Retirement is an age or a number? Find out

June 25, 2019 4:26 PM

The new breed of population is slowly adopting a new approach towards retirement, where taking a permanent break from work is much earlier than what it used to be before.

retirement, retirement planning, FIRE concept, millennials, post retirement needs, investment avenuesWith the days of pre-defined pension benefit all but over, prudent investments are needed to build a large reservoir of funds.

Touted as the golden years of life when it is time to enjoy the fruits of years of hard work and do things at your own pace and time, the concept of retirement has changed drastically over the years. While for the previous generation, mostly into government jobs, retirement generally meant hanging up boots at the age of 60, for the new breed of workforce, mostly millennials, this age is nothing but a mere number.

Millennials comprise 1/3rd of the total population, forming 46% of the workforce and contributing 70% of the total household income. This breed of population, who likes to live life on their own terms, is slowly adopting a new approach towards retirement, where taking a permanent break from work is much earlier than what it used to be before.

Embracing the FIRE concept

Why we are saying this is because today most individuals, including millennials, are slowly getting attracted to the FIRE (Financial Independence, Retire Early) concept. Also, propelling this belief is the changing ideology of people towards retirement, who strongly believe that the real luxury is time. This ideology is making individuals embrace the FIRE concept, thus making retirement a goal that needs to be realised early, probably in the late 40s or even earlier, if possible.

Newer investment avenues to build corpus for post-retirement needs

Another reason that has probably reduced retirement to a mere number is the availability of newer investment avenues to build the desired corpus for taking care of post-retirement needs. An early retirement means spending a considerable period of time without active income and hence it’s essential to have a nest large enough that can sustain one for a good 20-30 years.

With the days of pre-defined pension benefit all but over, prudent investments are needed to build a large reservoir of funds. Thanks to the growing financial awareness, there are a host of financial instruments through which this can be done.

While earlier fixed deposits (FDs), life insurance policies and Public Provident Fund (PPF) were the most bankable options to build a retirement corpus, today individuals are not shying away from using instruments such as mutual funds to address the needs cropping up post-retirement.

Let us take an anecdote of 27-year old Priyanka. She plans to retire in the next 20 years. What Priyanka did was that she started saving dedicatedly from her first pay check and invested 20% of her salary. While initially she began with recurring deposits, she shifted to mutual funds a few years back. Instead of lump sum investment, she has adopted the SIP route. Looking at her effort and discipline, she can have a corpus large enough to take care of her post-retirement needs.

It is important to note that the returns from mutual funds are not fixed, what makes them score over fixed-return instruments is their ability to deliver inflation-adjusted returns in the long run, particularly equity funds. Also, the availability to choose from a range of funds, depending on one’s objectives, is tilting the scales in their favour.

Should you too opt for an early retirement?

The answer to this question depends on your priorities and how early you plan your retirement. It is advisable to plan for this life goal as soon as you start earning, when you have fewer responsibilities to shoulder and have a higher risk appetite. At the same time, it is helpful to adopt an aggressive approach and have a healthy dose of equities in your portfolio.

If you are not sure about the quantum of exposure, the thumb rule of 100 minus age for equities can be adopted. So, if your age is 25, 75% of your portfolio should be tilted towards equities. At the same time, it’s crucial to cut down discretionary expenses, avoid borrowing lifestyle-related loans and have health insurance to keep a tight lid on out-of-pocket expenses in case of a medical contingency.

To sum up

Akin to planning the next journey of life, there are two aspects of retirement – save as much as you can and invest as well as you can. If you are able to do so and be disciplined in your approach, retirement will just be a number.

(By Rahul Jain, Head, Personal Wealth Advisory, Edelweiss)

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