How best to plan your retirement

What does retirement mean to you? Is it anxiety or happiness? Or both? Retirement actually is a transition. Someone has said, "I'm retired - goodbye tension, hello pension!"

Retirement is transition from work to no work, from Mr Mehta, general manager - SBI to just Mr Mehta; it is a transition from breadwinner to bread dependent. All kinds of transitions have anxiety; be it the first day at a new job, a bride going to her in-laws place or first day at college, there is always a fear of the unknown.

However, it has been usually observed that if financial aspects of transition are taken care off then transition becomes less stressful. The biggest anxiety about retirement is, "Will I outlive money or will money outlive me?"

In first phase of retirement we will discuss how to accumulate wealth for retirement. This is called accumulation phase. Second phase is technically called distribution phase. In this phase, an individual distributes his/her 'accumulated' wealth to one's own self after retirement.

Golden rule for retirement accumulation is "start early." The day you earn your first pay, set aside funds for investment. Remember 20s and 30s are your golden savings years. In this period, family responsibilities are least. In all probability you will be staying with parents and hence either there is no household expense or you are contributing a very small portion. Since you are single there are no children responsibilities too. Also your father (parents) could be still working and hence there is no financial commitment towards parents as yet.

From late 30s onwards, there will be home EMI, school fees etc to pay. Though your income would have gone up from what it was when you were in 20s, your expenses would have also kept pace with rising income.

Another advantage of starting early is that you can consider high-risk investments such as equities. Equity markets are place to earn higher returns 'slowly.' This is unlike common belief where people feel equities are instruments to earn higher returns very 'fast.' As has been written several times, investing in equities is like growing a mango tree. You need to sow seeds, water it and take regular care.  It will take years before it starts giving "mangoes." Lastly there is the benefit of compounding.

Ashit and Hitesh started their career at age 22. Ashit decided to set aside Rs 20000 every year for retirement. He continued saving till he was 29 years. After that he stopped allocation for retirement and started concentrating on other financial commitments. However, he left his initial investment untouched till he retired at the age of 65 years.

Hitesh started planning for retirement at age 29. He kept investing Rs 20000 every year till he retired at the age of 65.

Any guess who would have accumulated more retirement corpus at age 65 years? It is Ashit, who invested Rs 20000 each year between his age 22 to 29. He accumulated Rs 145 lakhs (at an assumed annual interest rate of 12%). While Hitesh who invested Rs 20000 each year from his age 29 to 65 years accumulated Rs 96.89 lakhs

Ideal option in early part of your career is to systematically invest in diversified equity funds. While in 20s and 30s, consider small-mid cap funds and even contrarian funds. Also open your PPF account. Token of money received on your birthday, Diwali, Eid, Baisakhi etc. can be placed in PPF account.

Once you are in 40s, your family responsibilities are highest. Home EMI, car EMI, school fees and even parental responsibilities would start showing up. In 40s you would be in middle to senior management. Chances are your spouse is back to work, after children have grown up to take care of their routine.

Use second income for retirement. Park funds in mid-cap and large cap mutual funds. (Also read - How to profit from Mutual Funds)

50s will be the toughest for retirement planning. You will have to balance between saving/investing for retirement and children's higher education, their marriage and even ailing parents.

Restrict investment into large cap funds and also consider index funds. Also 5/6 years prior to retirement, start-allocating funds to debt based mutual funds. Depending on the interest rate scenario, consider floating rate funds and/or bond/income funds.

At the time of retirement ensure about 25 or 30 per cent of corpus is into equity and rest is into debt based instruments.

We shall discuss the second phase of retirement in the coming week.

The author is a Certified Financial Planner. He may be reached at gmashruwala@gmail.com