Mumbai, Feb. 5: Dozens of Bollywood dramas have centred around old parents being mistreated by their children. Clearly, Amitabh Bachchan in Baghban or Rajesh Khanna in Avtaar didn’t take the time out for retirement planning – where you set aside a nest egg

during working life that will take care of you later. The issue, which seems complex at first, can be addressed by answering a few simple questions though.

How much?

The key to retirement planning is trying to figure out how much money will you need to have in the bank when you retire. "The actual amount will have to be based on four factors – your expected monthly expenses, inflation and life expectancy," says Mr Brijesh Damodaran, a Delhi based financial planner.

"There is one other factor that people often forget to account for — lifestyle inflation," says Mr Vishal Dhawan, a Mumbai based financial advisor. This is the change in expenses because of improving lifestyle.

"While a lot of people feel that post retirement, their expenses will fall because of a simpler lifestyle, the opposite can also happen because you have more time and opportunities to spend and enjoy" he adds.

However, as a ballpark, if someone were to retire today at the age of 60, they should have a minimum of 10-15 times their annual expenses in the bank. This would be enough if the person wants to maintain the current standard of living. Factoring in lifestyle inflation, the amount would be higher.

When to start investing?

As soon as possible. The earlier you start, the more time your money gets to multiply.

Where to invest?

The key idea of retirement planning is to have a corpus – a pool of money – in place when you retire. How you choose to get there is up to you. You don’t need to necessarily invest your money in a scheme with the word ‘pension’ in it. A mutual fund would serve you equally well, says Mr Dhawan.

The only advantage of a pension plan is that it forces you to make a commitment, he says. However, a systematic investment plan (SIP) with a mutual fund could do the same. In the short term, pension plans are more expensive because upfront charges are higher while management charges are lower compared to mutual funds, he says.

Another option to invest your wealth is real estate. Apart from diversification, it also helps keep pace with inflation.

On how to split this money, experts say it has to finally be decided by your personal risk profile and appetite. However, this should be a mix of debt and equity. Debt investments offer a steady, safe return. Equity investments give a better return in the long run, but are riskier — share prices can also fall sharply.

As a rule of thumb, when you are younger, a much larger share of your investments can be in equity linked schemes. As you cross milestones — say 45 years, you can start investing money in debt instruments in a bigger way.

Advisors are against the idea of retirement funds being directly invested in stocks for the long term without active management. "Blue chip companies of yesterday such as Scindia Steamships and Premier Auto have disappeared today. Telecom sector, which was a hot favourite three years back is now suffering. Direct investment in stocks is not at all recommended unless there is active money management," says Mr Dhawan.

Healthcare

Medical expenses tend to increase with age as well. A mediclaim policy taken early on – when premiums are lower – can help. But apart from that, a separate corpus also needs to be kept aside for healthcare expenses. "Healthcare inflation in the past has nearly been twice the inflation rate," says Mr Dhawan. One option could be to have a smaller SIP focusing on stocks if you are young — something that will give higher returns over the long-term.

Age Correspondent