Retirement saving is a crucial concept of financial planning, especially if you are in your 40s. The typical retirement age in India is 60 years, which leaves an individual in his 40s with approximately 15-20 years to plan and save a sizable corpus for his second innings. It is important to strategically plan your retirement and live a financially secure life, after retirement.
Why 40s is a good time to start
In your 40s, you are likely to have a higher income, compared to when you were in your 20s or 30s, and more disposable cash to invest. Also, you still have 15-20 years to save. While you need to set aside a large investment fund every month in your 40s, vis-a-vis in your 30s, you still have adequate time to accumulate a sizable corpus.
However, when planning for retirement, you need to consider several factors, including your current income and expenses, savings and investments, the age at which you plan to retire, inflation rate, major financial goals and responsibilities, and, most importantly, healthcare costs.
Also see: Retirement planning: The magical 30x rule and how it helps you build a comfortable life
This makes it important to approach retirement planning with careful consideration.
Consider your financial goals and risk appetite
How much do you need to save for retirement? For example, assume that you are 41 years old and your current annual expenses are Rs 12 lakh. You expect to retire in 20 years and wish to have a corpus, which is 20x-25x your total annual expenses.
Assuming 6 percent inflation, your annual expenses at retirement would be Rs 12 lakh * (1.06)^20 = Rs 38.48 lakh. The target retirement corpus would be Rs 38.48 lakh * 25 = Rs 9.62 crore.
This gives you a concrete savings goal to work towards. Adjust the multiplier based on your expected retirement age and lifestyle.
Also, consider your risk appetite while investing. For instance, at 41 years of age, you can have the liberty of investing in a portfolio with an equity component, due to the years to maturity, given that you retire at 60 years. However, at age 55, the risk appetite is likely to be on the lower side and the portfolio would tilt more towards fixed-income instruments.
Draw a savings plan
The amount calculated for retirement corpus might sound as a steep target at the starting point. But as your income grows, expenses do not go up proportionately. Hence, your savings potential increases in your 40s. One can step up savings each year and build a good retirement corpus.
Balance between equity and debt investments
With 15-20 years until retirement, you have time to benefit from equity mutual fund investments built by the Systematic Investment Plan (SIP) route.
If you are a conservative investor, you can allocate a certain portion to hybrid mutual funds through SIPs. Hybrid funds give a diversified portfolio and maintain a balance between equity and debt investments.
Hybrid mutual funds also provide different degrees of risk. From aggressive hybrid funds, which invest 70-80 percent in the equity market to conservative hybrid funds that only invest 20- 25 percent in the equity market, the options are many.
Best retirement plans
For retirement, along with mutual funds and stocks, you can maximise savings with debt instruments such as:
Employees' Provident Fund (EPF): You can contribute a maximum of 12 percent of the basic salary. Voluntary provident fund route is also available, if you wish to put more. The employer’s contribution will, however, remain at 12 percent of your salary.
Public Provident Fund (PPF): It has an annual limit of Rs 1.5 lakh. It is a great way to build up your savings, at unarguably one of the best interest rates available for any debt instrument.
National Pension System (NPS): Based on your current income and expenditure, you can contribute a certain percentage of your income in NPS and also receive additional tax benefits.
While focusing on retirement, don't neglect short-term financial goals. Create separate investment buckets for goals, like children's higher education, marriage, or a home purchase/upgrade. Allocate investments to each goal based on the time horizon.
For nearer-term goals, a focus on debt instruments is more suitable. For long-term goals, equity instruments are attractive. You need to focus on efficient allocation here to keep a balance not only for different asset classes but also for different maturity goals.
Regularly review and rebalance your portfolio
Review your retirement plan annually and make adjustments based on factors such as changes in income, expenses, financial goals, and other external factors.
For instance, if your children are nearing college admissions, you should increase your allocation to debt funds for their education expenses in the short term. Your asset allocation, which, so far, may have been tilting heavily towards equity, might change then.
See here: Will the Systematic Withdrawal Plan give you fantastic returns?
Similarly, if you get a promotion at work, hopefully accompanied by a salary hike, you can increase your monthly investment contribution by a certain percentage or increase the percentage of step-up SIP to 15 percent from 10 percent for the retirement portfolio.
Conclusion
Starting retirement planning in your 40s is a necessity, more than a good-to-have strategy. Saving a sizable corpus for your retirement not only helps you build wealth but gives you financial freedom. As the saying by Tennessee Williams goes, "You can be young without money, but you can't be old without it."
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