On the skeleton level, planning for retirement remains the same overall these years where you save through your professional life before you retire and then use the saved amount to lead a peaceful retired life. The mechanics may be the same, but the savers of our generation are facing challenges more than the generation before us as they did not have to sweat much over it.
This can be compounded by the fact that multiple companies are moving away from the outlined benefit pensions that came with the guarantee of a certain amount of money in post-retirement years. The movement has been witnessed towards certain defined contribution plans which are subject to market risk.
Conservative Investor: Those who follow an investment strategy under which the preservation of capital is prioritised over market returns or growth identify as conservative investors. The initial planning process requires a great deal of detailed understanding of the following factors that one should not forget while planning for their retirement:
• Risk Tolerance
• Liquidity Requirements
• Investment Horizon
• Tax Implications
• Existing Assets & Liability Evaluation
• Real Rate of Return
• Other Personal & Professional Situations (if any)
Among the above factors, Inflation happens to be a vital one. For a layman, Inflation can be defined as a persistent rise in the general price of goods and services of day-to-day use like clothing, food, fuel, transport, etc., which increases the cost of living of a person. For evaluating any investment, we must evaluate the tax-adjusted real rate of return.
a) Nominal Rate of Return: The gross return that you receive on your investment
b) Real Rate of Return: Return received on the investment that you receive after deducting inflation or inflationary cost
It is to be noted that a higher nominal rate of return is necessary to maintain the expected real rates of return offered by investment. As the Fisher hypothesis implies that when the real rate of return equals the nominal interest rate minus the expected inflation rate. In other words, we can safely say that the real interest rates fall as per the rise in inflation unless nominal rates upsurge at the same rate as inflation.
Hence senior citizens or people near to their retirement age should focus more on liquidity. The biggest drawback while choosing the right retirement plan is the fact that most senior citizens remain confused or are unaware of the concept of the real rate of return.
With the rise in the life expectancy of humans in India, the citizens need to get an earlier retirement corpus plan that will provide better support in the coming years.
With the rise in medical and consumption costs, it is highly advised to have a good retirement corpus in place. It can be achieved only by staying well invested during your working life to lead a happy and healthy post-retired life.
(The author is Managing Director at Alankit; views expressed are personal)
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