No matter how lively and passionate you feel at heart, a day will come when you feel the need to sit back and spend the next 25 or more years of your life to relive the moments in the past which you couldn’t at that time because of your work. The fact of life is: one can’t work forever.
At Fintock, we believe that retirement planning is an important block in an individual’s wall of financial planning. It is essential to have a certain amount with you to look after yourself and your dependents once you retire. Sustaining without investments, in your retirement can become burdensome for an individual once the cycle of his/her regular income stops.
Why is it important to plan for your retirement?
The most prominent factor to be kept in mind while planning your retirement fund is to invest in the right schemes. Just saving your money and depositing it in a bank savings account wouldn’t be advantageous, because the rate of inflation per year will bring its value down by the time you would actually start using it. Inflation is simply rise in the prices of goods and services. In a country like India, Inflation grows by 6% each year. A ₹ 2000 this year will have the value of ₹ 1880 in the next year. This means all your expenses are going to cost you fairly more in the future. So, it is important to invest in the right schemes so that you are able to accumulate a considerable amount to fall back on.
How and when to start?
The answer is simple enough: the sooner the better. The ideal time to start thinking for your retirement is in your late 20’s, when you are about to start your family. The perks of starting to plan your retirement fund at an early age is that your savings will have more time to grow, and the additional savings made year on year will have their own gains in the next year. To start with, try to save 10-15% of your annual income and plot them in the right scheme. Make sure that you make a savings target and try to stick to it. Also, remember to update your calculations time to time to see if you’re on track or not.
How much Money will I need in Retirement?
The first thing that triggers your mind when you think about your retirement fund. A simple rule of thumb is that a person would require 70-80% of his annual income post retirement to live comfortably. If a person is making ₹ 15 lacs per annum before retirement then he would probably require about ₹ 11 lacs once he retires. But that might be less for people who are willing to fulfil their ambitions once they retire.
Some people nearing their retirement are of the view that after years of working hard, they want to uplift their lifestyle, then it is always wise to add around 5x of their expenses right now to be able to live what they desire.
So, the advice here is to be honest with yourself while planning your retirement and estimating that how much it would cost you. The best way is to look into the current expenses that you incur and think that how are they likely to change considering your retirement plans. For e.g. One would experience increased medical costs while the expenses on daily commuting are likely to decrease. Once you have determined your retirement corpus, just get set save & invest.
Various alternatives to choose from
1. Public Provident Fund:
Public Provident Fund (PPF) is an investment scheme which is introduced by the government to help people save for their future. Under this scheme an individual can deposit up to 1.5 lacs per annum. The scheme comes with a lock-in period of 15 years, which can be further extended for as many blocs of 5 years each. The interest rate for the scheme stands at 7%-8% compounded annually. An individual is also bound to get a tax benefit of ₹ 40,000 (approx.) in a financial year.
Mutual Funds are one of the finest options when you are looking to plan your retirement fund. The range of return for Mutual Funds starts from 8% to a whopping 15% compounded annually. The longer you hold your amount of investment in the fund the more likely you are to perceive the magic of compounding. Out of the bunch of advantages that Mutual Funds have to offer, one of them is that you are at a lower risk of being wiped out by a bad bet as, you are pooling in your investment amount with thousands of other investors which makes the amount split across a variety of investments. Another point to be kept in mind while investing in Mutual Funds is performing a comprehensive research on the fund manager who runs the fund, because it is his competence on which you are putting your money.
When it comes to investing in the equity market, there is a misconception in people that stocks, due to their unforeseeable character, are only for the daring risk takers.
A thing here to understand is that investment in equities over the years has validated to create an equilibrium between the level of risk you are taking and the potential of returns that stocks offer.
Equity market is indispensable for every investor, young or old, depending on the risk factors that one is ready to carry. Let’s assume, two persons decide to invest in the equity market, “A” aged 30 and “B” aged 58 and the retirement age is 60. So, “A” can put his investment in new and emerging businesses as he has plenty of time to let his investments grow over the years. Whereas, “B” who is nearing his retirement should be more focused on investing in matured companies led by quality management, having a history of paying high dividends, as dividends can be a good source of regular income post retirement.
4. Index Funds:
To understand how investing in index funds work, lets get some knowledge on what are index funds. An index can be defined as a method to track the performance of a group of assets (securities) in a standardised manner. An Index Fund is a type of mutual fund that reflects the performance of the market as a whole.
“Low-cost index funds are the smartest investment that most people can make” ~Warren Buffett.
One can expect to earn around a 7% annual return over time if you invest in index funds. One such common index fund is the Standard & Poor’s 500 (S&P 500) index that tracks the largest and the most powerful companies of the United States. The selection of companies for an index fund is based on a host of factors, including market cap, liquidity, and sector allocation.
With an organised plan, one is capable enough to handle various obstructions like shortfalls or emergencies coming your way. Also, a significant amount is spent on catering to your present lifestyle, leaving very less for your retirement. Understand the importance of starting to think early about your post retirement life so that you are able to maintain a good lifestyle even after you stop working. Making smart choices for the allocation of your amount plays an important role, because there are many ways of doing a same thing.
For e.g. 2+2=4 and so does 1+3. So, make sure to choose wisely.