Humans have learned to adapt and live a decent life over the years. What was considered impossible a century ago is considered to be impossible to live without now. India is a developing country, and the proof of the same is seen in the drastic increase in the life expectancy of Indians. While the life expectancy on average in 1960 was only 41 years, the mean is 69 years now. It is crucial to note that the average retirement age in India is 60 years. The data indicates that, on average, people will have to essentially stay prepared for 9 to 10 years of life without income.
India’s median age is 28 years as of 2021, indicating that India is relatively young. So, 30 years from now, a large chunk of the population in India would have reached their retirement age! And that is worrisome because if the Millenials don’t start their retirement planning soon, it could bring enormous problems for India.
An Economic Times article notes that 51% of Indians are living without a retirement plan. And the majority of them are still dependent on conventional fixed deposits as a potential money source during retirement. If this trend continues, then Indians could be vastly unprepared at being able to beat inflation.
Inflation gets us to our next point. Several amongst the few who do retirement planning in their 20s do not consider the impact of inflation. One must remember that the value of money is decreasing as the years pass by. The number of purchases you can afford today with X amount of money will have drastically decreased by the time you retire. So, your purchases will get expensive, and the value of the cash you possess will decrease – it is a double-edged sword. And hence, we cannot stress enough the importance of budgeting, financial goal setting, and retirement planning.
How does one make a decent retirement plan?
Saving money at the end of every month is a far more strenuous task than earning money in the first place. People have been saving using this age-old formula:
Income – Expenses = Savings
Even though this mathematical formula is correct, it does not work very well in the practical world. You don’t end up planning your savings as a result. Your savings is then the leftover pile of money – which quite often is negligible. So what should you do to save today?
You should make use of an alternative formula:
Income – Savings = Expenses
What is the difference, you might ask? Even though the resulting numbers would be the same, there is a vast difference in the approach and methodology. We have sorted the steps you need to follow to make a retirement plan for yourself.
1) Step 1: Getting hold of your income
The first step is to get an approximate idea of the income you would be earning every month. This includes identifying all your potential income sources and getting them all in one place. Go ahead and consider potential increments. But your plan must be practical and flexible. Do not inflate your income. You are making this plan for yourself and your loved ones – there is no point in lying to yourself.
2) Step 2: Set a goal for your monthly savings
After you have understood your potential income sources, it is time to decide the amount of money you wish to save monthly. How much money you want to save is a personal choice and depends on the age at which you want to retire. Many of you would want to retire at the glorious age of 40 and fulfill the lifelong aspiration – work hard in early decades, accumulate a ton of wealth and retire rich and early. But imagine the part of life that you will have to give up in the years when you are slogging for extra income. Always sacrificing your enjoyment time is not a wise decision. Life planning is as crucial as retirement planning.
The second step is what differentiates the two mathematical equations mentioned above. You must prioritize savings over expenses and make room for savings first.
3) Step 3: Keep money aside for an emergency fund
An emergency fund and a retirement fund are different. One creates an emergency fund to cope with sudden adverse happenings like the death of a relative, major accident or injury, or even to meet expenses during times of unemployment. However, a retirement fund is what one creates for life after employment.
Hence, while you craft your retirement plan, do not forget to allocate money to your emergency fund as well.
4) Step 4: Incur necessary expenditure
Finally, the amount of money you have left with you after the above exercise is the amount you can spend freely. Try to cut down on unnecessary expenses, as that would benefit you in the long term.
FIRE – Financial Independence Retire Early, a movement started in the United States, encourages people to make their retirement plans to retire early on in their lives. This concept entails a brilliant idea – retirement is more about money one has than a person’s age.
|When one spends more than the average in retirement
|When one spends less than the average in retirement
|When one continues to work to meet current expenses
|When one continues to work part-time to earn additional income
|As there is less emphasis on leading a minimalist lifestyle, it takes longer to attain FIRE
|There will be less financial flexibility in retirement, but one can reach FIRE faster
|One will have saved enough in retirement to retire at the standard age
|One will be able to retire before the standard age of retirement
According to FIRE, one has to save at least 25 times their current annual expenses. For example, if your annual expense is Rs.6,00,000, then you would need Rs. 1,50,00,000 in your retirement savings. The number seems appalling.
Hence, experts recommend that one starts saving for a retirement plan as early as possible.
Most youngsters do not have ‘saving for a retirement plan’ on their to-do list. Many Gen-Z and Millenials stand by the belief that retirement is too far away, and it doesn’t make sense to plan for it today. But, when you start creating a fund early, you enjoy the benefits of compounding. Time value makes a significant difference to the overall portfolio in the end. It would be best if you started retirement planning in your 20s.
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