For most of us, retirement is a goal which takes the last priority. There are always some other near-term goals that take priority over this goal. In the first two decades of earning, most of our savings are channeled towards achieving nearer-term goals like buying a house, providing for children education, marriage, buying a car, annual vacation, and so on. Most often, it is only in our 40's that we realize the need to start planning for retirement. At that time we wonder, "How much will I need during retirement?", "Have I saved enough?", "Will I have to compromise on our lifestyle?", "Do I need to postpone my retirement, or can I retire as desired?" Of course, all of us want to maintain a good lifestyle even after retirement but the question is, have we planned for it? And if not, how do we do it?
Most of us postpone saving and investing for retirement, assuming we will have enough time to accumulate the retirement corpus in the coming years. However, this is one of the biggest money mistakes we commit. While we continue working for 30-40 years, we do not give our investments enough time to work on our goals. 'Time Creates Money' i.e. compounding over the years will work wonders on your investments. The earlier you start investing, the greater effect compounding will have on your investments.
For instance, consider a scenario where you need to accumulate a retirement corpus of Rs 7 crore by the age of 60. If you start saving from the age of 40, you will need to invest Rs 70,000 per month in an investment that yields 12% p.a. to accumulate the corpus. On the other hand, if you had started saving from the age of 30, you need an investment of only Rs 20,000 per month to accumulate the same corpus at age 60. This is the power of compounding.
So how do you plan for this goal?
The main reason, retirement goal is rarely a priority, is due to the absence of planning and having a proper retirement strategy.
In the planning process, the first step is to ask yourself is, at what age you would like to retire or slow down. This can be a dream goal, from a perspective that you do not need to work to provide for the family, after this age. You should be in a position where you can pursue an alternate dream career or spend your time doing what you love.
The second step is to figure out the lifestyle you desire post-retirement, which refers to how much retirement income you would desire if you were to retire today. You can get an approximate number by considering your current expenses, and exclude expenses that will not there post-retirement, like children's expenses, EMIs etc. Your goal should be crystal clear i.e. state clearly, "I want to retire on January 1, 2030, and want to have a monthly income of Rs. 2 lakh (as of today)".
There are various factors like inflation that are critical to the planning process, which a layperson lands up ignoring while estimating future expenses. Expenses of Rs. 2 lakh per month in today's cost is equivalent to a whopping Rs. 6.41 lakh per month, post 20 years considering 6% p.a. inflation. Hence, it is of prime importance that you invest in tax-efficient investments, that can yield a high real rate of return after considering inflation the economy.
Based on your age, risk profile, liquidity needs, existing assets etc. your advisor will recommend you the right investment options, that will help you achieve your retirement goal.
Along with traditional avenues like PPF, EPF etc. mutual funds are a very good investment option to accumulate wealth towards your goals. Post-retirement, you can start Systematic Withdrawals from existing mutual fund investments. This is one of the most tax-efficient ways to provide for regular income.
Hence, it is important to get started with saving and investing for your retirement goal right away to ensure that you are on the right track towards your financial freedom.
As Mark Twain rightly said, "The secret of getting ahead is getting started."
(By Amar Pandit, CFA, and Founder, Happyness Factory)