How to do financial planning for a steady happy life…

In last couple of decades, private sector has emerged as key source of employment in India. A new financial sector has emerged to cater the needs of these private sector employees. One of the very important need of these employees is financial planning for retirement. Our parents worked in government companies where they have pension to take care of retirement life but in private sector job there is no such luxury. In fact, post 2004 most division of government employees will not be getting pension with exceptions to Armed forces, MP’s, MLA’s & few select ones. It posts a huge challenge to this generation of workers to think & plan for retirement from the beginning. It sounds so funny to hear, “Asking a person for planning retirement who has just started the job” but if you don’t have luxury of government pension then there can’t be any other serious question.

As I told, a new financial sector has emerged which through innovative products are helping people for retirement Planning. With uncertainty of finances post retirement, there is no doubt why these products are big in demand & why companies are advertising big time for retirement planning products.

While n number of retirement plans are floating in the market & financial planner will advise to invest on fixed deposits to mutual funds to Equity. There are two larger questions keep floating in the minds of the people

  • How much they should save or how much they can save? & what amount they need by the time they retire from the active job
  • Where to invest these amounts to get the best return.

The second question is very well answered by all the financial planners. There are several instruments like Fixed Deposits, Mutual Funds, Equity, Debt or Gold to invest which can give returns from 5 to 25 %. So, what’s the problem- the problem is the first question statement.

It’s very difficult for a person to finalize an amount which he will need by retirement. Some advisor will say you need to have 3 crores by retirement & other will advise for 4 crores. A person who is finding difficult to run his house gets terrified with this thought of accumulating Rs 3 or 4 crore by retirement which also at times affect his health.

So how much amount one should plan for his retirement. The question is very difficult & most of us fail to get the right balance. A financial advisor can advise you that you will be needing x amount by your retirement, so you start saving y amount from today. A poor man is stumped by the thought of saving money more than his earnings. The regressive calculation not always work & I won’t advise this method of savings for retirement planning.

Many of you must have heard the hindi proverb, “Jitni Chadar ho utna pair falio”. In simple terms, it means you spend only that much what you earn. I want to add to it that you keep on increasing your income so that you can spend more & more.

My advice of retirement planning is on similar lines. I won’t advise you to think about what amount you will need at the time of retirement rather I suggest looking at your current income & plan accordingly. It will free your mind from complex calculations & will lead you exactly where you must reach. Most importantly it will have a positive effect on your health & I bet you, by the time of retirement you will have the amount you need to survive your retirement days without any worry.

My theory of financial planning of which retirement planning is a very important component believes that one must spend basis on the earning and categorize his spending in three broad categories

Journey of financial planning

Basic Needs- Everyone has some expenses which are must & by no means he can avoid those costs, but it also not makes sense to spend more than one can afford. One must spend in friendship of his income. One should reserve 65% of your income to meet basic needs & alarm bells must rang if one crosses this threshold limit. Few may complain that rent is high but in that case you must choose a house which fits your budget & not your aspiration. Same goes for schools, clothing, foods, EMI’s, electronic goods, Electricity bills, tax etc must be managed in this 65%

Leisure– One must live to enjoy life. By no means, life is meant for meeting your basic needs & saving for retirement. By no means one should confine himself in the compartment box. Here by compartment, I don’t mean house or buildings- I mean happiness at heart & freedom of your mind. You must explore life- go for the picnic with your family, spend on your hobbies, travel around the world. For these activities- One should park 15% of his income. This 15% of your income is for meeting the aspirational needs of a human being but must be kept within the defined bracket.

Retirement– It’s the old age when one is most fragile, weak & needs support. The most important part of one’s life where he has no income but only expense. I believe every individual must save a minimum of 20% of his income for retirement planning.

Why I am advising percentages than absolute numbers because every individual has different income levels & so as the lifestyle. He will need that much amount to continue a comfortable lifestyle post retirement. But why 20%? Cause post retirement- he will have to meet only his essential needs. He should not worry on EMI, School fees etc which forms big part of his basic needs.  Once you know the amount you must save then one can seek financial advisor advice for maximizing the savings. There are many products in the markets like Gold, Mutual Funds, Equity, Debt, NPS, Real estate etc which can help you to get good amount of return on your investments.

Not everyone will need the same corpus by retirement. A brief illustration of this principle of retirement planning. There are two individuals Ram & Shyam started working at the age of 25. Ram started career with earning 30K per month (Rs 3.6 lacs annually) & Shyam started career with 90K per month which 10.8 lacs yearly. Assuming their income has grown 10% year on year & bearing in mind the income, their lifestyle will surely be different so they must look for the corpus which can fulfil their needs post retirement. Ram will need approx. INR 20 million whereas Shyam will be needing approx. 60 Million.

Financial savings & expense journey of Ram & Shyam

It’s not part of financial or retirement planning but I wish to briefly touch upon this topic of social planning. Have we ever wondered, how our grandparents or their parents manage their life in the old age without any pension? They were able to successfully do because of the social fabric prevailing at that time. The culture of joint families was of immense help & old people lived peacefully with respect & dignity. May be like organic farming, we should plan to go back to our roots of joint family culture but that’s a long ask.

So financial or planning for retirement is not as complex as it seems, it just needs a bit of discipline & you are assured of a good life after retirement. Leaving you with happy face of Uncle Scrooge counting his coins.

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