Retirement – A Goal That Gets Neglected Amongst Life’s Plans
Regular investments in a mutual fund systematic investment plan (SIP) could help you build a substantial corpus for retirement and even generate cash flows after that
We often hear about how the youth population as a share of the total population is a major strength of the Indian economy. This cannot be disputed. However, I would like to draw your attention to how the situation is likely to change over time. By the mid-2050s, the scales are likely to be tilted, and a larger number of our compatriots are likely to be ‘senior’ than the younger ones. With the Indian economy going from strength to strength, it is the right time for us to collectively and individually, think about planning for retirement and things around it.
For now, let us focus on how planning for retirement can be handled at an individual level.
Picture this. You are a 30-year-old individual planning to retire at age 60. At present, you have Rs 50,000 monthly expenses, and you have already saved Rs 5 lakh so far. Now, let us assume that inflation will average around 7% in the future.
In the past 20 years, the Nifty 50 Index has given an annualized return of over 17%. However, another fundamental reality is that past performance cannot be a guarantee for future returns. Hence, for calculations for a critical financial goal like retirement, we have assumed a conservative return of 9% for the returns over the next 30 years. We have also assumed a life expectancy of 80 years.
The investments you make before retirement will also give returns on your retirement. Typically, investments are moved from a higher risk-bearing asset class to a lower-risk asset class closer to the financial goal. Accordingly, let us assume a lower return of 6% on your investments post-retirement.
The results could be startling. The Rs 50,000 monthly expenses at present would go up to Rs 3.8 lakh per month. At that rate, the total amount needed for retirement would be close to Rs 10 crore.
The next logical argument is that needs would be reduced by that time, and even major responsibilities would be taken care of by then. But the flip side is that healthcare expenses in old age could be higher.
To be able to achieve that level of cash flow through investments post-retirement, you would need to invest slightly more than Rs 50,000 a month for the next 30 years. If this sounds like a lot, let me remind you that we have assumed a conservative return on investments. If the assumed return is changed from 9 per cent to 11 per cent, the monthly investment needed goes down to Rs 31,000.
The above calculations are only illustrative, and every individual has a different situation. Hence, you should consult your financial advisor and plan your financial goals and your risk tolerance. There are multiple avenues at your disposal, and information regarding all such options is easily available. Mutual funds are one of them.
Mutual funds operate under Securities and Exchange Board of India (SEBI) regulations and also provide much operational information that lets you understand details about your investment regularly. Moreover, the fund management expertise of mutual funds saves you the hassle of frequently checking on your investments.
A feature that is the most useful feature for mutual fund investments is the SIP or Systematic Investment Plan. Once you start a SIP, you have automated your investing habit. The amount you have chosen to invest gets auto-debited from your bank account and invested in the mutual fund scheme of your choice. From there, the investments keep earning market-linked returns till the time you decide to redeem your accumulated corpus. In fact, to be certain about your investments getting earmarked for retirement in particular, you can also opt for an SIP in retirement-oriented mutual fund schemes so a mental accounting is done that this corpus is for retirement, unlike other equity-oriented schemes you might be tempted to dip into in case of an unforeseen circumstance or for discretionary use.
Now, even the Rs 31,000 monthly investment amount mentioned could be on the higher side for many individuals. Let me remind you here that you need not start and maintain a Rs. 31,000 SIP for the next 30 years. You can start investing through a SIP now and then increase it or top-up your SIP every year with an increase in income/salary.
Even though the goal of having a comfortable retirement could appear to be monumental at present, it can be achieved with patience and discipline. The investment avenues available today can certainly make this possible. Retirement might seem decades away, but when we are busy living life, those years can quickly pass. The most crucial part hence will be taking the first step today, keep investing and increasing the amount you invest regularly.
The author is the Deputy MD & CBO of SBI Mutual Fund.
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