The fuss-free checklist for millennials and 40-plus professionals who want to get savvy with retirement planning

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Retirement is a time when you can finally unwind and realise the much-awaited ‘golden sunset’ period of your life. This necessitates financial security at the time of retirement. Because, with no steady source of earnings post-retirement, one could jeopardise a peaceful and an enjoyable retired life. Are you ready to navigate the retirement space yet or does the thought of retirement planning bring out the perennial procrastinator within you? Whether you are a millennial or a professional in their 40s, retirement planning is one of the most important yet often ignored facets of financial knowledge. The reason? A pervasive lack of financial knowledge on one hand and the unlimited offering of products and schemes on the other hand, render the space of retirement planning as difficult to navigate.

While there could be diverse goals for retirement planning, here are some of the most-common goals, one aims to achieve :

  1. Beat inflation: Inflation is the rate at which the cost of living grows. Any retirement plan intends to beat this inflation rate, in terms of being able to afford the cost of living at and after the time of retirement.
  2. Create wealth to sustain your expenses post retirement and possibly leave behind a legacy : It is essential that the money one saves is used to create wealth. This is done by investing your savings into different asset classes. Whether it is fixed income securities (mainly fixed deposits offered by banks, government securities and corporate bonds), mark-to-market debt (such as through mutual funds or NPS), equity (investments in the share market, mutual funds, NPS), real estate and commodities (think gold), it’s critical that your savings are not allowed to gather dust or remain unused. Where one invests and how much, mainly boils down to one’s risk appetite and years left to retire. Investing in equity fetches a higher ROI (return on investment) than investing in fixed income securities; However, equity investments are relatively more volatile, hence requiring a longer investment time horizon so that the volatility as a percentage of returns reduces. Accordingly, when 15+ years are left to retire, one can allocate a significant percentage of their investment contributions to equity.
  3. Pay off any outstanding debts : Ideally, one should not have any outstanding debts at the time of retiring; however, in case it is unavoidable, then retirement planning would have to incorporate paying off debt as a goal as well.

Factors to take into account while calculating your retirement corpus

Calculating your retirement corpus is easier than it sounds. There are free equity calculators available (a simple Google search should suffice) online, which give you your corpus amounts after you plug in some details. While the calculation is the easy part, understanding the various factors in play is important.

Here is a checklist of all the variables that come into play while determining your retirement corpus amount:

  1. Age: The age factor is the first thing that needs to be considered. One’s current age and their planned retirement age determine the time one has remaining to build their corpus. Suppose, a 30-year-old decides 50 as the retirement age. This means that there is a 20-year-old investment horizon in which to build your corpus. Higher the investment horizon, the higher will be the compounding effects on your savings and the higher would be the possible risk-appetite allowing exposure to riskier asset classes such as equity.
  2. Income and expenditure: These determine your monthly savings after expenditures are deducted from the income and what portion of it could be invested in retirement funds.
  3. Inflation: should be considered to project expenses post retirement. The CAGR inflation over the last decade (6.5%) and another 1% added to it (to address higher inflation rates for medical expenses) could be a good proxy for projecting expected expenses post-retiring.
  4. Returns: This can be tricky as it depends wholly on what asset classes are being invested in. Equity investments offer higher return than investments in debt or fixed income securities. Factoring a return of 10%-12% will help in setting a realistic and conservative rate of return, provided prudent asset-allocation is followed, namely allowing relatively higher allocation to equity when years to goal-maturity are 15 or more and progressive reduction in Equity allocations % as the goal maturity approaches.
  5. Miscellaneous factors: There are several other factors, which need to be considered. The lifestyle that one desires after retirement will also determine the amount that needs to be invested. Any major life aspirations like buying a car or house, the growth one expects in their corpus, major health issues (this helps in determining your life expectancy) and investments already made all affect your retirement corpus.

Protecting your retirement corpus

A secure and profitable way to invest indirectly in the equity market is through mutual funds. SIPs are the best part of using mutual funds to build a retirement portfolio. The biggest benefit of SIP is its ability to utilise the power of compounding. Additionally, it aids in rupee-cost averaging, relieving the investor of concern over volatility. One of the finest ways to save for retirement is through mutual fund SIPs because you don’t have to compromise on other goals in order to achieve your retirement goals. You have taken various factors into account while building your retirement corpus, your growth and inflation estimates are on target and your corpus is aligned with your financial plans. What next? You have to monitor and protect your corpus.

The following pointers will help you:

  • Monitor your investments: It is critical to keep a close eye on how your corpus is performing. If your investments are equity-heavy, then aligning them with equity cycles and reorienting your investments to debt instruments to protect your investments when equity becomes volatile is critical. Investing in a pension scheme like National Pension Scheme (NPS) can be easier to monitor and track as these are mutual funds, which inherently have a mix of equity and debt. For more information visit StockHolding.com.
  • Emergency funds: It is also important that you have access to emergency or ‘rainy day’ funds to protect against shocks. These can be anything from a health issue, emergency travel to any unforeseen financial shock. The emergency fund you are creating should be liquid, which means you can withdraw the amount you need as and when you need it without delay or exit charges. Emergency funds can be kept in a savings account or preferably a liquid mutual fund (consider ultra-short debt funds for these as withdrawal time is considerably shorter and they are also secure). For more information on MFs, visit StockHolding.com, a consolidated platform for all your investment needs.
  • Health insurance: The COVID-19 pandemic has reiterated the critical importance of health insurance coverage. Sudden health issues and hospitalisation can be both mentally and financially devastating and health insurance can protect you against these unexpected shocks. Visit StockHolding.com for more information.

Conclusion: Before investing in any scheme, you need to list down your financial goals and objectives. Then define your investment horizon. And finally, align your goals with investment objectives. Then you can pick the investments which suit you the best, ELSS funds are good for both short term and long term goals. The eariler you think of getting comfort at your retirement, the sooner you can get it done as it’s better to start early rather than getting late. Start investing now as it will help you make your financial goal as India’s GDP is set to double from the current $3.4 trillion to $8.5 trillion over the next decade. India will add more than $400 bn to its GDP every year, a scale that is only surpassed by the US and China, the chance to make your dream come true at an early stage is now or never.

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