Mr Sanjeev Sharma, 50, is working as head of operations in a leading auto ancillary company. Sanjeev has been a conservative investor but most of his savings were consumed either in down payment of the house or for daughter’s wedding.
Sanjeev’s take-home salary is Rs 30 lakhs and his annual expense includes Rs 12 lakhs living expense and Rs 9.25 lakhs home EMI. The EMIs will continue for another ten years and the current home loan outstanding is Rs 58 lakhs. Other than employer’s health coverage, Sanjeev also maintains a personal health plan for his family.
Although Sanjeev expects to receive Rs 2.5 crores from the provident fund at the time of retirement but he is worried, whether that is enough funds to retire at 60.
Just like Sanjeev, if you are also worried about your retirement, you can do a few things so that your retired life is more comfortable and enjoyable.
Protect your emergency fund
Emergency expenses can happen any time. However, the possibility goes up, as you grow older. The emergency reserve must increase year on year, based on the inflation and change in your expense levels. Sanjeev must always maintain six months of his living expenses for the emergency.
Payoff all your loans
If you are taking a housing loan, personal loan, car loan or any other loan make sure that you repay them on or before your retirement. You need to choose the term of the loan in accordance with your retirement age. You can truly enjoy your retired life when you have 100 per cent financial freedom, not when you have to repay your loans.
Sanjeev has an outstanding home loan of Rs 58 lakhs. The home loan will be paid off before he retires but in case he has additional income say an annual bonus, he can partially reduce the home loan.
Understand your retirement needs
You need to visualize your retired life well in advance and need to create a budget for your retirement. Most of the people start to plan for their retirement when they are close to their retirement age. Often it is too late to have a structured approach to creating appropriate fund before you retire.
You can always consult a professional financial advisor who can set realistic expectations and create a right asset allocation for your retirement fund. However, here is a simple formula to know your retirement corpus.
Current annual living expenses X years of retirement.
Assuming, Sanjeev’s life expectancy to be 85 years, retirement corpus at 60 would be Rs 12 lakhs X (85-60) = Rs 3 crores.
Rs 2.5 crores will be available through the provident fund and that will leave a deficit of Rs 50 lakhs. Sanjeev maybe required to invest Rs 3 lakh annually for the next ten years to cover the deficit.
Examine your cash flow
Assess your cash flow situation and consider any income that will continue post your retirement such rent, interest income, etc. You must realign your existing policy and other investments in sync with your retirement age.
Sanjeev has a cash surplus of Rs 5.75 lakhs after meeting living expenses, home EMI and retirement savings. An additional saving of this amount can create further retirement cushion.
Consider inflation withdrawal strategy
When someone retires, the bulk of payout is made through an employer. In case you have not created a plan for withdrawal you can either commit your funds to wrong investment channels or park in an extremely safe option that does not cover your retirement life. One simple rule is to spread your retirement savings across various vehicles and then strategize with withdrawal strategy to ensure continuity, stability and tax-efficiency.
The monthly income you need when you retire is not going to be the same even after 5 years of your retirement. Inflation will increase your retirement expenses year after year. Therefore, your retirement portfolio should grow more than the inflation.
Sanjeev expects Rs 2.5 crores from his employer’s provident fund in ten years. Careful due-diligence of investment vehicle well in advance can reduce Sanjeev’s tax during his retired life.
Get sufficient healthcare coverage
The moment you retire, your employer will stop covering you under the group medi-claim. Therefore, you need to plan for your individual medical cover. If you have not planned it properly then all your retirement plans can go haywire.
Sanjeev must continue to maintain his personal healthcare plan and if required, evaluate super top-up plan to increase coverage.
Appropriate action by Sanjeev can ensure his peaceful retirement.
Do not put off today what you cannot afford to do tomorrow. Understand your retirement goals and structure your current investments so that you can retire comfortably.