Retirement planning is one of the most neglected of one’s financial planning. Retirement always seems to be in the very distant future – even if one is nearing the 60s! In fact, it should be the most important.
Generally one starts earning around 20, stops earning at around 60 and is expected to live till 80 at least. Which means one has around 40 years to earn to pay for 60 years of living! Hopefully, there is no disability or major sickness to cut short those 40 earning years.
Let me bring out the importance of starting saving early for retirement. Let’s make the following assumptions:
A SIP is started for Retirement Corpus.
Amount required for retirement: Rs. 2 Crore.
Stop SIP at: 60 years.
Average returns per year: 12%. This figure is not high as the HDFC Equity Fund has given a cumulative CAGR of 16.3% over a period of 25 years since inception in 1995.
If one starts at the age of 20, i.e., investing for 40 years to reach a goal of 2 cr, one requires to invest Rs.1,700 per month.
However, if one starts investing only 5 years later, then to reach the same goal of 2 cr at the age of 60, one will have to invest an amount of Rs. 3,110. Almost double!
Since one gets a long time horizon before reaching the Retirement age, one can take a calculated risk with the Retirement savings. However, as this is one goal that cannot be postponed – like, for instance, buying a car, the Retirement corpus should be closely monitored as the day draws nearer. We recommend a ‘2-basket’ approach.
The first basket should consist of Debt and Real Estate products which should not be affected by the volatility of the stock market, though the returns may be a bit lower.
The second basket should consist of products exposed to the Equity market, to give your Retirement funds a chance to grow above the rate of inflation.
Remember, you have several decades to fill both these baskets and monitor them closely!
Mutual Funds are the best way to invest if you are someone who does not understand the intricacies of the stock market or do not have the time to understand it. They give a choice of either investing in debt which is relatively safe or the most volatile combination of shares depending on your choice.
Our Investment Strategy is a combination of Goal setting, then setting a price and time horizon for each goal. Understanding the investments already made towards the goal and then planning a path for fulfillment.
Investment planning should be done for a specific goal. Say, you want to save for a child's education in 3 year's time. The money should be invested in a Fixed Deposit with. It is necessary to decide the goal and then look for an appropriate investment.