Basic thumb rules to start planning your retirement

There are many who believe retirement is a distant reality, planning for which can be pushed to a much later stage. What this usually means is, in your 20s you feel you are too young to plan for your retirement, while people in their 40s feel that they are too late.

Start setting aside money early for retirement to create a sizable corpus, with lesser, but more frequent investment values.

Every big milestone in your life can be a natural starting point. Always remember, the sooner the better. Give your savings the opportunity to compound over a longer period of time.

As your income increases, try to save more. Lifestyle inflation eats into the savings available for retirement. Set some corpus aside for emergencies so that you do not have to dip into your retirement nest egg. This year, due to the COVID-19 pandemic, leisure outings have come to a stop, resulting in relatively more savings. It is a good time to divert some of these savings into long-term goals like retirement. However, even beyond that, you need to cut back frivolous spending on things like shopping, gadgets and so on.

It is ok to start small for the long-term goal of retirement or financial freedom. However, make a commitment to increase your investment amount every year. This can be a fixed amount, a fixed rate of increase, or even be linked to your yearly increments. It is a proven fact that we find it easy to commit to events in the future, and this is a great way to secure your retirement without sacrificing your present.

Not taking the risk in your investments is the biggest risk of all. You need to ensure that your investments grow at a rate faster than inflation. This can happen if you juggle your asset allocation to allow for a slightly bumped allocation to growth assets like equity.

While it does increase the risk in your portfolio, you can consider a calculated risk. Invest in some research or a good advisor and make the right choices in managed products like equity-oriented mutual funds.

Pull out all those forgotten investments and insurance policies, get rid of those which give you low returns or are proving to be too expensive. If you already have a hefty equity mutual fund or stock portfolio, then spend some time cleaning it up and getting rid of underperforming securities.

Kamlesh Vadilal Shah, Managing Director, Share India, meanwhile focuses on "Multiply by 25" rule and the "4 Percent" rule. The Multiply by 25 Rule estimates how much money you'll need in retirement by multiplying your desired annual income by 25.1.

He explains this with an example:

"If you want to withdraw $40,000 per year from your retirement portfolio, you need $1 million dollars in your retirement portfolio. ($40,000 x 25 equals $1 million.) If you want to withdraw $50,000 per year, you need $1.25 million. To withdraw $60,000 per year, you need $1.5 million," he opines.

The 4 Percent Rule, as its name implies, assumes a 4 percent return and guides how much money you can withdraw annually once you're retired, without cutting into your investment principal. As per this rule, you should withdraw 4 percent of your retirement portfolio in the first year, suggests Shah.