Tax-efficient retirement planning in your 50s

The sooner you start retirement planning in your life, the better placed you are at the time of retirement.

However, retirement planning is not always in our hands. Many are unable to start the retirement planning process sooner despite best efforts. 

If you are hitting 50s but have not been able to start your retirement planning yet, there is still time for it. In cricket analogy, you need to aim for some slog over hitting and post a decent score.

Let us find out how you can accumulate your desired retirement corpus by planning your 50s efficiently.

How to plan for retirement in 50s?
 

Since you have around 10 years to go, you must make the most of it. To do so, you must keep retirement planning as your top priority. This means that you will have to organise your finances with surgical precision. You can do that by following these steps -

• Becoming debt-free

By becoming debt-free, you will have no EMI burden on your monthly budget. This will help you to save more money every month towards your retirement corpus. You must also avoid any new long-term debts as they might extend to your post-retirement life and increase your monthly costs. In the meantime, you must settle your existing debts, and start with the ones that bear a high interest cost. You can also consider a debt consolidation loan to lower your interest cost and reduce your debt burden more systematically.

• Cutting down on expenses

You should consider curtailing your lifestyle expenses in your 50s. For most families, it happens naturally as expenses become more and more pragmatic as you age. All the cost savings must go into your retirement planning investments. 

• Keeping contingency funds

As you grow older you may face more health concerns. This calls for a reassessment of your health insurance coverage. Besides, your children would be older as well, so you may have to contribute towards their marriage and higher education costs. For these reasons, you must set aside a separate corpus. This will help you meet any sudden or planned expenditure during the decade.

Also read - Key benefits of a tax saving fixed deposit

​​Assessing your retirement planning corpus
 

To begin with, there are many thumb rules followed to calculate retirement corpus. For instance, there’s the 30X rule which means that your retirement corpus must be thirty times your annual income. 

Then there are formulas like –

Retirement corpus = Inflation factor X Longevity X Lifestyle cost

Here, your inflation factor is 2 (Assuming an inflation rate of 7% and the time left for retirement is 10 years. Therefore, the inflation factor is 1.07 ^10=2). If your lifestyle cost is Rs 6 lakh and longevity is 30 years, the corpus will be,

2X6X30 = Rs 3.6 crores

If you choose to go for a more methodical approach instead, you should apply the following approach -

• Scrutinise your expenses

Take a look at your expenses and identify the ones that you will continue to incur after your retirement. Expenses like commuting to the office, children's education, home loan EMI, etc., might not be a part of it. Add expenses that will be introduced with old age as well. While one hopes that you wouldn’t, you may need to buy more medicines or employ a driver or a cook a few years into your retirement.

• Estimate the incomes

Once you have an idea of your post-retirement expenses, you must also identify the income sources. This may include pensions from employment, the National Pension Scheme, insurance and pension plans, etc. Income may also come from interest on investments, dividends from stocks held, rent from house property and so on. 

• Mind the gap

Your retirement planning must focus on the gap between your expenses and the income you earn after retirement. If you continue to earn around Rs 20,000 after retirement and your regular expenses are Rs 50,000, you must plan for the remaining Rs 30,000, which amounts to Rs 1.1 crore for a retired lifespan of 30 years.

That’s Rs 1.1 crore in today’s money. You must then consider the inflation for the next 10 years. 

For example, at 6% inflation, the corpus requirement would become more than Rs 1.8 crores.  

​​How to build the retirement corpus
 

To save money for retirement planning, you must select your investment options carefully, considering the risk and return equation along with. Some of the popular investments for your 50s include the following -

• Equities

The equity market is volatile but generally delivers high long-term returns. While investing in equities, a 50-year-old must keep capital safety in mind. Due to the volatility, all of your savings must not go into equities. The thumb rule is that your equity exposure percentage should be 100 minus your age. So, you can invest 50% in equities, be it through direct investment or mutual funds. You can also opt for a combination of both.

You can further divide your equity exposure across different market caps, where large cap and blue chip companies have moderate returns at a low risk, and small caps may promise higher returns albeit for a higher risk.

• Debt investments

Like equities, you can start your fixed-income investments through mutual funds and debts. There are mutual fund schemes that invest in debt instruments, and others that invest in both equities and debts in varying proportions. You must select a bouquet of different mutual funds and start a Systematic Investment Plan (SIP) for disciplined investment.

Popular fixed-income investments suitable for you include,

• Public Provident Funds (PPF)

Starting a PPF at 50 years will run beyond retirement as it has a tenure of 15 years. Nevertheless, it is one of the most rewarding investments with investment, interest, and maturity sums being tax-free. If you plan to retire at 60 and can invest for five more years, you can enjoy the power of long-term compounding at 65. 

• Term deposits/National Saving Certificates (NSCs)

Considering PPF’s long tenure, a 50-year-old may find fixed deposits, term deposits, or instruments like NSC more suitable. FD and RD tenures can be chosen as per convenience, while NSC has a tenure of five years.

• Sovereign gold bonds

If you want to invest in gold and also prefer an assured income, SGBs are ideal for you. You earn 2.5% interest on investment and an appreciation in gold price. 

• Investment-linked insurance and annuity plans

Investment-linked insurance plans offer tax benefits and financial protection, along with market-linked returns. Annuity plans, on the other hand, pay you an immediate or regular annuity amount which can be invested to open up an alternative post-retirement income.

Also read - Online tax payments with Credit Cards - how do they work?

Taking stock
 

Starting retirement planning in the 50s means that you must have a disciplined and aggressive approach towards savings and investments. You must also have a clear sight of the retirement corpus goal.

A trusted and reliable banking partner like IDFC FIRST Bank can help you select from a plethora of investment options across mutual funds, equities, SGBs, and various investment products. Besides, your IDFC FIRST Bank Savings Account balance generates an attractive interest income too (up to 7% p.a.).

Choose IDFC FIRST Bank and kickstart the solid retirement planning that you always wished for.



 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.