Sound financial planning is all about taking care of your present financial needs and at the same time, keeping an eye on your future. One of the most common and the biggest financial mistake we make is not saving for each of our future needs. And one of the biggest amongst these goals is having a corpus in place that will ensure our after-retirement life is stress and worry free. While most of us realize the need to invest to fulfill goals like buying a home, funding children’s higher education and marriage with time, what is often ignored is financial planning for our retired life. We often see senior citizens forced to work after 60-65 years of age, just to keep the household running. While working till you can is great to keep one active, it should not be a compulsion due to financial reasons.
Here are 4 simple tips that should help you create your retirement corpus and enjoy a happy retired life:
Calculate your retirement corpus: A main portion of your savings would be spent on future monthly expenses and one of the easiest ways to determine this is to factor in inflation on top of your current monthly expenses. Suppose, at present, your monthly expenses is Rs. 50,000 every month and let’s assume that the rate of inflation increase at the average rate of 6% annually. This means, 20 years down the line, you will need approximately Rs. 1.6 lakhs per month to meet the same monthly expenses. Additionally, consider the fact that you will need the same income level during your golden years to maintain your current lifestyle. So at the very least you need to plan investments that will create Rs 3.8 crore (1.6 lakhs X 12 months X 20 years). In addition, you should consider having an additional amount in lieu of emergency expenses
Consider equity to build your retirement corpus: As interest rates for old school investment options such as PPF and fixed deposits keep falling, your investments in these schemes might end up giving you very low or even negative returns after adjusting from inflation. In such a situation, market-linked investments such as equity mutual funds have emerged as a popular alternative that can potentially provide higher returns on your investment. Equity mutual funds have outperformed other asset classes over the long term, and is ideal for retirement planning. If you are new to this investment product, it might be a good idea to engage the services of a financial advisor during the initial days. However, it will definitely be a good idea to educate yourself and plan your investments yourself after you have gained some experience. As you take control of your investments, over the long term, you would be better placed to alter your portfolio allocation to reflect your specific requirements which may change as you grow older.
Start investing today: One of the most commonly repeated phrases in financial planning is “the power of compounding” and the simplest way to unleash this power is to give it time to grow your wealth. Thus, the best time to start investing is today. With each day that goes by you are missing out on the opportunity to make most of the power of compounding. Remember, the corpus for your retirement should be big enough to take care of your regular household expenses along with the medical expenses that usually come with old age. So, if you are planning to retire at the age of 60, and expecting a life expectancy of 80, your corpus should be able to cover your expenses for at least these 20 years. Creating such a large corpus in the later part of your working life can be a daunting task and may not only adversely affect your other investment goals and overall lifestyle, but may also impact the needs of your family. For example, assume that you start investing Rs 10,000 every month in an SIP at the age of 23 years. Assuming that your mutual fund delivers 12% compounded growth per annum, your retirement corpus will be more than Rs 2.38 crores when you reach 60 years. However, if you start investing for your retirement from the age of 35 years, you will need to invest Rs 47,640 each month in that SIP to accumulate the same amount.
Be disciplined financially: Perhaps the most important aspect is to stay disciplined with your investment for a long term to build an adequate retirement corpus. Remember, the corpus is for you to use for at least 25-30 years after retirement, and hence requires discipline for a similar time frame, if not longer, when you are young and working. Fortunately, there is an easy way to achieve this – start an SIP. In case of an SIP, a specific amount gets deducted automatically from your bank account without any additional intervention on your part (once you have set up the SIP). Apart from ensuring that you save on a regular basis, the SIP style of investing also provides you with the unique benefit of rupee cost averaging, while simultaneously leveraging the power of compounding.
By -- Naveen Kukreja CEO & Co-founder, Paisabazaar.com
