate the retirement corpus you will need
- Use retirement calculators to estimate the amount you need to invest regularly to achieve the goal
The three steps above are sufficient to create an investment plan towards your ideal retirement. However, there are few things you would like to consider:
- Consider 110% or more of your estimated living cost post retirement
- Be conservative in the interest you will earn on your investment
3rd How aggressively would you invest?
The right answer in your case will depend on several key factors. These include:
- Your income and assets,
- Your attitude toward risk in investment,
- Whether you have access to an employer-sponsored plan at work,
- The age at which you plan to retire,
- Your projected expenses during retirement.
But it’s possible to lay down some guidelines that may be of help to you. The conventional wisdom has traditionally been that you should invest aggressively when you’re young and then move gradually toward a more conservative investment.
4th How far is the Goal?
Even when you are open to additional risk, you need to keep the ‘time’ in mind. The only compounding growth rule with investments is ‘time’. This factor is even more important when you are planning an early-retirement.
The more time you can give to your investments the higher risk you can afford to take. Just to align your thoughts and investment functions, consider the following time-sheet:
|Time to Goal||% of Risk (Investment in Equity)|
|5 Years||Nil (All corpus transferred to safe investments)|
Time to goal in the sheet equals to “The age you wish to retire at (minus) your current age.”
Thus, if you plan to retire at 50, and you are currently 30, max you should allocate to equity is about 50%. Even if you feel you can allocate more, given your penchant for the equity market, you should be careful not to put everything there. The markets are unpredictable, regardless of your current level of confidence.
5th Does your plan offer Life Cover?
Life cover with retirement investment is not an absolute necessity. However, if you are married and your spouse depends on you, it’s better to safeguard their future with life insurance. Life insurance with your retirement plan will ensure that they receive a pension for life even when you are not there to ensure the same.
Don’t Think You Need Planning? Think Again
Since only 59% Indians are regularly saving up for their retirement while the other 41% are just working their time out or not saving at all, you need to rework on your retirement plans. It has also been found that over 77% of Indians do not save for their retirement as they expect their children to support them. Given the challenges faced by the current generation, expecting kids to support your expenses could be unrealistic.
Your retirement could be a dream come true or a lead to a life of sacrifices if the preparations fall short of your needs.
But, you can be sure of the former if you are careful enough while selecting your retirement plan. The retirement plans offered by life insurance companies not only offer you exposure to equity for better growth but also, many other features that we discussed above, including switching feature between risky and safe investments.