Investing for your retirement – Part 2

4. Prepare a budget built around your savings –

 This means when you build up a budget first put in the amount that you are going to save for your retirement and other investments and then put in your expenditures. Unfortunately we tend to do it the other way round. This also does not mean that if your net take home is Rs50,000 per month and you set aside Rs10,000 for retirement you are going to spend Rs40,000 on shopping !.No way! This means that after setting aside for your retirement funding you set aside money to buy your own house or car or for funding your child’s education or marriage and then with the available balance you can go out and do your shopping. In short start spending or planning to spend only after you have saved up for the month.

When you build up a budget ensure that you segregate investments for your child’s education, marriage, EMI’s for your house/car and retirement separately.

Do not touch your retirement savings to fund your EMI’s and dare I say your child’s education or marriage. This is a tough choice but remember that your child if required will be able to fund his own higher education with a loan and enjoy tax benefit on the education loan but no bank will provide you with a loan after your retirement.

5. Investing in the stock market –

Be careful when you invest in the stock market. Do not get swayed by the analyst appearing on television or articles in the newspapers. A decade ago Satyam was a darling of the stock markets, retail investors who had invested in Satyam saw their investments nearly wiped out when the Satyam fraud was unearthed. Always remember that those advocating allocation of your savings to the stock market may have their own hidden agenda. It is always better to do your own analysis of individual stocks before making an investment. Do not under any circumstance invest more than 5% of your net take home in stock market. If you are unable to make an analysis of stocks then it is better to invest in a Mutual fund. Even then keep tracking the stock prices or the Net Asset Value of the Mutual Fund on a regular basis. If you have made notional profits of 20% , book the profits and exit, a bird in hand is worth two in the bush!

6. Systematic Investment Plan – SIP

   Do your own Systematic Investment Planning – Investing in SIP does not mean that you need to do it only via Mutual Funds through your broker or dematerialized  account. You can set aside a certain sum of money each month and invest it in gold, PPF, VPF or even blue chip stocks .Ensure that your SIP is a long term investment and should be utilized for your retirement planning. However ensure that although the investment is long term in nature you need to track the market value of your investment regularly.

Watch out for global events apart from domestic policies which may impact the value of your investments.

7.Projecting your post retirement expenses

 This is probably the most difficult of them all.

Projecting your future expenses in an environment where you stop earning can be an interesting

experience. You should start with listing out your current expenses that you incur. Take out expenses that you are not likely to incur post retirement  such as rentals (assuming you own your own house to by the time you have retired),keep a separate line item for medical expenses which would balloon up post retirement. Other expenses would include food,clothinig,electricity,internet and mobile telecom expenses.

 Ensure that the expenses are inflation indexed which means you need to factor in inflation which is currently at 10% while projecting your retirement expenses. So something which costs you Rs 100 today might end up costing you Rs 700 after 20 years. Include one off items such as travel ,purchase of household and electronic equipment, spending  in your budgeting. Once again remember that planning

for your children’s education and marriage should be done separately.

This should not be difficult. Start noting down your current expenditure by month and factor in inflation.

Annualise the expenses and then add one of items that you incur once or twice a year. Ensure you keep a 10% buffer by adding 10% of the above computed annual projected expenses.

As stated in one of the previous points you should ensure that you have paid all your outstanding EMI’s by the time you retire. Now that you have a reasonable idea of your post retirement expenses expense you now need to look at your projected income to ensure that your budget balances.

Remember the steps that we had taken previously (saving up a portion of your salary,start saving now etc).Revisit the amount to set aside for your investment if you think that your amount is too small to meet your expenses post retirement.

Your modeling may not be accurate so ensure that you get a second and if necessary third opinion.

You can ask your spouse or your friend to look at your post retirement budgeting. They would not only want to genuinely help you out but also would have a fair idea of your spending habits, medium long term plans etc.

Revisit your plan and assumptions made regularly , at least once every 3 months. Change assumptions such as inflation rate, rate of returns on your investments etc. Ensure that you are prudent while making your assumption. If you end up assuming a very low rate of inflation you might end up saving much less than what you require post retirement.

8. Second line of Income –

Think about a second line of income which you can continue even after  retirement. The added benefit could be that it is something that you enjoy. Providing tuition or selling photographs or designing websites could not only add to your bank balance but would allow you to do

Something which you truly like. You can save up a portion that you earn from your second line of income for retirement purposes.

With this I conclude my blog pertaining to retirement planning.Hopefully it was informative as well as helpful for retirement planning. I will relook this important topic in the near future to include points that I might have overlooked this time around.

Please write back and provide your feedback.It is extremely valuable.