Retirement or financial independence is a stage where one can stop working for their livelihood. One can treat this stage as the end of daily struggle for earning. Every individual dreams about having a better lifestyle than what they do today, and retirement is the perfect opportunity to spend one’s life the way they’ve wanted. Yet, one would continue to live even after retirement with rising expected and unexpected expenses. Hence, it is required to have a sufficient amount of corpus at the time of retirement.
Long term financial goal is usually overshadowed by short and medium term financial goals
Usually, people consider saving for retirement when one is nearing the fag end of their working life. Retirement being a distant or long term financial goal, people focus more on the short and medium term goals such as buying a car, first home, international trips, children’s education, and so on. Most of the time, the retirement plan gets importance only after fulfillment of other financial goals. However, one must understand that, the delay in starting retirement planning will either lead to inadequate amount of retirement corpus or in some cases postponing the retirement age. And trust us, it is easier to choose a mutual fund investment for retirement compared to working till a later age.
So, if one wants to emerge as a wealthier senior citizen and live a comfortable retired life, it is essential to have a prudent strategy for retirement planning to make the investor financially independent. One of the key benefits of retirement planning is to cover any contingencies from any unexpected events without compromising one’s desired lifestyle. One selects an equity route (high risk: high return) or mutual funds (experts taking care of investment) depending on their goals.
Furthermore, the life expectancy of Indians has increased over the years and in-turn requiring one to fund for a longer retired life. Another important factor to note is the fact that the majority of the Indian population is not covered under any formal retirement income scheme, thus the need to plan for retirement. With India transitioning from the traditional joint-family system to a nuclear family system, financial independence during non-working years became extremely important. Skyrocketing medical expenses in India and the rising cost of other essentials, demands one to save and invest more in a prudent investment strategy.
Strategising and defining a plan
With proper planning, one can reach their retirement goal. For that, one needs to strategise and define retirement planning objectives for the kind of retirement they want. The planning should be based on their current age, expected age for retirement, the life expectancy, desired corpus for the retirement and prevailing inflation. Further, one needs to consider all their income streams along with future expected expenses. Lastly, the retirement corpus should be capable of generating a regular income during one’s life expectancy considering tax efficiency.
The complexity of the retirement planning is to find the right moment to start saving for it. When it comes to retirement planning, the sooner the better. The wider the gap between one’s current age and retirement age, the better the benefits in terms of minimum saving amount, risk bearing capacity and investment portfolio diversification. At a younger age, equity mutual funds would be more attractive due to their long term return potential. The fundamental principles of sound investments - power of compounding and rupee cost averaging help to multiply corpus over time.
However, if individuals have a lesser time frame then saving for retirement planning should have a more conservative approach insisting on steady income and capital preservation. These will ultimately compel the investor to invest in low risk assets. The low risk assets will give a low return and the amount required to save would increase to a substantial amount. The magic tool behind the retirement corpus is compounding and time. The longer one has for their retirement, the more one can build their wealth with less amount of investment per month.
We can clearly see this in the following illustration
*Note - For illustration purpose. Returns assumed at 12% per annum. Returns are not guaranteed.
A, B and C have been friends for a long time and are of the same age. A started investing Rs.10,000 per month at the age of 30 years and B at 40 years. At 60 years, when both had planned to retire, A’s corpus had grown to Rs. 3.15 crore (assumed returns at 12 per cent per annum), while B’s corpus was just Rs. 1 crore. The significant difference in corpus is only because of the power of compounding - the eighth wonder of the world.
The third friend C started investing along with B at 40 years, however, C wants to match his retirement corpus with A. In this scenario, C has to invest Rs. 41,000 per month which is 4.1 times more than A so that he can generate Rs. 3.11 crore at 60 years. This signifies that a small amount invested over a longer period of time will have a large impact on one’s investment and can be compensated with a much higher investment amount.
Furthermore, look at the magic of time in building the retirement corpus. A was able to generate 8.75 times returns on invested amount because of longer time (30 years). While B and C were able to generate just 4.16 and 3.16 times returns on respective investment amounts due to a shorter time frame (20 years).
Start early – Every small amount counts!
Early retirement planning helps one build a larger retirement corpus with a minimum investment amount. Furthermore, one’s investment will take a much longer period to compound and multiply one’s investment exponentially generating much higher returns. Also, the taxability for the long term investing is lower, giving one higher returns with tax efficiency. Hence, it is important to start early, stay disciplined and adhere to their long-term investment strategy to reap investment gains.
Imagine retiring at 50 instead of 60!
Wouldn’t one want to retire early and spend time relaxing? A retirement plan would help achieve that goal. While one’s friends are still working, they’d probably be chilling at a lovely island or a peaceful villa or a place they like. Because, unlike others, the investor started early, created a proper retirement plan at an early age, which allowed them to save more money.
When one starts early, they save more. We would advise creating a mutual fund investing in one’s early 20s. If one has passed that age, start now with some larger amount but lower risk investment instrument. In other words, starting early has less liabilities and hence one can take a higher risk. Further, considering the longer tenure – high risk instruments can be chosen and the peak and trough cycles are taken care of.
More investment options are available
As the risk taking capability is higher in the early stage of one’s career, one can invest in several different types of investment options (mutual funds, equity or other alternative investment assets) without fearing loss. People who start retirement planning in their 20s, 30s, and even 40s can put more money into their retirement savings fund. One has to develop an investment plan by setting up financial goals. How much retirement fund is necessary can be calculated easily and based on the same one can develop a retirement plan?
Conclusion: Retirement planning is a long term goal and if one starts early there are advantages of creating a better corpus with lower return generating instruments. Retiring with a handsome amount in their bank account depends on the age the investor decided to create a retirement plan. Start early and enjoy a higher multiplier impact on the corpus.
Pro Tip: Start early and start with higher risk instruments (equities), eventually shifting to lower risk (different mutual funds schemes like debt, balanced or hybrid) towards the fag end of one’s working life.
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