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Invest in equities more if it's long time for you to retire

While the mantra several decades ago of earlier generations was to be prudent and to save and question the need for every rupee spent, the credo today is Epicurean – live well today.

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It is not surprising in these days of inflation and consumerism that savings have fallen. The gross domestic savings in India fell from 37% in 2008 to 31% in 2012 and to 28% in 2014. At this rate it would be around, if not below 20%, in 2020.

With regard to gross savings 29% is in real estate and a whopping 27% in gold. Salaried employees save roughly 33% of their income and others around 23% of theirs. Of this, about 12% is spent on weddings and on social occasions and 80% is spent on child education and medical expenditure. Only 3% is actually saved in banks or invested in shares, insurance policies or government securities.

While the mantra several decades ago of earlier generations was to be prudent and to save and question the need for every rupee spent, the credo today is Epicurean – live well today (especially with a deteriorating rupee). While I am glad a huge chunk does go towards house purchase, I believe that those who can must save much more towards their retirement. It is not fair to expect children to financially look after one when one grows old.

Let us assume that at the age of 60, you would get a pension of Rs 50,000. If we assume that inflation is at 7%, and you are presently 35, the purchasing power of Rs 50,000 in 25 years would be only Rs 9,212. If you are 45, the purchasing power in 15 years would be Rs 18,122. In short, you'd need to build quite a large corpus in order to meet the shortfall.

Your expenses are Rs 20,000 per month. You want to ensure that when you retire at the age of 60 you would have adequate funds to meet this amount of expenditure. Let us assume you begin saving and earn 8% per annum and inflation is at 7% per annum. If you are 35, you would need to build a corpus of Rs 2.7 crore and this would require a monthly investment of Rs 13,971. If you are 45, you'd need to build a corpus of Rs 1.2 crore, which requires a monthly investment of Rs 25,401.

The earlier you begin saving for your retirement the better. And the fund that you create you should avoid breaking. If you place Rs 1 lakh every year in a fixed deposit at 8% per annum at the end of 10 years you would have Rs 17,80,441, of which Rs 6,80,441 would be interest that you have earned. Interest is earned on interest. That is the magic of compound interest.

I had in the earlier examples assumed that the investment would be in a fixed deposit with a bank. However, it is always more advisable when one is young to invest in equities. The propensity and the ability to take risks is when one is young. It is also when one is young that one has to begin focusing on wealth creation. My suggestion is that in the beginning one should invest in shares.

If one does not have the wherewithal with regard to which share to buy, place your funds in an equity fund. The compounded annual growth rate (CAGR) of equities has been 17.6% in the last 25 years, and this is taking into account bad years too.

How much should one place in equities. It is suggested that if a life expectancy of 80 is assumed, the amount one should invest in shares is 100 less one's age. Therefore if one is 30, the amount invested in equities should be 70% of one's savings. This progressively reduces as one grows older as after retirement, one is focusing on income to meet one's expenditure as opposed to wealth appreciation.

Real estate too was a real option. I recollect a time nearly 40 years ago when the cost of property at Napeansea Road was a mere Rs 300 per square foot. Unfortunately today, prices are very high and as a consequence there is very little demand. Apart from a few areas such as Bandra, prices have actually fallen. It is even being said that it is better to rent as opposed to buy.

The point I would like to stress is that in these times, do not spend purely because you have it. Invest it for the future. You do not know how much you'd need to live in the style you are accustomed to when you finally put down your pen. After a long and satisfying career, you are entitled to a life of relaxation, without the worry of whether you have enough to take a trip to visit your children in another city.

The writer is MD, Cortlandt Rand, and an author. 






 

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