Retirement planning basics: a practical starter guide
Start here if you're new to retirement planning. Learn the key numbers, order of operations, and how to build a robust plan.
Step 1: Know your spending
You can’t plan without knowing how much you’ll actually need. Track real spending for 3–6 months across all categories.
| Must-haves | Nice-to-haves |
|---|---|
| Housing (rent/EMI, tax, maintenance), food, utilities, transport, healthcare, insurance, basic clothing | Travel, hobbies, dining out, gifts, upgrades |
Rule of thumb: Plan for your “must spend” to be covered with high confidence. Your “want to spend” can be more flexible in down years.
Step 2: Estimate your retirement number
A simple starting point: Annual spending × 25 (4% rule). For more conservatism, use 28–30× (3.33–3.57%).
Example: ₹12 lakh/year spending → ₹3 crore (25×) to ₹3.6 crore (30×).
Adjust down if you have reliable guaranteed income (pension, state pension, annuity). Don’t count uncertain rental income.
Use our retirement planning calculator to model this.
Step 3: Build your safety net
Before maximising long-term investments:
- Emergency fund: 6–12 months of essential spending, in liquid cash.
- Insurance: Adequate health insurance (critical). Term insurance if others depend on you.
- High-interest debt: Pay off credit cards and high-interest loans first — guaranteed “return”.
- Short-term goals: Don’t invest money you’ll need in <2–3 years in volatile assets.
Step 4: Invest for growth
For money you won’t need for 5–10+ years:
- Keep costs low: Prefer low-cost index funds over actively managed funds. Fees compound against you.
- Diversify globally: Don’t put everything in one country or one sector.
- Stay consistent: Automate investments (SIPs). Time in the market beats timing the market.
- Match horizon to assets: Near-term (1–5 years) = safer (cash/debt). Long-term (10+ years) = growth assets (equities) usually make sense.
- Rebalance occasionally: Once a year is fine.
Step 5: Protect against key risks
| Risk | Protection |
|---|---|
| Inflation | Plan in real terms; keep equity exposure for long-term growth (How inflation changes your plan). |
| Sequence of returns | 1–2 year cash buffer at retirement start; spend flexibly in down years (Sequence of returns, Bucket strategy). |
| Healthcare costs | Budget extra for medical; maintain adequate health cover. |
| Longevity | Plan to age 90–95, use conservative SWR, or build flexibility. |
| Behavioural (panic-selling) | Write down rules (“if down 20%, I don’t sell growth to fund luxuries”). Automate. |
| Taxes | Be tax-efficient across account types where sensible. |
Step 6: Stress-test your plan
Don’t stop at a single projection. Test for resilience:
- Monte Carlo: See probability of success across thousands of paths. Aim for 80–95% under conservative assumptions (Monte Carlo simulator).
- Bad-early sequence: Check how a poor first 5 years affects you (Sequence of returns calculator).
- Inflation shock: Try +1–2% inflation.
- Spending shock: Add unexpected large expenses.
- Flexibility test: Can you cut discretionary by 10–20% for 2–3 years? If yes, your plan is more robust.
Order of operations (simple)
- Track spending (3–6 months) → know your number
- Emergency fund (6–12 months) + cover insurance
- Kill high-interest debt
- Capture any employer match (free money) if available
- Invest consistently in a diversified, low-cost portfolio
- Avoid lifestyle creep — invest raises
- Review annually — adjust for life changes
Common mistakes to avoid
- Using gross income. Plan on spending, not earning.
- Ignoring inflation. Always think in real (today’s money) terms.
- Chasing returns. Consistency > perfection.
- Over-optimistic returns. Use 4–5% real after fees for balanced portfolios.
- Planning to too short an age. Living to 95 is a realistic possibility.
- All-or-nothing. Starting small beats waiting for “perfect”.
- Too much cash long-term. Inflation erodes it.
- Not testing downside. The best-looking projection rarely shows the worst case.
Bottom line
Retirement planning doesn’t need to be complicated. Spend less than you earn, invest the difference consistently in a low-cost diversified portfolio, protect against downside with buffers and flexibility, and review once a year. That’s 80% of what matters. Everything else is optimisation.