How To Recover From The Late Start Planning For Retirement
Generally we do not think of retirement planning till we reach age of 40–45 years. By that time we miss the advantage of starting early and getting additional 15–20 years for compounding of our retirement funds. If a person starts saving and investing for his retirement funds at the age of 25 years, he has got 35–40 years for compounding. So, even if he starts investing just Rs. 2000 per month, he will end up with a very good retirement fund. But if a person starts investing for retirement fund at the age of 45 year he will have to slog hard to reach the same amount.
So, if you have not started investing for your retirement fund, start immediately. A saying goes “Whenever you wake-up it’s time to act” or Better late than never. Even if you decide to start building your retirement fund at the age of 40–45 years not much is lost. You can still build-up a respectable fund to take care of yourself and your spouse in the old age.
First of all estimate how much money you need on retirement. Based on how much money you want and what you have saved or you have today, you can plan for your personal finance management or creation of your retirement savings plan. The gap would decide how much you need to save monthly / yearly till you retire. If you are in 40–45 years age bracket you can catch-up fast, but if you are in 45–55 age group, you will have to really save a lot to get your target amount.
So what to do? Where to start from? I have some tips for you.
1. Begin Saving More Money for Retirement: Start saving as much money as you can without hurting your and family’s needs. Cut down a little on luxuries of life and save that extra money. Since you need to make up for late start you will have to put in some extra savings. If you re-look at your home budget, you will be able to find out a few avoidable expenses which will not only save you extra money, but will also help you improve your health. For example many of us take our vehicle out immediately to grab some milk, bread, eggs or a grocery item from a shop nearby our residence. Don’t go by vehicle. Walk down to the shop. Save fuel and burn a few calories also. These small savings add up to a big amount if you pay regular attention. Buy an Insurance plan online instead of an agent or any other intermediary because it saves you a hefty sum of commission.
Pre-pay or clear all personal debts: If you have taken any personal loan or credit card loan, try to repay it immediately. This will help you save a lot of money you pay on high interest rates. Try to shift your costlier loans to a bank with lower interest rates. Even a 0.5% cut in annual interest rate helps you save a lot of money.
Move to a Low Cost Area: Relook at the house / flat you live in. Can you manage with a smaller house / flat? Do you really need that bigger house? Can you relocate to a little less costly area in the city, provided it doesn’t increase your travelling cost / time to office? Relocate to a smaller house / flat in a less costly locality if it offers a cost benefit, otherwise not.
2. Make Your Boss and the Government Pay to Maximize Retirement Savings: Try to get extra from your employer and the government for your retirement funds.
A Maximize Retirement Plan Contributions: You can ask your employer to switch from EPF to NPS to get extra return on your retirement savings. New Pension Scheme offers you a flexibility of investment choices with scope for higher returns in long term. Also has tax advantage over EPF contribution on incremental contributions.
B Multiple Savings Plans: Put your money in different long term investment plans which offer tax advantage on earned income and maturity. Like some schemes offer Zero tax on funds withdrawn after the age of 60 years. These plans also offer a little extra return over regular normal saving plans.
C Switch Employers: If need be switch employers to high paying ones. Also look for employer one who offers better retirement benefits. For example some organizations do not offer any retirement contribution to either EPF or NPS whereas some employers offer up to 12% contribution of Basic salary + Dearness Pay to retirement funds of the employees. Look for employer who makes contributions to your retirement funds.
3. Get More Out Of Your Retirement Savings: You should look for investment plans which offer you highest return at least cost for your retirement fund. Since the time horizon is 20+ years even a small increment in returns makes a huge difference in total available funds at the end.
a Control Investment Expenses: Invest your hard earned money with fund managers which offer minimum fund management cost. For example in India the Life Insurers offer retirement savings plan which are costliest, whereas NPS (New Pension Scheme) at present offers investment at the lowest fund management charges. Similarly, if you can manage by yourself switch to ‘Direct’ (or self) mode instead of ‘Advisor’ mode for your mutual fund investments.
b Maximize Tax Advantages: Look for investment options which offer maximum tax advantage. There are three types of tax benefits available for different investment options i) Tax Rebate on Investment amount ii) Tax Exemption on Investment Returns and iii) Tax exemption on maturity proceeds. Like instead of putting your money in long term fixed deposits with bank where interest is taxable you shall invest with mutual funds where returns are exempt from tax.
4. Redefine Your Retirement Plan for More Happiness and Less Savings: Pay attention to your health and relook at your retirement plan. You may not need to work like a mad till you reach the age of 60–65 years so that you can save more.
a Postpone Retirement: If you keep a good health you need not retire at 60/62 or 65 years. You may continue to work even when you retire from one job. It may sound improper, but be practical. You had been working all your life and all of a sudden you are a dead log sitting all day long doing nothing. Instead, you may start enjoying your life more when you reach 50–55 yrs and slow down a little in terms of earning more and becoming a machine. So, by extended working life you get more time to accumulate and enjoy at the same time.
b Phased Retirement: Your employer may want to retain your talent and experience and can offer you a less hectic life once you reach a certain age, look for such options. Your employer may wish you to continue contributing to the organization 3–4 days a week at a handsome payout. You may get an extended phased retirement this way.
c Don’t Retire: Start something of your own, where you have expertise and people are looking for your talent. Consulting, part-time engagements can help you not to retire. In India we see many retired people start a grocery shop or help in their family businesses. This helps them use their time constructively, but generally the parents don’t get paid for their services. You should try fix a price for your services when you are helping in a family business, after all the business is utilizing your services.
5. Retirement Savings Dos & Don’ts: Since you have started late, you must be looking for maximizing the fund in the shortest period. Now this may lead you to commit many mistakes which may be disastrous for your planning. Don’t get tempted to frauds and cheats who may part away with your hard earned income, by offering you lucrative unbelievable returns.
a Reaching for Return: Do not assume too much risk in order to reach for higher return for your portfolio. Divide your investment in different assets. A very little of that can be invested in high risk high return assets, but beware of frauds and touts. A desperate investor is an easy target of conman.
b Assuming Overly Optimistic Returns: Do not assume too high and too consistent returns for your retirement funds. People may suggest that it’s easy to get 15–18% return in long run on the investments. This is unrealistic and cannot be sustained. So, plan a retirement fund estimates with a realistic returns or 9–10 percent per year only.
c Banking the Inheritance: Do not over depend on the expected inheritance you may receive from your family. It should not be your excuse for not planning your retirement funds. A little technical or legal issue and you may be in soup.
d Don’t Follow Simplistic Guidelines Blindly: Just don’t over depend on your ‘financial advisor’. Think realistically and avoid too simple looking options. In the matters of finance, things which look too simple are not that simple. Acquire a little knowledge of investment options and evaluate the advice of your financial advisor before committing any funds.
e Invest For A Lifetime: Do not plan for just retirement, plan for life after retirement also. Even if you start saving at the age of 45 years, don’t think that you have to plan for just 15 years, rather you have to plan for 35–45 years that is life of 20–30 years post retirement life depending upon your health.
It is never too late to start saving and investment. Design and execute a strategy for your retirement funds. This fund has too much importance in your life as you are dependent on this for the rest of your life when you are not working. You may not have much family support available after retirement as kids will be away in their jobs hence you should have financial backup always at your side to take care of your needs.
Save and invest carefully for retirement is the mantra.