You can build your own retirement savings portfolio by investing in equity, hybrid and/or debt funds.
Alternatively, you can also invest in retirement funds which provide asset allocation solutions for different investment needs and risk appetites, explains Dwaipayan Bose
Why is retirement planning important?
After retirement the main source of income for most people is from their investments.
In India, a relatively small percentage of retired people have other sources of income, example: Pension, rental income etc. You need to have sufficient savings and investments, which generates enough income to meet your regular expenses after retirement.
Financial independence is the most important objective of your retirement planning. Financial independence implies that your income from your investments is sufficient to meet all your financial needs.
If you lose financial independence you will have to be financially dependent on your children or other relatives.
With increasing longevity thanks to better medical care, retired lives are getting longer. Your retirement corpus should be large enough to last for the entirety of your and your spouse’s lives. Longer retired life also means higher expenses due to inflation.
Let us assume that you are 30 years old and your monthly expense is Rs 30,000. Let us further assume that you will retire at the age of 60.
Assuming an inflation rate of 4 per cent, your monthly expense at the age of 60 will be Rs 97,320. Even after you retire, your expenses will continue to grow due to inflation.
In this example your monthly expenses will Rs 2.13 lakh by the age of 80.
Working lives are getting shorter as students are pursuing higher education, professional courses before joining the work-force. In the previous generation, people started working at the age of 20-21; now people are continuing their education till the age of 24-25.
Also many people are being forced into retirement early, due to ill-health, challenges with career mobility at a certain age, workplace redundancies due to change in technology, etc.
Shorter working lives and long life expectancy has made retirement planning even more important for you today than it was for the previous generations.
How should you plan for retirement?
Calculate how much corpus you need at retirement: You should calculate how much corpus you need at the time of retirement, factoring in inflation.
Income from your corpus should be sufficient to last 20-30 years of retired life.
Calculate how much you have to save: Next, you need to calculate, how much you need to save on a monthly basis to reach your retirement goal.
Let us assume your retirement savings target at the age of 60 is Rs 2 crore. Let us see how much you need to save and invest on a monthly basis, to meet your retirement goal if you begin retirement planning at different ages.
We have assumed a return on investment of 10 per cent in this example.
Start as early as possible
Time is the most important factor in investment returns.
The chart above shows that you can reach your retirement goal with much smaller monthly savings if you begin early.
The longer you remain invested, the bigger will be your returns due to the power of compounding.
You can reach your retirement goal comfortably, with relatively less savings, if you start investing early.
Saving is not enough; you have to invest.
You need to invest your savings to get returns that help you reach your retirement goal. Different asset classes have different risk/return profiles. You need to invest in the right asset class depending on your investment needs and risk appetite.
You should consult a financial advisor if you need help in understanding your risk appetite. Mutual funds can provide solutions for a wide variety of investment needs (capital appreciation, income), investment tenures and risk appetites (low, moderate, high).
Mutual fund in retirement planning
Mutual funds help you get exposure to different asset classes and sub-classes, which can help meet your financial goals in different stages of life.
Wealth creation is very important for retirement planning because your retirement corpus should last for 20-30 years and should be able to beat inflation.
Historical data shows that equity is the best performing asset class in the long term and has the potential to create wealth for investors over a long investment horizon.
In the last 10 years, Nifty 50 TRI — the total returns index of 50 largest stocks by market capitalisation in India — gave a compounded annual growth rate (CAGR) return of 16.5 per cent.
Systematic Investment Plan (SIP) for retirement planning
Mutual fund systematic investment plan (SIP) is one of the best ways to save and invest for retirement planning.
You can start your SIPs with very small monthly (or any other intervals) investments, as low as Rs 1,000.
The longer your SIP tenure, the more wealth you can create through the power of compounding.
The chart below shows growth of Rs 20,000 monthly SIP in Nifty 50 TRI over the last 20 years. You can see that with a cumulative investment of just Rs 48 lakh, you could have accumulated a corpus of Rs 2.2 crore over the past 20 years.
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