Retirement is a goal which cannot be funded with loans. Earlier you start better off you are, as you can devise a strategy which works in the long run. Also the strategy can be re-balanced if need be.
How much do I need to save for retirement? Where should I invest my money? How can I start so early? These are the common questions in the mind of an investor regarding retirement. Retirement is the goal for which every individual has to plan, whether in job or having a business. Earlier people used to spend 25-30 years in retirement phase, however, now due to early retirement, better life expectancy and inflation; people are thinking and planning more seriously than any other goal.
Importance of retirement planning in India.
In the past few decades the culture of our country has changed at a very fast pace. Previously people use to live in a joint family due to which the importance of retirement planning was not felt. These days’ most of the people are moving towards metro and other big cities in search of better life and job due to which nuclear family culture is making its way. Also the constant increase in the inflation across every sector is making it difficult for these families to survive. According to a survey, currently 65% of Indian population is below 35 and in the next 20-25 years, this young population would be near to the retirement. These are the few reasons due to which retirement planning is more required than any other goal.
So how one should start saving for retirement, how much money is required and what are the options available. Let’s find out answers to these questions and make retirement planning easy for younger generation.
How much money is required?
Few years back experts used to advice on how to accumulate Rs. 1 cr. for retirement. The amount of Rs. 1 cr. 15 years back has become Rs. 3-4 crore today due to constant increase in inflation. This ideal corpus amount is not the same for everyone as the inputs required to calculate the corpus such as current age, expenses, rate of return, retirement age varies.
Thumb rule says by the time one retire around 58-60 years of age, retirement corpus should have 100 time of last drawn monthly salary.However, one should always do the proper calculation before starting. Let’s understand the calculation with the help of below example:-
Suppose Nachiket wants to retire by the age of 55 years. Currently he is 30 years old with a monthly expense of Rs. 50,000. Considering average inflation to be around 7%, at the age of 55 his monthly expense would be around Rs. 2.70 Lakh. Now, if we take life expectancy around 80 years, then he would require this amount every month for next 25 years.
Considering Real rate of return of 2% during retirement, he would require Rs. 6.3 Cr. for his retirement.
(This calculation can be done simply by using PV formula in MS Excel. One can also use online calculators to find out the corpus value. Please remember while calculating always use real rate of return and not nominal rate. This can make a huge difference to your retirement corpus.)
How one should start saving for retirement?
In India people start thinking about retirement once other goals are completed. This is wrong approach. People should understand that goals such as children education and purchase of house can be taken care even with the help of loans but no one in this world would lend you money to survive during retirement. So as soon as one starts earning, he should start saving for retirement. The biggest advantage of starting early is that one will have to save fewer amounts and will also get compounding benefit for at least 20-30 years. In the above used example, if Nachiket starts today he would have to save at least Rs. 23,000 per month, the amount will increase to Rs. 48,000 per month if he starts after 5 years. So the sooner you start, the lesser you have to save. Another advantage is that one can revise the strategy many times and can adjust the investment accordingly.
What are the investment options available for retirement planning?
For employee class in India, there are defined contribution plans available such as Employee's Provident Fund (EPF) where the amount towards this contribution is deducted from the salary and employer also contributes towards this fund. Also an option of Voluntary PF is available for employees where they can contribute but employer will not. Similarly, Public Provident Fund (PPF) is another option available for every individual. The government pays fixed interest on the amount invested every year in PPF.
National Pension Scheme (NPS) is also one of the products which can be used for retirement planning. Anyone can start his NPS account and start saving however, this is mandatory for all government employees and optional for private sector employees.
One can use direct equity as a long term saving option. Now this is advised only to those who can manage their own equity investment. If not then as an alternate there are many good equity mutual fund schemes which invest in equity market and can be a great option for retirement. Also these days few mutual funds companies have launched schemes which are dedicated towards retirement planning.
Pension plans from insurance companies are also available as saving option. This is one of the most popular products in our country, however, not many experts will advise to invest in this product as it is incapable of beating inflation in long term, which means the returns generated are less than the average inflation in our country.
To conclude, one should always start investing early towards retirement goal with a proper strategy to follow. One can select a product according to his risk profile, which beats inflation in long term, maintains liquidity and also gives tax free returns.However, over exposure towards one asset class can some time create imbalance in the portfolio, so to avoid such situation, one should always revisit the investment strategy and rebalance the portfolio from time to time.
The author is Certified Financial Planner (CFP). He is associated with Getting You Rich, a Mumbai based financial planning firm.