If you ask your friends or peers how much you will need, they will tell you: "Save as much as you can". While this is technically sound advice considering that retirement savings tend to fall short more often than not, it doesn’t negate the importance of planning well with specific retirement goals in mind to ensure that your standard of living is equal, if not better, post-retirement.
So, how does one go about calculating their required retirement savings? While there are many retirement calculators available online, there are factors to be thought about which will help you arrive at a more accurate number that’s in line with your goals and expectations. Let’s discuss the major factors one by one.
1. Retirement age
The first factor to consider before deciding how much you need to save for retirement is to figure out how long you are going to work. While most assume that retirement only starts after one is 60, many people around the world choose to retire young. Hence, knowing when you would want to hang up your work boots and put on your travel sneakers is important for you to understand your monetary needs and income sources. If you are thinking of retiring early, you should start investing early to generate a larger retirement corpus for meeting your future needs.
2. Current and future life goals
For most people, retirement is an opportunity to fulfill their desires when there are fewer demands during that time. It could be travelling the world, pursuing a long-waited hobby /passion or picking up a new skill. It’s important to figure out your life goals early in your career so that you can financially plan for them for every stage in life. Your retirement corpus needs to increase with every additional retirement goals, by a commensurate amount.
3. Current income and future inflows
The golden rule of retirement savings is that you should be able to make at least 80% of your last annual income per year during your retirement. However, that’s just the basic minimum amount. With rising inflation rates, you are likely to need a bigger corpus which beats inflation. One way to go about it is to start investing 10% of your salary every year in a retirement investment plan such as new-age ULIPs and keep increasing that amount to 15%, 20%, 25% every five-seven years to guard against inflation and keep your savings in line with your income. If you are still indecisive, use a retirement calculator to understand your estimated corpus basis the current income, expenses and other factors.
4. Potential liabilities
When planning your retirement, keep in mind some of the expenses that may befall on you. Even if you have paid off your EMIs on your home and car, there might be healthcare expenses to take care of, children and family to support and unforeseen emergencies that will dip into your retirement savings. It’s advisable to take into account every possible source of expenditure before you settle on a figure for your retirement goal.
5. Choice of the instrument
If your goal is to retire rich, the importance of choosing the right retirement investment plan can’t be overstated. You might be saving a large part of your income early on in life but it will not give you the required corpus if it’s not invested in the financial markets through the right instrument. For instance, many people now prefer to invest their money through new-age ULIPs which provide market-linked returns while allowing the flexibility to switch funds and chose investment strategy as per your risk appetite. This is in addition to the life cover benefits ensuring continuity of your family’s goals and tax benefits.
With these factors in mind, retirement planning doesn’t have to be a tedious guess-work. It can be a breezy process of investing for your own future – one where you are deciding between holiday destinations instead of worrying about the ticket prices.