What is Retirement Planning?  

Retirement planning refers to an individual's planning for life after retirement. Retirement planning means how a person manages their finances which help them in achieving their financial goal during both stages: working life stage, and during the life after retirement.

The emphasis that an individual puts on retirement planning may differ at the different stages of life. At the stage of an individual's working life, retirement planning means setting aside enough money for retirement. The middle phase of life might also include setting specific incomes and taking steps to achieve them. And then come to the retirement stage, also known as the distribution stage, where an individual is no longer paying in, instead of their years of savings payout. 

Reason for the Need for Retirement Planning   

"Reason for the need of retirement planning"

There is one time in life when you are celebrating your first salary, and after few decades, the same person is cutting a cake on their retirement. Yes, life moves that fast.

Everyone knows that they might face problems like day-to-day living expenses, medical expenses, rising prices, and many more. There are always some emergencies in old age as retirement is an important reality for everyone. So, having enough finance is necessary to deal with all the problems that might be happening in old age. That is why an individual's need retirement planning because of the following reasons-

  • One cannot work throughout his life.
  • Future complications like day-to-day living expenses, medical expenses.
  • Contribution towards the family after retirement:
  • In today's generation, you can't depend upon children.
  • Best time to fulfill life aspiration.
  • Depending upon one source of income is risky, i.e., pension
  • Start early planning and diversify investments.

So, to lead a peaceful life after retirement, it is important to start retirement planning early and investing in it.

Benefits of Retirement Planning  

There are various benefits of retirement planning. Some of the benefits are:

  • Money works for you at old age: Everyone runs after their 9 to 5 jobs during the younger age. Everyone is working so hard to earn money so that they can live a good life. But, after retirement, an individual is no more working, but the money they earned should do all the work. So, if they want money to work for them at their retirement days, one has to start their savings at a very young age towards retirement planning. Starting with the small amount during the initial time also helps generate a significant amount in the future, which will help them in their retirement days.
  • Peaceful life: this is one of the important results of retirement planning. An investment that earns sufficient income during the retirement stage leads to living a peaceful and stress-free life. Retirement is when one has to be relaxed and benefit from all the hard work they do in their working life.
  • Tax advantages: Retirement planning also help an individual to save tax because as there is a variety of investment options available for retirement plans, and all these retirement planning is exempted from tax.
  • Cost-saving: If retirement planning is done at a young age, it will help reduce the cost. For example – in an insurance policy, during young age, the amount of premium to be paid is lesser than the amount of premium to be paid at retirement.
  • Safeguard property and assets: Without a retirement plan during the retirement days, it compelled people to sell their assets to run the family and support their living expenses. But, having proper retirement planning from an early age will help you safeguard your property and assets. 

Steps of Retirement Planning 

"Steps of retirement planning"

Step 1 – First decide your retirement age  

The most common age of retirement is 60 years, but it may vary from person to person. Someone may wish to work after 60 years or as many persons retire before 60 years of age. It's a matter of choice.

Estimating a retirement age is one of the important steps because your regular income stopped, and only they can get pensions. After that, an individual has to depend upon their savings and investment to fulfill their retirement needs. 

Before deciding on retirement age, you must estimate the number of years you are expected to live based on age, medical conditions, or any other factor.

Step 2 – Start early to retire peacefully  

Start planning for your retirement as soon as possible because a delay in planning may lead to compromise your goals at the retirement days, or else you might have to depend upon your children or family after retirement. So, start planning early or else start now.

Most individuals who start earning at the age of 20 may think that retirement is a distant reality. At this stage, they think they have enough time to think or start planning for their retirement. But, investing early in life will help you accumulate a considerable amount of money which help them to live peaceful life during their retirement days.

Step 3 – Determine your retirement corpus 

Retirement corpus means the amount that an individual requires after investment to meet the future expenses and continue with the same lifestyle or other personal goals. 

It is important to calculate accurately estimate the amount of money an individual requires to maintain their current lifestyle after retirement. And for calculating or determining this amount, one has to be first calculating their present yearly expenses. For this, an individual needs to first calculate monthly expenses such as household expenses, EMI, entrainment and travel expenses, medical expenses, etc.

Step 4 – Calculate the future value of your current savings 

After deciding how much money is kept aside for retirement planning, the next step is to determine the value of these savings in the future. 

For example, if you can save $100,000 yearly towards retirement planning, at the interest rate of $10% annually. Then, after 25 years, you have an estimated retirement corpus of $9,834,706.

Step – 5 Cut down on unnecessary expenses. 

Suppose you are unable to save the money to reach the target that you set towards retirement planning. In that case, you have to cut down some avoidable expenses such as entertainment expenses, vacations, dining out, etc.

Cutting down on such expenses help you to invest more towards retirement planning and help you to reach closer to the amount of retirement corpus. 

Context and Applications 

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for:   

  • Bachelor of Business Administration
  • Bachelor of Commerce       
  • Master of Business Administration
  • Master of Commerce

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