Retirement Planning – What Is It? Types, Phase, Emergency Fund Planning

Planning for your retirement in the present is important to avoid financial difficulties in the future. However, it may get difficult due to the rising inflation.

Retirement may seem far away but planning for it immediately ensures you are financially stable in your golden years. You may choose from a wide array of plans and stay invested for the long run.

Read on to know how to conveniently plan for your retirement.

What is retirement planning?

Everyone retires and planning for the time after you stop earning a regular income is what retirement planning is all about.

However, it is not just limited to a regular income source, it also includes being financially independent, dealing with medical emergencies, and fulfilling your life goals.

You must set your retirement goals, estimate the corpus required, and invest in different instruments to build wealth.

Why is retirement planning important?

You retire only from work and not from your dreams and objectives. Additionally, sustaining your current lifestyle even after retirement is important.

Planning early can help you in several ways, here is why it is important.

• Life expectancy is longer and planning for your retirement ensures you are ready for it.
• With the right retirement plan, you can face medical or other financial emergencies without any hassles.
• It helps you achieve your goals, such as starting a new business, traveling, or funding your child’s international higher education.
• Inflation results in increasing costs and with the best retirement plans, you can build an adequate corpus to sustain your current lifestyle even after you no longer earn a regular income.
• You may work hard for your family’s comfort and planning for your retirement enables you to build savings that can be left as a legacy for your loved ones.

Tips to follow while creating retirement plans

For a happy and stress-free life, planning for your retirement is important. Failing to do so may result in financial difficulties during your golden years. Here are some tips you should consider while planning.

Estimate your expenses

Calculate your current expenses, such as household costs, utility bills, loan installments, and others.

You can eliminate education expenses and installments that you may not incur after you retire. While determining these expenses for the future, do not forget to factor in the inflationary rise.

Opt for retirement investments that deliver inflation-beating returns.

Determine the investment tenure

You should estimate the age when you want to retire and then calculate the number of working years left. This is the investment tenure, and you should also include the age until which you want to plan.

For example, if you are 30 years old and plan to retire at 60 years, the investment horizon is 30 years. Additionally, if you want to plan till the age of 80 years, your chosen investments should ensure you are able to meet expenses until then.

Choose the best asset mix

You may choose from different investment products, such as equity, debt, pension plans, and much more. If you are young and several years away from retirement, assuming higher risks and investing in equities is recommended.

As you get closer to your retirement age, moving to safer instruments is advisable. To make an informed decision, you may consult a financial advisor to learn about the best retirement investments that suit your requirements.

Start your investments early

The earlier you start investing, the higher will be the retirement corpus you build. Moreover, you will need to invest a smaller amount each month when you start planning at an early age.

You can benefit from the power of compounding, which allows you to earn additional returns on your income from initial investments, thereby building a huge retirement fund.

Advantages of retirement planning

• Planning eliminates stress and you can enjoy your golden years without worrying about your finances.
• Investing in a well-diversified portfolio ensures your money works for you even after you do not have a regular source of income, ensuring financial independence and stability.
• Tax benefits under section 80C of the Income Tax Act, 1961 are available when you invest in retirement pension plans, public provident fund (PPF), national savings certificate (NSC), and other instruments.

Types of retirement plans

1. 15-15-15 Plan (Investment Strategy)

This strategy typically refers to:

15 years of investing horizon
15% return per annum for your investments
15% of income saved or invested

The simple idea is to regularly invest 15% of your income in an instrument that yields an average annual return of 15% over a span of 15 years. At the end of 15 years, the power of compounding can potentially create a substantial wealth accumulation.

2. 60-20-20 Budgeting Rule (Financial Planning)

This is a popular budgeting method where:

60% of income goes toward essential expenses (e.g., rent, food, utilities).
20% goes to savings or investments.
20% is allocated for discretionary spending (entertainment, hobbies, etc.).

It helps ensure that you live within your means while saving and investing for the future.

3. 50-30-20 Rule (Personal Budgeting)

This rule helps allocate your monthly income as follows:

50% for needs (housing, groceries, transportation).
30% for wants (entertainment, dining out).
20% for savings and debt repayment.
It’s a simple, easy-to-follow strategy for effective personal financial management.

4. Retirement Planning (4% Rule)

The 4% Rule is used for retirees to ensure they do not outlive their savings. It suggests that retirees withdraw 4% of their retirement portfolio annually to maintain their lifestyle while allowing the rest to continue growing.

Things to consider

Retirement savings plans

You can build wealth over the long term before your retirement. You may periodically invest in these plans to build a retirement corpus. These are safe options to grow your investments over the years.

Retirement annuity plans

These retirement plans are beneficial in generating regular income during your lifetime. In the initial years, you can invest in these plans and then decide the age when you want to start drawing a regular income from the accumulated corpus.

You can also determine the frequency of income; monthly, quarterly, bi-annually, or annually as per your convenience and financial situation.

What do young or new investors need to know about retirement planning?

Several youngsters do not think about planning for their retirement as they feel there is a lot of time and there are many other goals they must achieve in the short term.

Growing in their careers, buying a home or car, and having a family seem more important than planning for retirement that is decades away. However, here are some things young investors should know about planning for their retirement.

Reduced costs

When you start early, you will reduce the retirement pension costs as you will have to pay lower premiums.

The premium is directly proportionate to your age and investing in a plan while in your 20s can help you save a significant amount in the long term.

Lesser financial commitments

Youngsters have lesser financial commitments, allowing them to maximize their benefits from investments.

As you grow older, your responsibilities increase, making it difficult to save for your retirement.

Higher risk appetite

Planning for your retirement means building a corpus that not only takes care of your regular expenses but also helps you support your family, meet medical emergencies, beat inflationary increases, and much more.

When you are young, you can assume more risks to earn higher returns and build a huge retirement corpus.

How to use a retirement planning calculator?

A retirement calculator allows you to determine the corpus you will need to meet your financial goals during your golden years. Additionally, it helps you estimate the amount you need to invest each month to build this fund.

An online calculator makes the task of planning for your retirement easier. It is an error-free tool that helps you determine all your financial objectives.

Retirement planning phases

There are two phases when you think about planning for your retirement—the accumulation phase and the distribution phase.

During the first phase, you accumulate your savings from your income after meeting your regular expenses and other financial commitments.

In the distribution phase, the accumulated corpus is paid in your post-retirement years. You may choose how you want to receive the money during this period.

How to build an emergency fund

As you grow older, the possibility of medical ailments rises, and having an emergency fund to meet the treatment costs is crucial.

While planning for your retirement, make sure you have an emergency fund that can be used to pay for such unexpected expenses.

To build a significant contingency fund, it is important to ensure you do not use your retirement corpus for other short-term goals and unnecessary expenses.

Financial planning and retirement

Planning for your golden years entails personal and financial planning. Personal planning is about how you want to spend your post-retirement years, which helps to determine your financial needs.

On the other hand, financial planning assists in budgeting expenses and income based on your personal plan.

How much money do you need to save for your retirement?

There is no fixed formula that will help you determine the exact corpus needed for a comfortable retired life. However, considering some important parameters can help you estimate the required corpus. These are as follows:

• Present monthly expenditure, which includes household expenses, loan installments, children’s education fees, and others.
• Current and retirement age, which gives you the number of years left before you retire (accumulation phase).
• Rate of interest that is estimated on the financial instruments you invest in during the accumulation phase.
• Monthly investible amount, which is the surplus available after meeting your regular expenses and other financial commitments.

Here is an example to help you understand how to estimate the retirement fund.

• Present monthly expenditure (E): INR 40,000
• Estimated inflation rate during accumulation phase (I): 6% per year
• Number of years until retirement (N): 30
• Monthly expenses post retirement (P): E * (1+I) ^ N = INR 2,29,740
• Life expectancy after retirement (L): 25 years
• Expected rate of post-retirement returns (R): 7% per annum
• Estimated annual inflation after retirement (G): 5% per year
• Yearly expenditure during retirement (A): P * 12 = INR 27,56,876
• Estimated retirement corpus: A*(1-(1+G)/(1+R) ^ L)/(R-G) = INR 5,18,38,484

Investing in the right products and diversifying your portfolio can help you build the necessary retirement corpus. You must also consider tax implications and the compounding effect while planning for your retirement.