What is retirement planning & why is it important?
Retirement planning is a critical process of preparing for life without your regular salaried income. Retirement planning is done by establishing a steady source of alternate income to tide you through your second innings, and combining the corpus with your previous savings and investments to achieve your retirement goals. Retirement planning is essential to ensure a comfortable and financially secure future.
Reasons why retirement planning is important:
- Regular income post retirement: By investing in retirement plans, you can create a source of income that will last for the rest of your life. It can help you enjoy your retirement without worrying about your finances.
- Financial independence: In retirement, salaried earnings stop even as expenses may increase (such as medical costs). Setting aside a portion of your income for retirement during your earning years ensures you have enough savings to cover your expenses by yourself once you retire.
- Tax benefits: Contributions towards retirement plans are eligible for tax deductions. You can claim up to Rs. 1.5 lakh in deductions under Section 80C of the Income Tax Act.
- Prepare for financial emergencies: Retirement planning helps you have an emergency fund to fall back on in a crisis.
- Death benefits: Retirement planning also involves creating a backup plan for the future and providing financial support to your loved ones in case of unforeseen unfortunate events. Most retirement-focussed products pay the accumulated corpus to legal heirs or nominees, if available.
A step-by-step guide to retirement planning
Here is a step-by-step guide to retirement planning:
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- Start early: The earlier you start saving for retirement, the more time you will have to build a sizeable retirement corpus.
- Set your retirement goals: Determine the requirements for your retirement, including your age at retirement, health condition and financial health, lifestyle assessment, etc. It will help you develop a clear picture of how much money you need to save.
- Decide what you would do after retirement: Consider your interests and hobbies and how you plan to spend your retirement years. It will help you estimate the expenses you may have in retirement.
- Analyse which expenses would continue after retirement: While some expenses may decrease, certain expenses like healthcare costs may increase. Consider the potential cost of inflation when planning for retirement expenses.
- Prepare a budget: Create a budget that includes your projected retirement income and expenses. A budget will help you understand how much money you must save to meet your retirement goals. Pay off costly debts as early as possible and avoid unnecessary expenses.
- Calculate how much you have already saved: Take note of your savings and investments. It will help you determine how much more you need to save to reach your retirement goals.
- Research before choosing a retirement plan: Several retirement investment options are available in the market today. Research and choose the plan that aligns with your financial goals and risk appetite. Moreover, plans with longer tenure offer more flexibility for an uncertain future.
- Invest:
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- Start investing regularly to build your retirement corpus.
- Consider diversifying your investments to manage risk and maximize returns. You can invest in health insurance and other plans simultaneously.
- Review and adjust your retirement plan periodically to ensure you remain on track to meet your retirement goals.
Conclusion
Retirement planning is crucial to ensuring a financially secure future once you have reached retirement age. A healthy retirement planning strategy involves starting early, choosing the right retirement plan, creating a monthly budget, allocating a fixed percentage of your income to a retirement corpus, and planning ahead for the years after retirement. These steps ensure you have the sufficient financial backing to lead a lifestyle that doesn’t require you to depend on your family members. By incorporating these elements into your retirement plan, you can set yourself up for a healthy and fulfilling retirement.