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Build-A-Fund : Retirement Edition ⏳

For most people, the thought of retirement planning is terrifying. Unexpected medical expenses and the fear of going broke while senile only adds to our anxiety.


We cannot squander our lives preparing to face unknown problems in the future. However, if we have the flexibility of resources, time, and energy, we can respond when disaster strikes.


The staggering sums that most people see when using a retirement planning calculator can be disheartening. Younger workers with low incomes, high debt loads, and no savings may feel like they can never save enough money.


It's off-putting to contemplate how much money you'll need at retirement. However, breaking it down into small steps makes the idea much easier to lap up.


Why Do I Need One?

Don’t bet on being an outlier: Most people expect a life-changing event that will shower them with large sums of money. This may happen to a few people. Assume you are not one of those people. Most wealth is created over time and in small increments with perseverance.


Fight inflation: The cost of living will rise as you get older. Expenses that appear to be manageable may spiral out of control. Building a solid retirement fund can help you maintain a your lifestyle even after you retire.


Investing not saving: When compared to simply putting money away in a savings account, a retirement fund entails investing and growing money over time. Careful planning while investing for retirement can result in outsized gains as compounding works its magic.

Consider these things decades before retirement. The sooner you begin, the more relaxed you'll be about the money you do save and the more determined you'll be to save enough to meet all of your long-term goals.


Make Compounding Work for You!

The SIP route: Setting aside a portion of your monthly income before you begin spending is a good way to build a retirement fund. Add a little each month and gradually increase this amount by, say, 10% each year. Whenever your income increases significantly, a larger bump is due.


The earlier the better: Let's say you invest Rs. 25,000 per month for 25 years, you will end up with a corpus of Rs. 4.75 crore assuming a 12% rate of return. However, if you start investing just 5 years prior, with just Rs. 20,000 per month for the same rate of return, you would have ended up with a corpus of over Rs. 7 crore. The sooner you begin, the more time your money has to grow.


Be disciplined: The main barrier to amassing the corpus desired is a lack of discipline. Only if investors are dedicated to saving in accordance with their goals will compounding work its magic.


How Much Should I Save?

A few factors that decide your post-retirement income are:

  • Retirement age and when you start saving

  • Lifestyle post retirement

  • Current investments and liabilities

  • Expected rate of return on above investments

Track your finances: This can help estimate future expenditures and savings. Remember that you only need to save enough to cover your expenses, not your current income. This also ensures that your fund will last in retirement and that you will not outlive it.


The 4% rule: You require a small, single-digit drawing from your corpus and assets. No more than 4–6% of your corpus should ideally go towards this each year. If you withdraw 4% of their retirement funds in the first year and then adjust for inflation in subsequent years, you will not outlive your money.


Investment Vehicles

Stocks: Investing in the right equities can result in significant wealth accumulation over time as the company grows and its stock price rises. Some companies distribute a portion of their profits to shareholders in the form of dividends, which is appealing to retirees. However, stock picking is challenging for novices, and direct stock investing is not recommended. Getting an advisor or manager helps be on the right side of things.


Bonds: By purchasing bonds, you can lend money to corporations and governments. The way they usually pay you back is with interest-only payments known as coupons. When the bond matures, the borrower repays the initial loan amount. This is a relatively safe investment option that typically yields lower returns.


Gold: The yellow metal has long been the preferred investment among Indians, but it may not be the best option. Gold may also provide meagre returns when compared to other assets and should not account for more than 10% of your corpus.


Index funds. An index fund is made to follow assets with similar characteristics, such as size or sector. Index funds can be mutual funds or ETFs. It's no-frills passive investing that will provide market level returns.


Mutual funds. A mutual fund can be composed of various types of investments, such as stocks and bonds. You can quickly and easily diversify or spread out your investments by investing in mutual funds. Mutual funds are not publicly traded and may levy a variety of fees, such as an expense ratio, an entry load, an exit load, and so on.


Smallcase: Long-term investors should consider these actively managed portfolio with lower fixed fees and a higher alpha. Consider Rupeeting's equity portfolios, which charge only Rs. 2,000 for a six-month subscription regardless of investment amount. Unlike mutual funds, your fees will not increase as your investible corpus grows.


Avoid

Real estate investing is a bad idea if you think the rent will support your retirement. It is difficult to manage an old property as you age. Maintenance costs will be significant, and rental yields will be low. An enormous asset that you didn't use will be left behind.


Being overly conservative with your portfolio, relying solely on fixed income products. To reap the benefits of compounding, you must have a growing corpus. Don't hold back your retirement savings. Invest in equities to let it grow and appreciate in value.


Believing that the corpus must be safe and unaffected at all times. This one blunder has destroyed the quality of life for many retired investors. If you want to bequeath the entire corpus, then only this is true. Use the money you've earned and saved for yourself. Only the remaining balance should be for bequest.


Bottom Line

Anybody can build a successful retirement fund using this straightforward formula, no matter their age or income: Make a goal, commit to it, and then repeat.


Saving for retirement is a gradual process. Instead of sprinting, picture it as a marathon. Creating a reliable retirement fund will typically take a lifetime of work.


💡 Use our retirement fund calculator to know how much you should be saving!

Retirement Fund Calculator
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