5 JAN 2017
Ways to plan for your retirement
Planning for retirement is an integral part of financial planning. However, this is one aspect which is often neglected by most people. With increasing life expectancy, it becomes all the more important to plan for your retirement. Preparing for your retirement and being ready financially can help in leading a peaceful life post retirement. Here are some ways you can plan for your retirement:
Constitute a sufficient health cover: The risk of falling ill and being hospitalized increases as you grow older. Incidentally, the cost of health insurance also becomes higher when your age increases. You must, therefore constitute an adequate amount of health insurance cover or a critical illness insurance in your early age itself.
Pay off debt: Next, you should aim to pay off your liabilities before you retire. When EMI payments spill on to retirement, they can eat away a large part of your cash flows. Repay long term debts like home loan and avoid taking any new liabilities when you near retirement.
Buy critical illness insurance: Another form of insurance which becomes useful in retirement is critical illness insurance. Many a time, people rely on health insurance alone. However, critical illness policies pay a lumpsum amount irrespective of hospitalization in case of critical illnesses like heart attack, cancer and paralysis, to name a few. It is for this reason that it is recommended to take a critical illness policy in addition to a health policy. Also, remember to take it for your spouse as well.
Plan your investments smartly: An important component of retirement planning is managing your investments smartly. It is recommended to start planning for the retirement corpus in your 20s. However, when you are about 10 years away from retirement, it is important to estimate if your present investment level and corpus is sufficient for life after retirement. If this is not enough, you must immediately direct your savings to achieve the desired corpus, either by stepping up your monthly investment levels or by investing in higher yielding assets. When you near your retirement (say 5 years or less), gradually de-risk your portfolio by moving your volatile investments like equity to safer avenues like debt. While investing for the retirement corpus and while moving instruments, remember to consider your overall risk appetite and balance your investments accordingly. While equity investments come with higher risk, do keep in mind that equity as an asset class will always give better returns over the long term.
Use windfalls for critical goals: Depending on your retirement age and the age of your children, you may have to meet critical goals such as your child’s higher education or marriage, very close to your retirement. Sometimes, these goals can even get pushed beyond your retirement. It is recommended to save separately for these goals in your working years. At the time of retirement, move this corpus to debt instruments to de-risk the same. However, if the corpus saved for these critical goals is insufficient and if there is a shortfall, it is seen that many people dig into their retirement savings to meet these goals.
Now that is not a sensible move, as it can completely upset your post retirement plan. Instead, try to use any windfalls or lumpsum cash you may receive close to retirement to meet these goals. Examples of such lumpsum cash inflows include provident fund corpus and commuted portion of the pension amount taken at the time of retirement.
It is never too late to start planning for retirement. Making this a priority can go a long way in easing the stress which is often faced after retirement. Start today and prepare a robust financial plan to take care of all the above aspects.
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