How to Plan for Retirement Step by Step SBI Life

How Much Do You Need to Save for Retirement?

After working tirelessly for decades, most people look forward to hanging up their working boots. They would wish for a walk in the park on a sunny morning, with a newspaper in hand, and have a good time doing everything they could not do during work. This is, after all, the perfect picture of retirement.
However, how to plan for retirement? For an event that will be life-changing and, at the same time, require spending without earning much, retirement is often a maze for many. It's commonly advised to start planning for retirement at a young age. But where should you begin, and how can you effectively plan? The initial step in retirement planning is to consider your goals.
How much do you need to save for retirement?
Remember, retirement represents a period when you will not have a regular monthly income.
So, this means you have to save and build a corpus that will last you for your lifetime. If the retirement age in India is considered to be 58/60, you will need 20-25 years’ worth of funds that you can use during this golden period.
Corpus for retirement in India depends on many factors, such as current annual income, age when they plan to retire, post-retirement recurring and one-off expenses, anticipated inflation (because you may require more money over time), and a reasonable idea of how long they expect the retirement fund to last.
While there is no strict rule on how much to save, the universal guideline is 'the more, the better.' However, due to expenses and duties, there might be a saving threshold.

Many retirement experts recommend following these rules:

• One, save at least 25 years of annual income.
• Two, follow the 4 percent rule. During retirement, it is often recommended that retirees spend no more than 4 percent of their savings annually.

There are many such rules, but since your circumstances will differ from everybody else, you should use a retirement calculator before investing.

1. Understand Your Time Horizon

Before blindly deciding to invest, you must know when you plan or want to retire. Based on your current age and the decided retirement age, you can invest in the right tools that will provide you with a high return from investments.

For instance, if you are considering retiring at the age of 60 and are currently 30, you should consider investing in instruments that can give you high returns, even if they are high on the risk factor. Since the tenure for investments is long, they tend to do better with time and soften the blow of any high risk. Also, choosing plans that can compound your money would be wise in the long run.

2. Allocate a fixed percentage of your income toward your retirement corpus:

Most people follow the 50/30/20 rule of saving and investing, believing in the ‘pay yourself first’ motto. Considering this, you should ideally be able to put aside at least 20-25% of your monthly income in active savings. This should be in addition to investing in provident funds, fixed deposits, etc.

From the 20-25% saved, allocate a fixed percentage, say 5-10%, of your monthly income towards your retirement corpus. This is just the base idea, however, some retirement and financial gurus even say that one should consider saving 10-15% of their income for retirement.

Regardless of the retirement age in India, or your personal preference, consistently save a percentage of your paycheck every month. In this way, you build discipline in terms of retirement savings.

The amount you set aside monthly will be shaped by your prior decisions. Even if debts limit your savings, it is important to start somewhere.

3. Calculate the After-Tax Rate of Investment Returns

While certain investments attract tax exemption, this may not be true with certain pension schemes/annuity proceeds. Hence, understanding taxation-related issues are important for future retirees.

Once you have anticipated the time horizon till retirement and spending needs post-retirement, the after-tax real rate of investment return should be looked into. Taxes tend to eat into real returns. Hence, it is important to understand whether after-tax your retirement corpus portfolio produces the required income. Do note that low-risk retirement portfolios may generate safe returns, but taxes should be considered.

A primary edge of early retirement planning is that the portfolio can be grown better. If you have a realistic post-tax rate of return and a large enough corpus, regular income post-retirement will not be a problem.

Pro-tip: Depending on the nature of the investment that is being used to build a retirement corpus or pension, pay a lot of attention to the actual rate of return after deducting taxes, if applicable. Many insurance products, for example, may offer better or no taxation. As a senior citizen, during your retirement, your tax status will be better, but still, assessing post-tax returns is a crucial component of retirement planning.

4. Consider future medical costs

Once you are nearly 60 years of age, the body requires more attention. Retirement is also a time when you can no longer increase your income; hence, smart retirement planning will require a good plan for future medical/healthcare costs.

In certain countries like the USA, once you are 65 years or older, Medicare covers most of your routine healthcare costs. However, retirement in India is trickier from that perspective. So, when you use a retirement calculator in India, leave wiggle room for healthcare costs. Even if you have some sort of insurance coverage beyond 60, supplemental coverage will help pay for your many healthcare expenses.

Creating room for healthcare costs that are bound to happen in the future is being future-ready. Many understand that retirement means they will not be in the prime of health, so they use health insurance as a financial guardrail in such times of emergency. Health insurance, without any doubt, protects your savings and the returns if healthcare costs come. This is even more relevant during retirement because once used, your corpus won't be replenished quickly.

5. Stay on Top of Estate Planning

Good retirement planning in India is incomplete without intuitive estate planning. This particular aspect requires the expertise of lawyers and accountants as you build and seek to maintain your estate. Securing comprehensive insurance is a pivotal component of your estate planning.

Simply put, estate planning is all about how your assets are distributed in the manner you chose and also, that your loved ones will not experience hardship following your demise. A carefully outlined estate plan also helps avoid a complicated probate process for wills.

Like insurance, tax planning is another very important key to estate planning. It's essential to consider the tax implications when gifting assets or transferring them through the inheritance process.

Do note that as you move ahead on how to plan a retirement, estate planning will vary over your lifetime. Issues like powers of attorney and wills become significant as one approaches retirement. Estate planning will ultimately decide how you would like money to be disbursed and at what cost and taxes post-retirement in India.

6. Estimate your retirement expenses

Recurring post-retirement expenses ideally include many day-to-day things such as food, medicines, utilities, transport, leisure, etc. You need a general idea of how much they will be when you retire. Using a retirement calculator, you can understand how certain expenses will grow 10, 20, or 30 years from now.

If you specifically plan to do some activities more than you do now, account for them in your retirement expenses. For instance, many retirees become travel bugs, and hence a good retirement plan will have a portion earmarked for this and carry out savings and investments so that the goals can be achieved without creating bigger problems.

Regardless of your retirement plan, estimate future expenses so that you have a realistic number to chase. Begin by listing the goals you aim to achieve in retirement. Then, use a retirement plan to tally all the major and minor expenses you have noted.

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Disclaimer:
Our content given in this article is as per the existing provisions, laws and regulations as per the Income Tax Act, 1961 and Income Tax Rules, 1962 issued thereunder. Tax laws are subject to amendments made thereto from time to time. The benefits / guidance mentioned herewith should not be considered as opinion / view of the Company. We request to seek independent view from your personal tax advisor on applicable tax benefits / guidance under the said article.