Falling between the age brackets of 23 and 38 years, most millennials accord greater priority to their immediate lifestyle expenditures and short-term financial goals than creating their post-retirement corpus. Retirement planning is a distant financial goal for them that can be done in the last phases of their working years. However, rising life expectancy, increasing healthcare costs and the absence of any social security for the old have increased the need for bigger post-retirement corpuses.
Here I will list a step-by-step approach for millennials to build their retirement corpus.
Start investing as early as possible
The sooner you start, the lesser contribution will be required to reach your retirement goal. Beginning your investments early also helps instil financial discipline and assist you to benefit from the power of compounding. Owing to the compounding effect, the gains generated from your investment begin generating returns themselves, thereby growing to a much bigger corpus over the long term. For instance, a 25-year old would need a monthly SIP investment of Rs 5,000 at an assumed annualised return of 12% to build a retirement corpus of Rs 3.22 crore by the time he turns 60. For a 45-year old, building the same corpus at the same rate of return over the next 15 years would require a monthly SIP investment of Rs 64,500.
Factor in inflation
While estimating your retirement corpus, remember to factor in the inflation rate. As inflation reduces the purchasing power of money, ignoring it would lead to you to save less than what you would require for your post retirement life. This will increase the chances of witnessing financial shortfalls in your post-retirement life and thereby, force you to extend your working years. For instance, today if you spend Rs 30,000 every month on your mandatory expenses, you would need close to Rs 3.20 lakh per month for maintaining the same lifestyle in 35 years from now, assuming the annual inflation is 7%. Thus, take the help of retirement calculators to get an estimate of the monthly investments required to generate your retirement corpus after adjusting inflation.
Buy adequate health insurance
Given the steady rise in India’s medical costs, the need for buying adequate health cover has become very important. As your current age is one of the most crucial factors deciding your health insurance premiums, buying a health insurance policy later on will cost you higher premium. Moreover, health insurance policies usually come with waiting periods before allowing claims for many treatments, surgeries, etc. Purchasing health insurance policies early in your life would allow you to complete the waiting period before the probability of getting those diseases or requiring treatments becomes really high.
Invest in equities to build higher retirement corpus
Creating a retirement corpus is a long-term financial goal spanning over decades. Equity is the most suitable asset class for meeting long-term financial goals as equity tends to beat other asset classes as well as inflation by a wide margin over the long run. As you near your retirement age, say 2-3 years away from it, activate Systematic Transfer Plan (STP) in equity mutual funds of your retirement portfolio for a steady shift to low risk ultra-short duration debt funds. These funds have higher capital protection features than equity funds while generating higher returns with better liquidity features than bank fixed deposits. A well-planned STP can help you consolidate your gains from the equity schemes and ensure enough cash flow to meet your post-retirement needs.
Review your retirement portfolio at periodical intervals
Investing in mutual funds with outstanding past record does not necessarily guarantee higher returns in future. Fund management style and various market-related factors can cause past outperformers to remain laggards for a long time. Hence, make sure you review your retirement portfolio at periodical intervals, at least once a year. Compare the performance of your mutual fund schemes with its benchmark indices and peer funds every quarter and redeem them for better performing schemes if they have consistently underperformed over the past 3 years.
(The author is CEO & CO-founder, Paisabazaar.com)