What is Retirement Planning?
Created on 04 Sep 2021
Wraps up in 4 Min
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“Someone’s sitting under a tree today because someone planted a tree a long time ago”. This quote by Warren Buffet beautifully sums up the impact of current actions on the future. Today’s article revolves around a similar planning strategy that will definitely help you reap its benefits in the future. Let’s dive into the topic of retirement planning and understand why it is so important for one to plan their retirement.
Retirement Planning: Overview
Retirement planning is the process of managing your income and expenses in an efficient manner and chalking out other ways to comfortably live your life in a period when your steady income ceases. It is a comprehensive planning process that takes into consideration your future financial goals, assets, liabilities, income, and expenses. Considering your current and future financial goals and planning to achieve those goals in a specific period of time can be called “Retirement planning”. If you are a government employee or work at a place that would pay you a pension post-retirement, your personal retirement planning can be slightly eased out. In any other case, a detailed planning process is required to ensure that your post-employment phase is smooth and comfortable.
So, When should you start retirement planning?
It is similar to asking, “when should you start eating healthy?”.The only answer to this question is - start as early as possible. Why you ask? If you are aware of the magical concept of compounding, you already know the answer to this question. For those who don’t, we’ll help you out. Compound interest is basically interest that is earned from the original principal plus accumulated interest. In layman's terms, Compound interest is getting interest on interest.
If you invested Rs.10,000 today at 10% interest, you’d earn an interest of Rs. 1,000 at the end of the year. For the second year, the interest would be calculated at Rs,11,000 and thus you’d earn an interest of Rs.1,100 at the end of the second year and so on. This is the power of compounding.
To answer the question of when to start planning for your retirement, the answer would be, “start today”!
Why is retirement planning important?
Inflation is an inevitable element of your income. To ensure that you have sufficient funds during your retirement, you should focus on long term investments. Also, investments does not mean that you should park all your surplus in bank deposits. Though they are considered one of the safest options available, the returns they yield definitely do not provide a hedge against inflation.
Financial independence is growing in importance recently. There are plenty of opportunities and various income sources from which one can earn. Having passive sources of income after one has retired will help one be financially independent and not dependent on anyone else.
If we told you that you can save for your future and also reduce your tax liability, wouldn’t you want it? Absolutely. The Income-tax provides certain sections and provisions that exempt tax on investments in certain retirement-focused funds like the Public Provident Fund, National Savings Certificate, etc. Also to consider is that some of these investments are exempt while investing but are taxable when you withdraw them. Be mindful when choosing the funds.
Fulfill retirement goals
Individuals have various goals set for different phases of life. Retirement is a time when people have ample time in hand and would want to live their life on their own terms. Efficient retirement planning will not only help them achieve these goals but will also keep them stress-free.
Early retirement helps one cut down their current costs significantly. For example, health and life insurance are thought about, only during the later stages of adulthood. At this point, the costs incurred on getting insurance are higher. If the same can be acquired at a lower cost if bought earlier. This is just one example. You can cut costs on various such elements if you start your retirement planning earlier.
Be emergency ready
Retirement planning also helps an individual to be ready for any sudden, unforeseen situations. There might come multiple situations when you might require funds. After retirement, the chances of you being able to procure a loan also reduces. So, it is imperative that you maintain your own emergency fund.
How to plan for your retirement?
Now that you are aware of the importance of retirement planning, you might wonder how you can go about planning for your retirement. It is really not as complicated as you think it is. Following a few simple steps will help you in effective retirement planning.
Firstly, determine at what age you would retire, and any retirement goals that you have. Next, assess your current financial position, income sources, and other responsibilities. Compute the funds that can be parked aside for a long period of time. Look for investments and other long-term assets that you can invest in, to reap their benefits in the future. Ensure that these assets and the returns they are expected to yield are aligned with the objectives set.
As in all successful ventures, the foundation of a good retirement is planning.” – Earl Nightingale
This quote perfectly sums up what we were trying to convert through this blog. Without a good plan nobody can reach their goal. You never know what comes ahead in your life but you have one thing that you can control , “your finances in retirement.” You can ensure a smooth and comfortable retirement through proper retirement planning.
We hope you now understand how important retirement planning is and moreover, the importance of starting it early. The future is definitely uncertain, but being prepared always helps. There is no absolute solution that would work for everyone. The Internet is a sea of knowledge. There are many options available from where one can gain knowledge and plan for their retirement in an efficient manner. Understand what suits you the best and proceed accordingly.
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