Invest SIP by SIP for happy retirement life

We all have to retire from work at one point in life. The day when the salary stops coming to the bank account. By that day, we should have planned for a stable source of monthly income on our own. Most of us aren't covered by a regular pension scheme or have a social security system.

The earlier the merrier. Instead the question should be how much period I have so far delayed for retirement planning. It's better to plan for the retirement right from the early days of the career. The more the time given during accumulation phase, the better it is for maturity/annuity phase (retirement life).
By doing so, one can enjoy the advantages of longer-term compounding of investment and returns, disciplined savings versus expenses equation, start off with an affordable amount, etc.
Accumulation phase is that part of the retirement plan during which you invest gradually (monthly, quarterly, etc) towards building the retirement corpus.
Maturity/annuity phase is the period post retirement, when you start withdrawing from the accumulated retirement corpus (example: invest and withdraw the interest) for meeting the monthly expenses.

More on accumulation...

This is the most crucial part in one's life. The accumulation can happen through systematic investment plans (SIPs), with a combination of lumpsum Investments whenever available (like a bonus amount, incentive, etc) and possible in between. One must also carefully increase the monthly SIP amount, in line with the increase in salary and earnings.

Where should I invest?

Invest in instruments which has the potential to generate returns that can beat the average inflation. Historically, equities have delivered returns beyond inflation. Also keep the diversification part in your mind. One of the time tested routes of equity investing is SIPs.

What is an SIP ?

For the first timers, SIP has several advantages, but significant points could be: Rupee cost averaging; timing the market – not required ; power of compounding. The more the investment, the more the units accumulated at a better average cost. The longer the tenure is, the higher would be it's compounding.

How much amount I should invest for retirement?

Deciding how much to invest for retirement, requires multiple number crunching. We will try to simplify this for you here. Follow the below key steps:

1. Ascertain your current monthly expenses?
Guideline: Consider those expenses that would continue post retirement as well like the monthly groceries, bills, etc (Example: Exclude school fees, home loan EMI, etc, which would stop after certain years).

2. How many years are left for your retirement?
This is the difference between your present age and the age in which you feel, you will be retiring.

3.For expenses: Assign an expected inflation figure?
Be moderate. Don't be very conservative.

4. For investments: Expected rate of return on investments during accumulation phase
This is the expected average rate of return on your investments.

5. Expected living years, post retirement?
Don't be very conservative here. Assume and prepare that you will live longer (say 90 years and above).

6. The expected rate of return on investments, post retirement?
Be conservative here. The accumulated retirement corpus is invested in various fixed income avenues (mostly) and one withdraws the interest. It is this average rate of return.

7. Medical contingency needs:
Anticipate a sum which might be required for meeting the regular medical and health check-up costs.

The writer is national head - distribution – Geojit BNP Paribas Financial Services