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Your Money: Why we need to plan for retirement at every life stage

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The focus at this stage is on the retirement corpus. A large portion of the savings should be channeled towards retirement planning investments.

By Lakhwinder Kaur Dhillon 

Retirement planning is a very crucial decision in everyone’s life as one has to leave the workforce someday irrespective how energetic, young, or high spirited you are today. The golden rule of retirement planning is to start as early as you start earning. It is a planning for a new stage of life and this journey will become more empowering and comfortable if we have desired financial stability and financial freedom on retirement.

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Power of compounding
A structured retirement planning starting at an early age will help unleash the power of compounding for a longer period of time, thus helping accumulate a bigger corpus. Planning for retirement is simply taking aside a part of your income during your earning years to provide for a passive source after you retire.

It is easier said than done, because keeping aside a part of income is one aspect and engaging this income in the right investment avenue for earning a future passive income and fulfilling the desired corpus requirement for different financial goals is another aspect. At different stages of life, different strategies of financial planning are required. In the initial stage of earning cycle, responsibilities are fewer and channelising the earnings in the right direction is very essential and budgeting plays a very significant role at this stage.

The goal for retirement planning should also be initiated at this stage of earnings cycle. But if one has dependents at this stage, then life cover is also required especially when there is no life cover policy provided by the employers. A term insurance that provides required protection with effective cost may be considered.

Life and health covers
In the second stage of life, you are likely to have dependents on your income. So you must buy life and health insurance. At this stage as both the income and expenses are expanding, it is essential to define the future financial goals in terms of short-term, medium-term, and long-term financial requirement. Management of fund requirements is also crucial at this stage as growing need for funds may drag you to a debt trap that may adversely affect your credit score.

Do not create any debt obligation at the cost of your retirement savings. Investment should be done judiciously taking into consideration tax savings, inflation rate, risk appetite, etc. The alignment of income, savings, expenses, and investments is very critical at this juncture as major investment planning related to buying a home, financing a car, planning for kids’ higher education, planning for children’s marriages, etc., is done at this stage.

Investment portfolio
Create a proper investment portfolio with a mix of variant investment products aligning with growth, income and liquidity requirement. Revise the portfolio regularly so that the planned corpus for different financial goals can be accumulated.

If you have managed stage one and two prudently, then the third stage is a rewarding phase as at this stage most of your expenses are stabilised while the income is growing which ultimately results in more savings. At this stage many of the financial needs are also met by the passive income gained due to judicious investments made in stage one and two. The focus at this stage is on the retirement corpus. A large portion of the savings should be channeled towards retirement planning investments.

The writer is assistant professor, Amity Business School

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