How to plan for retirement as per your age?

Proper financial planning is important if you wish to have a happy and peaceful life post-retirement. If you start saving early, you can save a substantial retirement corpus. However, with the rising rate of inflation and lifestyle costs, it has now become essential for individuals to explore the various investment options available in the market and choose the ones as per their requirements.

Additionally, thanks to development in healthcare services, the average life expectancy of an individual has increased exponentially to what it was a decade ago. This has made retirement planning an essential aspect of our future financial plans. Selecting the right investment options to benefit from the power of compounding and partaking in retirement planning by age will help to secure the golden years of your life.

How to Plan for Retirement?

Step 1: Calculate your retirement age

It is important to estimate your retirement age as this is the time when your regular stream of income stops. Estimating retirement age also helps determine the time left for retirement planning. While 60 is the most common retirement age in India, it is increasingly becoming a matter of choice.

Life expectancy is an important factor you need to consider while determining your retirement age. Economic experts have defined it as the estimated number of years a person is expected to live depending on age, medical condition, family history and demographic factors.

Step 2: Decide your retirement corpus

First, calculate your current expenses. Then, estimate the amount required to maintain your present lifestyle post-retirement. Finally, do not forget to consider the rate of inflation, which is the rate at which prices increase in an economy.

This will help you to calculate how much your present expenses will amount to when you retire. The amount you get is what you will need to meet your expenses after retiring.

Also Read: What To Do After Retirement in India ?

Step 3: Calculate the value of your savings

Retirement corpus depends mostly on the amount a person can save throughout their lifetime after meeting all current expenses. An effective way to build a retirement corpus is to allocate a portion of your savings in a disciplined way.

First, do not dip into this corpus unless it is necessary. Then, calculate its future value, for which you need to consider the expected rate of returns for your investments and inflation. The result would be the value of your investments or savings at the time when you retire.

Also Read: Investment Strategies by Age: How Your Asset Allocation Evolves

How to do retirement planning by age?

An individual’s priorities are bound to change with age as it greatly depends on varying financial commitments. As a result, the retirement planning initiatives will also vary depending on the individual’s age. Let us take a look at age-wise retirement planning:

When you are in your 20s

A major advantage of beginning your retirement planning in your 20s is that people have a long time investment horizon, which increases their capacity to take risks. In addition, this is when most young people have fewer financial liabilities, so they can focus on saving more. Furthermore, regular saving inculcates financial discipline, which is beneficial in the long run.

Here are some investment options if you are planning for retirement in your 20s:

• Equity: As young adults can remain invested for longer and take significant risks, they can choose from various equity-related mutual fund investment options like equity mutual funds, hybrid mutual funds, etc.

Also, investments in equities can outperform inflation and fixed-income instruments over a long horizon. One way to determine the amount you can invest in equities is to use the following asset allocation formula:

Percentage of allocation in equities = (100 – Investor’s Age)

• Pension schemes: National Pension Scheme (NPS) is another option that people in their 20s can consider. It is a voluntary investment scheme backed by the Government of India. You also get income tax benefits under Section 80C if you invest in NPS.

After you retire, you will be able to withdraw 60% of the accumulated corpus, while the remaining 40% will go towards an annuity plan. Therefore, it ensures that the investor has a regular flow of income post-retirement and a lump sum for larger expenses.

When you are in your 30s

By the time an individual reaches their 30s, they are bound by family duties and commitments, hence they have to formulate a retirement plan carefully.

If you are starting retirement planning in your 30s, make a note of all your income sources. Then, formulate a budget and set aside funds for all your daily expenses and financial emergencies. Finally, do not forget to keep aside a portion of your savings for retirement planning.

Here are some investment options if you are planning for retirement in your 30s:

• Mutual funds: Investing in hybrid mutual funds or equity funds via SIP (Systematic Investment Plan) is an effective investment option. SIP investments will not put much pressure on your wallet while you are dealing with family expenses.
• ULIPs or Unit-Linked Insurance Plans: These plans offer the combined benefit of life insurance and investments. These are ideal options if you do not wish to go for separate investment and insurance products. Moreover, they come with a lot of flexibility, so people can switch funds to minimise risks if they wish to. Tax benefits are added advantages of ULIPs.
• Life insurance plans: This can be an ideal option for people who have a low-risk appetite and do not wish to undertake any investment-related risk.  Life insurance plans will not only provide your family financial support in the event of your untimely demise but also ensure a stress-free retired life.

When you are in your 40s

Many people consider this an appropriate retirement planning age because, by now, people have generated multiple income sources, and they have a good idea about the extent of their expenses depending on their lifestyle.

When you are in your 40s, it is not ideal to opt for riskier investment options, like equity investments, as they can eat away a portion of your savings. This can affect your financial plans significantly; hence, investing in less volatile ventures might be the right approach.

Here are some investment options if you are planning for retirement in your 40s:

• Public Provident Fund (PPF): It is a traditional investment option with a lock-in period of 15 years. The minimum investment amount is Rs. 500, while the maximum amount can be Rs. 1.5 lakh. According to Section 80C of the Income Tax Act, PPF investments come with tax benefits of up to Rs. 1.5 lakh. Moreover, the returns generated by PPF are entirely tax-free.
• Annuity Plans: An effective way to build a retirement corpus is to start investing in an annuity plan while you are still working. Immediate annuity plans or deferred annuity plans offer guaranteed regular payments for the rest of your post-retirement life once you make an initial payment.

When you are in your 50s

If you are in your 50s and haven’t saved a retirement corpus yet, don’t worry because it is never too late to save for retirement. However, you might have to be a bit aggressive with your savings which might be possible if you do not have major financial obligations.

At the same time, you should avoid exploring risky ventures in hopes of generating exceptionally high returns. As there are less than 10 years left for your retirement, you should opt for low-risk investment options. In addition, focus on increasing your savings as much as possible.

Here are some investment options if you are planning for retirement in your 40s:

• Provident Fund: An effective way to increase your financial corpus in your 50s is to contribute to your PF account through Voluntary Provident Fund (VPF) scheme. The scheme will allow you to make contributions on a voluntary basis and get guaranteed returns once the lock-in period is over.
• Pension schemes: Research well and invest your money in pension plans that provide high returns in lesser duration. But keep in mind that the premium you need to pay would be much higher than the amount you were required to invest when you were in your 20s or 30s.
• Deposit accounts: Recurring and fixed deposits are other options people in their 50s can consider. Although they offer low-interest rates when compared to other investment options, these are considered low-risk options. Also, The DICGC insures principal and interest up to a maximum amount of ₹ five lakhs

Another effective tip would be to cut unnecessary expenses as it helps save more money for retirement.

Final Word

It is a good idea to start saving for retirement as soon as one starts working. However, note that financial obligations vary depending on an individual’s age. If you plan to do retirement planning by age, make sure to assess the ideal investment options as per your goals and financial capabilities.  

Frequently Asked Questions