Many a times you get so engrossed in fulfilling your social and business obligations that you completely ignore the importance of planning for your future needs. To be sure, planning for your future is as important as providing for your current requirements. So what are the future events you need to plan in advance for? The most obvious answers to this question would be – buying a house, or providing for your child’s education and marriage or even planning for a foreign tour. While there is no denying that all these events are important and must be pre-planned; there is another very important financial planning activity, and evidently the most overlooked one i.e. planning for your retirement.
The main reason why retirement planning is normally overlooked could be that, people typically find solace in their savings. Yes, you might have saved a bulk of money in your bank’s savings account and in fixed deposits.
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You might also have investments in some avenues like stocks and mutual fund schemes. And then, if you are salaried, there is the added windfall on retirement in the form of your Employee Provident Fund (EPF). But whether these savings and investments will be enough to cater to your needs after you retire is what you have to ascertain.
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At SMC Wealth, our recommendation to clients is to save for retirement at an earlier stage of their lives. This helps in two ways,
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a) it reduces pressure on finances at a later stage and
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b) it enables one to aim for an ideal retirement scenario and not a compromise.
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To start with let us first explain why you should start planning for retirement at a very young age:
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1. Life expectancy: In India current life expectancy for Male is 70 and for females it is 74. With advancement in technology life expectancy is likely to increase. Result: You will have to fend for more number of years post retirement.
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2. Medical emergencies: With age come health problems. With health problems, come medical expenditure which may make a huge dent in your income post retirement. Failure here could lead you to liquidate (sell) your assets in order to meet such expenses. Remember mediclaims do not always suffice.
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3. Nuclear families: Retirement Planning has become more important also due to the disintegration of the joint family system, a system in which the extended family co-habited and acted as a financial safety net. Needs are increasing with time and fulfillment of these needs is a big question mark.
4. No government sponsored pension plan: Unlike the US and UK where they have Individual Retirement Accounts(IRAs), 401(k) and state pension respectively as social security benefit during retirement, the government of India does not provide such benefits. So again you are on your own.
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5. Job hopping: With youngsters hopping jobs regularly they are unable to get benefit of plans like super annuity and gratuity as these plans require certain number of working years spent in the service of a particular employer.
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6. Inflation: As you need to worry about it you need to account for it as well. You need to take into account inflation while calculating your retirement corpus as well as your returns. The biggest financial problem for most people is developing a strategy to help them live the way they want to in their golden years. Yet most people have no idea where to start. Here’s our advice:
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START EARLY – POWER OF COMPOUNDING
The secret lies in making an early start. We have an illustration on how ‘expensive’ retirement can become for the ‘late riser’ Sumit starts saving for retirement at the age of 25 years. Assuming he plans to retire at 60 years i.e. he has given himself an investment time frame of 35 years. This is a good period over which to save for retirement. The longer the investment horizon, the more you can benefit from the power of compounding. Sumit starts investing Rs 50,000 per month at the rate of 10% per annum to accumulate Rs 18.98
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