GOLDEN RULES FOR RETIREMENT
1. Save 10% of your income for retirement
· For regular employees, make a voluntary contribution of 10% of your income every month in your Provident Fund account.
· For self-employed professionals and others, put away 10% of your income every month in a recurring deposit account for contributing to a retirement corpus later.
2. Increase investment as your income grows
· Not many people match their investments with the increase in their income.
· Whenever you get a raise, allocate half of the additional income to savings.
3. Don’t dip into the retirement corpus before retiring
· Let your corpus gain from the power of compounding.
· Withdrawing money from it before you retire prevents this growth.
· This can be disastrous in the long run as inflation will keep eroding your corpus anyway.
· Due to inflation, of say 7%, the value of corpus will shrink to half after 10 years, to a quarter after 20 years, and to a sixth after 30 years.
4. Withdraw 4% initially after retirement, then step up
· To ensure that you don’t run out of money, make a withdrawal plan.
· Don’t withdraw more than 4% a year from the corpus in the first 5 years after retirement.
· This can be hiked up to 10% gradually by the time you are 70.
5. Save 20 times your annual expenses
· Estimate the monthly expenses you are likely to incur after retirement and multiply this by 240 to know how much should be your retirement corpus.
· This should replace about 85% of your pre-retirement income.
· If you have other sources of income, you can get by with saving less.
6. Borrow for kids’ studies, but save for your retirement
· Sacrificing your retirement corpus for kids’ studies can be disastrous in the long run if you find yourself left high and dry.
· A bank may give an education loan for their higher studies, but will never lend you for your retirement.
7. Allocate 100 minus your age to equity assets
· Your investment portfolio allocation will decide how much you have when you retire.
· You should maintain an exposure to equity assets of 100 minus your age at all times till your retirement, with the rest being in fixed income and other assets.
8. Start saving early in life
· All plans of life insurance, health insurance and pension work best if taken early.
· You will live longer than the previous generation as the average life expectancy has increased.
· Very few understand the consequences of outliving their savings – till it is too late.
· If you delay saving and investing for your retirement, you will have to amass more to reach the desired corpus and yet end up poorer.
· Assuming returns of 8.5% a year and investment age till 60 years of age, you can amass 2400 times wealth if you start investing a fixed amount every month at 25 years of age.
· On the other hand, you will amass only 350 times wealth even if you start investing 3 times of this amount every month at 45 years of age.