No matter how much you earn or love your work, one day age will catch up with you and you will stop working. In an ideal scenario, you must start planning for your retirement from the time you start working. Unfortunately, real life would not always follow the perfect path towards the attainment of our goals. Therefore, many of us leave the matter of retirement planning for a later stage of our lives—sometimes, too late.
Following the retirement planning thumb rule can make a difference
Retirement planning is an essential, must-have life plan. Starting off early on this quest is one of the best things you could do for your own financial security. Even if you start off with a small monthly sum of money, a lengthy investing period allows for greater compounded growth and lessens the need to take on high risks, making it easy for you to achieve a steep-looking target in the long term. But starting off later to meet the same target would need you to take bigger risks.
As a rule of thumb, it’s a wise idea to set side 20% of one’s income towards a retirement fund in your 20s. You could gradually scale up the contributions to 30% in your 30s, and 40% in your 40s—or to the highest extent that your income and savings allow.
Now, the trouble with this thumb rule is that if you haven’t started off with retirement planning in your 20s and 30s, you will have to play catch-up in your 40s and 50s.
Illustration for starting out early
The earlier you start investing, the lower you will have to invest for building a higher retirement corpus. Let us assume a 25-year-old investor starts investing a sum of Rs. 5,000 per month towards his retirement corpus. Assuming he will retire at the age of 60, he would have invested a sum of Rs 21 lakh. Assuming an average return of 10%, at retirement the investor would have a financial corpus of Rs 1.9 crore.
Now if the same investor would have waited for another five years to start his retirement planning and started at 30 years of age, even a higher investment per month would not have generated such a high corpus. If he had invested Rs. 7,000 per month for the next 30 years till his retirement, his total corpus would reach only Rs 1.5 crore.
Not only did he make a total investment of Rs 25.2 lakhs, which was higher than Rs 21 Lakhs if he had started at 25, his final retirement corpus is short by Rs 32 lakhs.
Retirement planning in your 40s
Age is just a number but a change from late 30s to early 40s can bring with it a world of difference and responsibilities. Whether you’re salaried or self-employed, on average people peak in their careers and income-generating abilities in their 40s. Higher earnings also allows people to shift higher amounts towards investment and retirement planning.
Let us assume the case of two individual Mr. A and Mr. B, both 40 years old. Also let’s assume both will retire at 60 and have a life expectancy of 75 years and monthly expenses of Rs 50,000. For the 15 years of retirement, they will both need Rs 2.84 crore to maintain their current lifestyle, assuming an average inflation rate of 7%.
Now let us assume Mr. A has been investing Rs 5,000 per month from the time he was 30 years old. At a 10% annual rate of return, Mr. A already has a retirement corpus of Rs. 10.32 lakhs by the time he touches 40. Meanwhile, Mr. B’s retirement fund is zero at the moment.
With an expected inflation rate per annum of 7% and an expected average rate of return for investments at 10% per annum, Mr. B will need to make a monthly investment of Rs. 39,076 while Mr. A will need to invest a relatively lower Rs. 29,458 to accumulate a corpus of Rs. 2.84 crores at the time of retirement so that both can maintain the same standard of living post retirement as they are currently.
Tips for retirement planning in 40s
Starting closing your loans: Close any unwanted loans like personal loans or credit card debt to ensure you can maximize your investment towards retirement goals. Consider home loan prepayment keeping the EMI steady to ensure you bring down the tenure of your home loan and repay your home loan in your pre-retirement years.
Reevaluate your equity investments: Bring down equity investment and focus more on debt instruments as you touch 40. Bring your equity-to-debt ratio to 60:40 or better still aim at 50:50 by the time you reach your mid 40s for a stable portfolio. Reduce equity as you get closer to your retirement.
Ideally suited retirement tools: At 40, you should be investing in tools that offer more surety of returns and focus on assured returns rather than playing the high-risk-high-reward game. PPF, pension plans, ELSS, bank FDs, KVP, and mutual funds should all be a part of your investment portfolio towards ideal retirement planning.
The author is CEO, BankBazaar.com