How to start retirement planning at 40

According to statistics released by the Union Ministry of Health and Family Welfare, life expectancy in India has gone up by five years, from 62.3 years for males and 63.9 years for females in 2001-2005, to 67.3 years and 69.6 years, respectively for men and women, in 2011-2015. While it means that people will start enjoying longer lives, it also implies that there will be a significant increase in the number of post-retirement years that a person lives. In order to ensure one does not run out of cash in his or her "golden" years, financial planning for one's retirement needs to start early.

Most often, the very first question asked by individuals on retirement planning is: "When should I start saving for retirement?" The answer is simple: As soon as you can. Ideally, the sooner you begin saving for your post-retirement life, the more time your money will get to grow. However, most individuals, especially the salaried class, realise the importance of saving for retirement only when they approach their late 40s - at a juncture when they might not have enough time left for their money to grow.

Therefore, if you have just turned 40 and do not yet have a set plan for your retirement needs in place, it is absolutely imperative for you to start saving for your golden years and plan your finances, going forward. But inculcating a saving habit at that age is easier said than done. With a host of expenses such as mortgage payments and the children's ever-increasing tuition fees, it gets more and more tough to save. But it's certainly not impossible. Proper planning and commitment to the saving habit can still make a huge difference. Let us see how you can achieve your desired nest egg starting at the age of 40.

Financial planning for retirement will not be complete unless the following factors are considered:

>> TIME HORIZON AVAILABLE FOR INVESTING: The most basic parameter to consider will be the number of years available to the individual till he or she stops having a regular income;

>> REQUIRED INCOME: The individual needs to determine the amount of money he would require to ensure that he does not have to compromise on the quality of life that he or she wishes to have after retirement. In order to do this over a longer time period, one has to factor in rising inflation to have an accurate estimate of required earnings;

>> THE EXPECTED RATE OF RETURN: The expected rate of return from one's investments is also a pivotal parameter in planning for one's retirement income. An unrealistic rate can mean that one's savings will get depleted much earlier than it was planned. The allocation of fund should also be kept in mind while assuming an investment return rate;

>> APPETITE FOR RISK: While planning one's retirement, people normally play it safe with a higher share of investments in government securities which offer low risk and low returns. But depending on one's appetite for risk, one can allocate his or her fund. Diversification, as a recent study suggests, accounts for nearly 90 per cent of the performance of a portfolio; and

>> LEGACY PLANNING: Finally, one should pass on one's legacy to one's heirs. One should have an estate plan in place to ensure his legacy is passed on according to his wishes.

It is of little surprise that insurance as an investment option takes care of most of these factors, if not all. In addition to the investment needs, insurance plans also take care of one's need for life cover. To start off, one has to decide the amount of money required for life after retirement and plan his maturity, or vesting, benefit accordingly. Depending on one's risk appetite, an individual can opt for a unit-linked insurance plan (ULIP) or traditional insurance plans, which invest mostly in debt instruments. To add to that, insurance companies also offer annuity products that offer guaranteed income for a lifetime.

Keeping these points in mind, the most important step for a 40-year-old man or woman, today, is to start investing as soon as possible. Postponing your retirement plans by small periods of time can have seriously detrimental effects on the amount of money you manage to save.

Let us consider the case of Mr Sanyal, 40, who has invested in, say, HDFC Life Personal Pension Plus Plan, a traditional participating plan. For Sanyal, deferring his planning by just five years has cost him around Rs 15 lakh on his vesting benefit, a 40 per cent decrease in the lifetime annuity he would have received when he retires.

Clearly, postponing the start of retirement planning is a bad idea. If you are in your 40s with no defined retirement plan, it's time to sit down and chalk out the road ahead to ensure a stress-free retirement and a prosperous time in your golden years.

(The author is Managing Director & CEO, HDFC Life)