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Retirement Planning: 10 golden rules of financial planning and investments in 2020

retirement planning, retirement planning india, saving for retirement, investment for retirement, Senior Citizens Saving Scheme, real estate, Reverse mortgage, mutual funds

One of the most important questions to answer, when planning our retirement, is how much do we need to save or invest, to live comfortably in the retirement years. As per the National Health Profile published in 2019, life expectancy in India is 68.7 years. However, it is now normal to live up to 90 years and we must plan for this eventuality. What this implies is that we need a steady income plan for at least 30 years after our retirement. In addition, we must factor in higher costs on healthcare, care givers, lifestyle needs of the elderly, and increase in the cost of living due to inflation. This may sound like a daunting prospect but with intelligent and early planning, we can secure our future.

1. Plan for more than you may need

At the cusp of retirement, or earlier, we must have a general idea of our income needs after retirement. As a rule it's better to be cautious and plan for more than we may need. It is important to start with an estimate of all the expenses. Generally, people feel that they may only need about 70% of their last drawn income. However, it is prudent to assume that they may need more.

2. The 4 per cent rule

It is important to know how much income we could draw down from our investments. The 4 per cent rule was derived by financial planner William Bengen. According to him, a retiree with an investment portfolio of 50% equity and 50% bonds should be able to outlive the funds if they draw down only 4% of the investment every year, adjusted for inflation. In effect this rule also means that the investments must be long term and last for 30 years. The 4% rule guides us but is not necessarily perfect since it relies on past data and not on current market estimates or future risks.

3. Start retirement planning early

If we use the 4% rule as a guideline, and wish to drawdown Rs 1 lakh per month after our retirement, it means that our investment corpus must be at least Rs 3 crore. As with any investment, the earlier that we start our investments, the better the yields. As a rule, we should definitely start retirement planning and creating a retirement investment portfolio as early as in our 20s. Compound interest on our early investments add up to significant multiples. However, if we haven't started investing from an early age, we must invest significantly more to achieve the Rs 3 crore target.

4. Invest in real estate

One of the best ways to create a guaranteed income stream is to own property and lease the property to earn a rental yield. In case of multiple assets, the rental income is higher. In fact, many seniors lease out their residences and move into a senior care community. Since rents increase every year, this form of income also helps stay ahead of inflation. So, it is prudent to invest in property when we are younger and create a steady and guaranteed income stream. In addition, we can also sell the real estate asset and create an addition corpus for investment.

5. Reverse mortgage

Another way of creating an income stream from property is to opt for reverse mortgage. Reverse mortgage is not very popular in India. However, it is a good solution for creating an income stream.

6. Senior Citizens Saving Scheme

Public sector banks such as SBI have an investment scheme for senior citizens. This account is applicable for seniors above the age of 60 years, with an investment of up to Rs 15 lakh and offers an interest of 8.6%. The scheme qualifies for tax benefits under section 80C of the Income Tax Act. Though the interest earned is taxable, the scheme offers one of the highest interest rates.

7. Monthly Income Scheme at Post Office

This investment scheme offers a guaranteed return of 7.7% per annum, offers a monthly fixed income, keeps the initial capital intact and yields better results than other debt instruments. The scheme also provides for a recurring deposit into which the income can be parked. This accelerates savings. The maturity period is 5 years. There is no TDS for this scheme but the interest earned is taxable. The scheme does not qualify for tax benefits under section 80C of the Income Tax Act.

8. Mutual funds

It is also prudent to invest in mutual funds. These investments have higher liquidity and allow the investor to earn a steady income. They carry lesser risks than investing in the primary market and yet offer good returns on investment.

9. Pension Funds

In addition, seniors should invest in pension funds and saving schemes. Though these investment options are low risk and help them preserve their capital, they also offer much lower returns.

10. Investing in a senior living community

It is a known fact that costs of living increase as we get older, especially after retirement. The increase in costs of living may include hiring caregivers, higher healthcare costs, physiotherapy, security and lifestyle services.

It is, therefore, prudent to invest in a senior living community. At a senior living community, the community is sharing the resources and its costs. Therefore it is easier to live a better lifestyle, in comparison to living alone. In addition, offering healthcare facilities, quality housekeeping, chef prepared meals, curated wellness programs, sports and recreation facilities would be difficult to support financially by an individual.

Also, higher security, trusted employees and staff who are specially trained to look after seniors are an added advantage. This would be expensive to replicate at a standalone residence.

It would be difficult to provide additional services such as senior focused concierge services, legal and administrative planning, valet parking, senior friendly spa without the support of an entire community.

Due to the benefits of economies of scale, senior living communities are a preferred choice of seniors across geographies.

(By Basav Mukherjee, Chief Revenue Officer, Columbia Pacific Communities)