Early retirement planning can help you build corpus with less stress

The importance of efficient money management in fulfilling financial goals is driving more individuals to take up financial planning seriously. While modern investors are saving and investing towards a plethora of goals, preparing for retirement ranks right up there in this list.

The growing fixation of Indians with retirement planning can be attributed to multiple reasons. Maintaining a lifestyle in the old age without passing on its burden to the children is a common concern. Additionally, longer life expectancy and increasing cost of healthcare has made it imperative to provide for unexpected events post-retirement. The aspiration for a comfortable life, after grinding hard over the work life, has brought retirement planning under the spotlight.

In spite of the clarity of the goal, many investors struggle when it comes to building a retirement fund. Starting the process itself seems challenging. Lack of clarity on basics such as how much to save, when to start and where to invest, makes some investors put off retirement planning for later. If you are grappling with similar issues, tips below can make retirement planning easier for you.

Right corpus for retirement

There are several guidelines on the quantum of a comfortable retirement fund. One study suggests that by the age of 35, you should have twice your annual salary in your retirement fund. Another study says that starting in your 20s, you should save 10-15% of your income towards retirement. These studies at best are indicative in nature, not giving you a specific figure that you need to retire comfortably. This is so because one size does not fit all.

Each individual has a unique financial situation. Analysing your current financial situation and future requirements should be the base for your retirement planning. Determine the figure that enables you to sustain your current lifestyle annually. Adjust this figure, making it more in line with your retired life. For instance, once retired, there would be no travel expense to and from work. Similarly, you might not go out partying as often as you do now. But you might have to assign a bit more towards health and wellness. By fine-tuning your annual budget thus, you arrive at the sum that you would need to meet your annual expenses post-retirement. Assuming your retirement age to be 65 and life expectancy to be 85 years, multiply your annual budget with 20. This is the entire corpus that you need to accumulate towards retirement. You can use online calculators to factor in inflation to bring in more precision to your calculations.

Right time to start retirement planning

The figure that you arrive above might seem overwhelming. But if you start saving and investing early, it is possible to even surpass this figure. Young professionals, however, regard retirement planning as an exercise to be pursued in the later stage of their career. But starting late implies that you have to accumulate your retirement corpus within a shorter span of time, putting additional stress on your current lifestyle. Hence, it is advised to start this process at the earliest possible.

The right time to start building your retirement fund is as soon as you receive your first salary. Starting early gives you an edge by making the magic of compounding work in your favour. To put this in perspective, say you start earning at the age of 25 and retire at the age of 60. If you start an SIP of Rs 5,000 per month at a conservative return rate of 12%, you will accumulate Rs 1.1 crore by the end of 35 years. However, if you delay this exercise by 5 years to start at 30, the accumulated funds would be Rs 62.5 lakh when you turn 60.

Apart from the benefit of compounding, starting early gives you time to adjust your savings and investment behaviour as well. With age, you get your priorities right and learn from your financial mistakes to avoid the habits which set you back financially. You can also top up your SIP as you climb the professional ladder and earn more. An early start thus offers you an opportunity to not only build the corpus that you need but also to exceed your projections.

Right investments

To begin with, check the provident fund and gratuity policies of your employer to get an idea of what you are contributing towards your retirement fund. Project the amount you would accumulate through these options over your work life. Deduct this amount from the total retirement corpus requirement to arrive at the figure that you must aim towards.

While PPF is a safe investment option, the monthly sum you would have to invest for accumulating the required corpus would be high due to the limited rate of return. To reach your targets with lower investments, it is important that you diversify your portfolio to include low and moderate risk instruments. PPF, NPS and a healthy dose of equity in the form of equity mutual funds would be a good option. For the long-term horizon, you can also look at investing directly in equity. Equities are known to give inflation-beating returns over the long-term at minimum risk. By investing in equities via the mutual fund route, you get the benefits of diversification and professional management. You can start an SIP to invest in these instruments and let compounding work in your favour. Apart from higher returns, investment in equity mutual funds can also help you to save taxes.

As the source of income starts dwindling in advanced years, insecurities and anxiousness about the quality of life start kicking in. However, a carefully laid down retirement plan can bring the much-needed peace of mind in your retired life. The key to succeeding in building that life is not to get perturbed by the magnitude of the task and work diligently towards your goal without losing focus.

The writer is MD and CEO, Axis Securities