We’re all different in some way or the other.

Our needs are different, we have different responsibilities and the phrase, “All for one and one for all” doesn’t really work in reality.

And the “one size fits all” concept certainly does not work during retirement planning, because a retirement fund needs to be well customized, so as to fit the requirement of individuals. In this blog, we, at Groww, seek to provide you with a crisp understanding on how you can plan your retirement and what kind of investment instrument can help you achieve the same.

Every individual thinks of retirement differently and thus, the amount of money he/she would need varies.

How Will You Start Retirement Planning?

Following are the four steps that could help in retirement planning:

1. Computing Monthly Income

An individual should start computing the amount of money he/she would want to spend every month upon retirement. While it goes without saying that more a person has, the more he/she is willing to spend.

The starting point would be to analyze your current spending pattern from your monthly take-home pay. For example: post-retirement, your laundry expenses may go down, but your travel expenses or regular health check expenses may go up. You should also avoid mistakes such as foregoing about non-recurring items such as home repair, etc.

2. Take Inflation Into Consideration

You must account for the inflation factor and life expectancy. Multiple factors such as return on investment, life expectancy and prevailing interest rates must be taken into consideration, as it is likely to have a big impact on the amount of money required for retirement.

We, at Groww, believe it is good to assume two scenarios. The best and worst, after which, we can arrive at the different amounts required for retirement. Multiple scenarios help us to ensure that you do not get carried away.
Ideally, this should be the best and worst case scenarios:

Best case –
Typically assume average to above average returns on investment along with average life expectancy and low inflation could be taken.

Worst case – Below average returns, above average life expectancy returns and high inflation

3. Categorizing Your Income

Categorizing income from fixed sources would typically include income from pension plans, annuity payment etc. Higher is the guaranteed income, lower is the saving you will need to do.

An individual should typically compare his/her estimated retirement expense with the guaranteed income. Ideally, your guaranteed income should cover around two-thirds of your post-retirement expenses. If this is not the case, you should consider opting for an annuity plan.

4. Compute the Balance Gap and Term of Investment

Your retirement goal, when adjusted with your income from fixed sources provides you with the balance you would need to achieve. Secondly, many people don’t consider longevity when they set saving goals, but, it matters a lot from the compounding perspective. The longer is the horizon, the more you save and the more benefit you generate in turn.

Once your balance and horizon are factored in, you can choose mutual funds as an investment instrument to achieve your objective. An individual who starts early in his/her career should typically have a higher allocation to small-cap fund and mid-cap funds as they tend to provide higher returns due to market inefficiency.

With increasing age, you should re-balance your portfolio with a higher allocation to large-cap mutual funds in equity category and debt mutual funds. This helps in minimizing the risk of capital erosion.

Happy Investing!

Disclaimer: The views expressed in this post are of the author and not those of Groww