Retirement planning: Start early for a bigger corpus
December 29, 2020 12:30 AM
A portfolio of proper mix of different investment avenues should be created. Choice of investment products is vital if you want to beat inflation.
The retirement planning strategy is based on your current age, your expected age for retirement, the life expectancy, and your desired corpus requirement on retirement.
By Lakhwinder Kaur Dhillon
Planning for retirement is a long-term goal to ensure the desired financial stability and freedom after retirement. The best time to start planning and investing for retirement should be as early as you start earning. It will help to unleash the power of compounding over a long period of time.
First and foremost, saving should be the priority and an individual should be disciplined and committed towards the set savings goals and financial planning. At a young age, the responsibilities are fewer and with small investment, a large corpus could be created. For example, today you are 25 years old and you are planning to retire at the age of 60, and looking at your family history the life expectancy is 90 years. So, your savings period is 35 years and the corpus required is for the next 30 years after your retirement.
Now if you start putting Rs 10,000 every month till your last salary before the retirement, the total value accumulated would be around Rs 42 lakh. Now if the monthly saving of `10,000 is invested wisely in appropriate avenues considering the inflation and computed annual growth rate (CAGR) then the overall corpus will be in crores. If we see the CAGR over the last 20 years, it is around 12%. Now if the retirement planning is delayed, then the monthly saving requirement will increase.
Strategy for retirement planning The retirement planning strategy is based on your current age, your expected age for retirement, the life expectancy, and your desired corpus requirement on retirement. The wider the gap between your present age and the expected age of retirement, better will be the scope of investment and financial planning in terms of minimum saving requirement, risk bearing capacity and diversification of your investment portfolio.
Likewise, if the time frame is less, then the focus of retirement planning will be more on steady income and preservation of capital that ultimately demands for large investment with moderate to low risk that will assure steady but low returns. While strategising for retirement planning, all income streams—present and prospective— should be taken into consideration along with all present and expected expenses of the future. The retirement corpus built should be capable of generating a regular income stream and distancing itself from tax liability.
Where to invest? A portfolio of proper mix of different investment avenues should be created. Choice of investment products is vital if you want to beat inflation. The investment avenues could be a mix of mutual funds, bonds, NSS through post office, stocks, etc.
Mutual funds may be considered as good avenues for investment. Variants of equity mutual funds such as equity-linked savings schemes offer good returns and tax savings. Avoid investment in return-based insurance products, unit-linked plans or readymade retirement plans. Build a customised retirement plan, manage it well and it will grow with monitoring and rebalancing as desired.
While investing one must ensure that principle is not lost in the process, the rate of returns is over and above the rate of inflation and the financial goal is met. One should not be too conservative or too aggressively while investing as it may result in defeating the purpose of creating future financial security for a comfortable retired journey of life.
The writer is assistant professor, Department of Accounts & Finance, Amity Business School, Amity University