Invest and save when you start working to achieve all the goals of your life and to move comfortably into a retired life, pursuing interests you never had the time for
Retirement can be a time for travel, golf, spending time with grandchildren or pursuing a hobby. It could also be a time when you anxiously count every penny you spend and worry about your future. What it is going to be like will depend on how well you have planned while you are still working.
“It is never too early or too late to start planning for retirement, “But, the earlier you start, the better. By saving a small amount today and investing it wisely, you can create a corpus that will take care of you in the years in which you are no longer earning. “Not so long ago, one used to think about retirement planning only for his or her post-retirement life, but, the recent layoffs of employees have made people realize the necessity of planning early for retirement.”
Building a corpus
Planning for your retirement is, at its best, an educated guess. The size of your retirement corpus will depend on several factors, including your health and where you want to live. Generally, the rule of thumb is that you will need 75% of what you spent before retirement to maintain the same lifestyle after retirement. But, to get a fair idea of the amount you will need, you have to answer certain questions
- When do you want to retire?
- Are you planning to retire early?
- What kind of lifespan do you expect?
- Are you planning an estate for your next generation?
If you are planning to retire early, you will have to save more money every month as your accumulation phase (The phase when you are working) will reduce and the distribution phase (when you retire and start withdrawing money) will increase. Then there is inflation which will eat into your capital if the portfolio is not well diversified into different asset classes like, Equity, debt, gold and real estate etc.
Where to invest
This depends on your age and risk-taking appetite. If you are in your 20s and 30s, equity is your best bet. “In the short run, returns from equity are highly volatile. But in the long run, they are mostly positive and likely to beat inflation,” Investing in mutual funds through systematic investment plans (SIPs), which involve setting aside a portion of your monthly disposable income for a particular investment option is recommended option. SIP helps to spread your risks as you buy regularly over a period of time, which averages out your cost of purchase.
For those in their 20s and 30s, with retirement still more than 30 years away, nearly 70% of the total portfolio should be invested in equity and about 30% in fixed-return instruments, such as public provident fund (PPF), employer’s provident fund (EPF) and national savings certificate (NSC), Bank FD etc There is a need to review and revise the portfolios regularly to see that asset allocation is not deviating from the desired level.
Madhu Sinha CFPCM , CIWM
Author (Financial Planning A Ready Reckoner and Retirement Planning A Guide for Financial Planners)
Campus Director, Former Director, FPSB India