Retirement planning is one of the most ignored topics among the working population because most people feel that retirement is far away and nearer term priorities seem important. Once they get near the retirement date, many people realize that they have not saved enough for their retirement and fear losing their financial independence. Retirement is the culmination of the decades of hard work you put in your career. This should be the golden period of your life and you should be free from financial worries.
Inflation: Inflation reduces the purchasing power of money over time. If inflation is 5%, then Rs 100 can buy only Rs 95 worth of goods after 1 year. After 10 years, it can buy only Rs 60 worth of goods and after 20 years, only Rs 37 worth of goods. Your needs will remain the same but your money will be worth less and less. In order to fight inflation, it is very important that your money also grows over time. You need to plan for inflation.
Rising medical costs: With advancing age, health related problems are a concern for senior citizens. However, cost of quality private sector healthcare is increasing at a very fast rate in India. Some studies show that inflation in the cost of medical expenses is around 15% per annum. A serious illness can eat a big part of your retirement savings and put you under considerable stress.
Falling interest rates: Senior citizens traditionally rely on bank fixed deposit and government small savings schemes for their regular cash-flows. Over the last 20 years, interest rates of government small savings schemes have come down significantly. As our economy (GDP) grows, money supply will also grow and interest rates will come down even further. You need to save more and create a larger corpus in order to generate sufficient income to meet your post retirement expenses.
No pension: India is largely an un-pensioned society. Private sector employees in India, unlike western nations like United States or United Kingdom, do have not have safety net in the form of a national pension programme. They need to create their own post retirement income stream by saving and investing systematically during their working lives. As such, retirement planning should be one of your most important financial goals during your working lives.
We have many responsibilities in our working lives like taking care of children’s education, caring for aged parents, paying home loan EMIs etc. Many people erroneously assume that most expenses will go away when they retire but they are mistaken. Financial planners suggest that 70 – 80% of expenses remain even after retirement. Suppose your monthly expenses are Rs 1 lakh and you are 10 years away from retirement. Ten years later, your expenses will be Rs 1.6 lakhs assuming 5% inflation rate. If your post retirement expense is 70% of your pre-retirement expenses, then your monthly expense post retirement will be Rs 1.1 lakhs.
You will need a corpus if Rs 1.7 Crores to generate a monthly income of Rs 1.1 lakhs if you get 8% return on investment. We ignored inflation and taxes when estimating the corpus. If we assume that your retired life is 25 to 30 years long and inflation is 5%, you will need a retirement corpus of Rs 2.5 – 2.7 Crores to maintain financial independence throughout your retirement. In addition, you should also have some emergency funds set aside for medical or other exigencies. If you want to leave behind an estate (inheritance) for your loved ones, then you need to have an even larger corpus.
Let us assume you need Rs 2.7 Crores for retirement and you have 10 years left for your retirement goal. Assuming you get 8% return on your savings, you need to save nearly Rs 1.5 lakhs per month just to meet your retirement goal. For many investors, it may seem a daunting task because you may have other financial obligations like home loan EMIs, children’s education, saving for children’s marriage etc. While the task is daunting, it is quite achievable if you have a good financial plan in place and start saving for retirement early in your careers. Mutual funds may help you meet your retirement planning goals, while fulfilling your other aspirations at the same time.
Return on investment is one of the most important attributes of wealth creation. Mutual funds help you get exposure to different asset classes and sub-classes, which may enable you to get superior returns. Historical data shows that equity has been 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 capitalization in India, gave 10.3% CAGR returns (Source: NSE India). If you were saving for retirement by investing in Nifty 50 TRI through monthly Systematic Investment Plan (SIP) for the last 10 years, then you could have accumulated a corpus of Rs 2.7 Crores with a monthly investment of Rs 1.2 lakhs. If you started 5 years earlier, then you could have accomplished the task of accumulating Rs 2.7 Crores by investing just Rs 55,000 per month through SIP.
Mutual fund systematic investment plan (SIP) is one of the best ways to invest for retirement planning. Through SIP, you can invest in a mutual fund scheme of your choice, based on your investment needs and risk appetite, from your regular monthly savings through auto-debit from your savings bank account. SIP can be a disciplined way of investing because it will make you control your spending habits and invest regularly. SIPs in equity mutual fund schemes also average the cost of your purchase (Rupee Cost Averaging) by taking advantage of stock market volatility.
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 may create through the the power of compounding. The chart below shows monthly investments required through SIP to create a corpus of Rs 3 Crores over different investment tenures assuming 12% annualized return on investment. You can see that over longer tenures the power of compounding is enormous.
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