9 April 2012.
Planning for Retirement: The how, when, how much and why of it
Source: IRIS (09-APR-12)
Very often, we assume, retirement is too far away to bother about how we can sustain a lifestyle similar to our working years.
However, not many realize that retirement as a goal is one of the most important and most difficult to conceptualize, because of its long duration to the start of goal achievement, lack of clarity on interest rates, returns, performance, sustainability and longevity of income required.
Thatâ€™s what makes this goal one of the most important priorities in the financial planning process.
What one needs to do, is identify what one`s monthly expenses are today and identify what percentage of these expenses are likely to continue into your Golden years. (The ball park is around 70% of your current living expenses).
After this, a Financial Planner can help you ascertain what is the corpus that is needed to sustain the same standard of living after retirement, and what this corpus will generate for you on a monthly basis for life, after of course considering inflation and taxes.
The Objective of Returns is two fold: First, what investment options/ avenues would best grow your money for you in the saving years to retirement. Parameters like tax free returns, and inflation adjusted returns should be considered in selecting the investment vehicle to achieve this goal amount, besides considering the amount and ability to invest this amount over the tenure of savings to the start of goal year.
Second, on attaining the desired goal amount, which vehicle, again would best serve to provide, if possible, tax free regular income and if taxable, to account for post tax income need.
Also, whether this income is guaranteed or variable, and what happens to the corpus that has been accumulated at the start date of Retirement, through the savings that you have made over the years. Would this amount be left as an estate for the nominee or utilized by applicant for the monthly income needed.
Again, whether this corpus is utilized by withdrawal of the monthly income need or kept for the nominee, would determine, the amount of monthly income that one will get. In the former, the monthly income would be more, if no corpus is left as an estate for the nominee and in the latter, the monthly income would be lower, if the corpus is maintained for estate planning.
What is in control for the investor, is to start and plan early for these goals. Since, the longer the duration to achieve the goal, the more the uncertainty in meeting the goal requirement.
Also, the earlier one starts investing, the lower will be the amount one needs to save to reach a goal.
This would not only help in Wealth Accumulation but also lead to Financial Independence of being able to enjoy the goal, that you have saved so meticulously for!
(Contributed by Dilshad Billimoria, BBM, LUTCF CFPCM, Certified Financial Planner and Investment Advisor)