Retirement planning 101: Simple steps to secure your financial future

In the journey of life, we often prioritise immediate needs over future goals. Retirement planning is no exception. It is a common trend for individuals to delay thinking about retirement until their late 40s or early 50s, a time when other financial responsibilities like children's education and home loans take centre stage. This delay often leaves individuals with a meagre amount from their earnings to save for retirement.

What individuals often fail to realise is that this delay comes at a cost. With fewer years until retirement and a limited investment corpus, many find themselves facing a significant shortfall in their retirement savings. Those who begin investing later in life may feel the pressure to save substantial sums each month. However, consistent, and disciplined investing, even with smaller amounts, can lead to significant retirement savings over time.

The key is consistency over the long term. One effective way to start saving is through SIP or Systematic Investment Plan in mutual funds that allows individuals to build wealth steadily over time.

Planning for Retirement

Retirement planning involves several crucial steps. The foremost step is determining the amount of money you will need at the age of retirement. To do this, consider three factors: responsibilities post-60, emergency corpus you desire (including for medical emergencies), and most importantly, inflation, including lifestyle inflation.

1. Defining your retirement corpus needs

• Post-Retirement Responsibilities: Any financial commitments or dependents you expect to support.
  
• Emergency Fund: A cushion for unexpected expenses, including medical emergencies.
  
• Inflation, especially Lifestyle Inflation: Inflation affects purchasing power over time, and lifestyle inflation—an increase in spending to maintain a certain standard of living—must be factored in for accurate projections. Ignoring lifestyle inflation can lead to underestimating how much you’ll need, leaving a gap in your retirement planning.
  

2. Optimise for tax efficiency

The second crucial consideration is tax optimisation. Consider the tax implications of mutual fund investments, such as capital gains tax, dividend distribution tax, and opportunities for tax savings. Optimise your portfolio for tax efficiency to maximize after-tax returns. One of the easiest ways to plan for retirement is through mutual funds.

Creating a Retirement Corpus: The three phases

Effective retirement planning involves three main phases: Accumulation, Preservation, and Withdrawal. Each phase has specific investment objectives and strategies:

1. Accumulation Phase (starting work till age of 50)

During the accumulation phase, which spans from the beginning of one’s career to around age 50, the primary focus is on growth. In this phase:

• Aggressive Investments: Equity investments, primarily through SIPs, can be ideal for achieving high growth, especially for those with a longer time horizon.
  
  
• Power of Compounding: Consistent contributions in high-growth assets like equity can lead to substantial returns, leveraging compounding over time.
  

2. Preservation Phase (Ages 50-60)

In the preservation phase, the focus shifts toward protecting the accumulated wealth as one nears retirement:

• Move to Safer Asset Classes: Investors typically transition toward more conservative investments, such as debt funds and gold, to reduce portfolio volatility.
  
• Hybrid Funds as an Option: For those who still seek some growth but with reduced risk, hybrid funds—combining both equity and debt components—can offer a balanced approach, matching individual risk tolerance.
  

3. Withdrawal Phase (Retirement Age and Beyond)

The retirement phase is centered on drawing a stable income from investments:

• Systematic Withdrawal Plans (SWP): SWPs in mutual funds allow for regular withdrawals, providing a steady income while keeping the remaining capital invested for growth.
  
• Stable Investments: Portfolios in this phase often focus on low-volatility assets like debt or conservative hybrid funds to ensure reliable income.
  

Simplifying Retirement Planning with Mutual Funds

Mutual funds can simplify the journey toward retirement security, especially through systematic features:

• Systematic Investment Plan (SIP): Ideal for building wealth steadily over time.
  
• Systematic Transfer Plan (STP): Useful for shifting investments from equities to debt as one approaches retirement, ensuring a smoother transition to safer assets.
  
• Systematic Withdrawal Plan (SWP): Enables fixed-amount withdrawals post-retirement, providing predictable income.
  

By combining these tools and sticking to a long-term strategy, individuals can create a comprehensive retirement plan that provides both growth and stability.

Disclaimer: The article is authored by Saisom Chaturvedi of Precap Financial. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class. This article is published by the Insider Studios team. You can get in touch with them on insiderstudios@businessinsider.in.