Assuming that you’re in your 30s and 40s, at this age, you still have 20–30 years until retirement if you wish to quit the work force at the age of 60.
By Sachin Sikka
A recent study conducted by Aegon Center for Longevity and Retirement, called The New Social Contract: A Blueprint for Retirement in the 21st Century, found that by and large, Indians are cautious about saving for retirement, and also believe that future generations will be more ‘retirement ready’ given the slow and steady improvement of retirement schemes. While it stated that most Indians are habitual savers, it’s important to know that to build a strong retirement corpus that can handle any curveball, simply saving isn’t enough, especially when you consider rising inflation in the country.
Healthcare inflation, for instance, is steadily increasing, at double the rate of overall retail inflation. So, what you do with your savings and where you invest have a direct bearing on how ready you will be for retirement. This can seem out of your reach unless you take small, methodical steps. To understand how much you require to retire, the first step is to determine what your expenses will be once you retire.
Calculating what you need post-retirement
To do this, decide the age at which you want to retire and then note current expenses that are likely to continue even once you retire. This will include expenses like groceries, utilities and home maintenance, but perhaps exclude ones such as your child’s education, as by the time you retire this will be taken care of.
Once you multiply this by 12 to calculate your current annual expenses, adjust the amount for inflation, around 7% per annum, to determine the amount you’d need annually once you retire. As healthcare costs are likely to increase, factor this into your annual amount and also make additions if you’d like to travel every year or pursue a hobby. Once you total this amount, calculate the amount for the 20-25 years you’ll spend as a retired individual.
While this is a basic calculation, you can use one of the many retirement calculators available online to determine the amount you’ll require. Then, determine how you’ll build this corpus.
Gathering what you need post retirement
Once you determine the amount, say Rs.12 crore, your approach depends on how many years you have left until retirement. Assuming that you’re in your 30s and 40s, at this age, you still have 20–30 years until retirement if you wish to quit the workforce at the age of 60. This means that you have the potential to be aggressive in your approach towards saving. So, increase your contribution to retirement savings, buy adequate health insurance, and also look into buying a second property that you can leverage once you retire.
From an investment standpoint, invest maximum savings in equity. This approach offers optimal returns and your earning potential at this stage affords you the risk appetite you need to have an equity-forward investment approach. Of course, your remaining portfolio should be linked to debt and deposits. Grounding your portfolio with a fixed deposit, for instance, gives you a safety net to fall back on in a year when your equity investments underperform.
On the other hand, if you’re in your 50s, you have 10 years to be able to reach your retirement target, so it’s best to pick a more conservative approach as your risk appetite is significantly lower. A good idea is to park the funds you have accumulated thus far in an instrument such as a fixed deposit as it offers assured returns that are still higher than what a savings account would offer. This allows you to grow your money steadily without taking on any risk. While you can invest a small amount in market-linked instruments, it’s best to consult experts before you proceed to ensure that you’re curtailing your exposure to risk as best as possible. Also, look into clearing debt aggressively, so you don’t have to divert your retirement corpus to tackle such expenses at a later date.
On the other end of the spectrum, if you’re in your 20s, you can make the most of instruments that require you to invest a small amount for a long tenor. In this manner, you can build your retirement corpus in the background, over a long tenor. Options such as Public Provident Fund, National Pension Scheme and fixed deposits are worth looking into. All of them have a low minimum contribution amount, which means that even if you find that you don’t have too much to spare from your monthly salary, you don’t have to compromise on planning for retirement. Moreover, fixed deposits are a safe bet in a volatile environment, and when you invest now, you can lock in a high rate for a long tenor.
Keeping these tips in mind, plan your finances for retirement cleverly, and ensure that you don’t have to cut corners during your golden years.
(The author is Chief Business Officer – Retail & Corporate Liabilities, Bajaj Finance Limited)