With more individuals joining the workforce in their early 20s and preferring to opt for an early retirement, a corresponding change in financial planning is vital to match changes in workforce scenario. Apart from focusing on life goals such as owning a house or planning for child’s higher education, make sure you accumulate adequate retirement corpus for a comfortable life post-retirement. The following steps would ensure a happy and financially worry-free retired life:
Begin investing before it’s too late
Most of us shrug off the idea of investing early (in late 20s or early 30s) as we believe it is a task designated for later stages of work life. However, as your retirement corpus would require a considerably larger amount, investing in late 40s or early 50s may strain your finances, given that you would have to accumulate larger corpus in shorter duration.
For example, if you start investing for your retirement corpus at the age of 25, a Rs.1 crore retirement corpus by the age of 60 can be accumulated through a monthly SIP of around Rs 1,500, with expected average returns of 12% p.a. However, if you start investing at the age of 45 years, the same amount of corpus would require monthly SIP of around Rs 20,000. Therefore, investing a meagre Rs.1500 per month for 35 years clearly is a wiser option than investing Rs.20,000 per month for 15 years, for the accumulation of the same corpus.
It would be prudent to start investing for your retirement corpus as soon as possible since an early start would allow you to benefit more from the power of compounding.
Do not ignore inflation and longevity risk for corpus calculation
While estimating retirement corpus, one needs to take into consideration two factors-inflation cost and longevity risk. Not factoring in the role of inflation would result in underestimation of the post-retirement corpus, which would, in turn, increase the chances of a possible financial crisis.
For instance, if your current monthly expenses amount to Rs.30,000, and the expected inflation rate is 6% p.a. Then, after 20 years, for the same monthly expenses, you would require a monthly amount of close to Rs.96,000 after taking into consideration inflation’s effect on goods value and your purchasing power.
Moreover, with an increase in life expectancy of people, it would be prudent to also pay heed to longevity risk, implying the risk of living longer than expected. For instance, if you created your retirement corpus assuming a life expectancy of 80 years, and luckily you end up living for about 90 years, your retirement corpus would most likely fall short for those extra 10 years of life. A good way to deal with this longevity risk would be to let a portion of your corpus remain invested in equity mutual funds, even during your post-retirement life.
Invest in equity mutual funds for retirement corpus
Equities have proven to be the most suitable asset class for long-term investments, and have consistently outperformed its peers such as PPF and NSC, by providing inflation-beating returns over the long term. And, over the long term, equities are less riskier and provide higher returns which would sufficiently accumulate the target corpus. If you are a risk-averse investor refraining from investing entirely in equities, mutual funds provide the option of balanced funds as well, which involve a mix of both debt and equity, and are primarily aimed at balancing the risk-reward ratio for the investors.
Make sure that, as you near your retirement age, consider steadily shifting a major proportion of your retirement corpus from equity funds to low-risk securities such as debt funds, high yielding savings account or fixed deposits, which have been providing regular interest rates up to 9% p.a.
Ensure periodic review of your retirement portfolio
Investing in mutual fund schemes with impressive past track record doesn’t necessarily guarantee better returns in future owing to market dynamics. Hence, it’s vital for you to periodically review your portfolio, preferably at least once a year. Doing so would help you identify funds/schemes which have been consistently underperforming against their benchmark indices and peer funds since about 3-4 quarters. Redeem such funds and invest in better-performing ones whose expected returns would assist in achieving the target corpus.
Moreover, with changes in lifestyle, financial condition or risk appetite, you may need to re-balance your portfolio to ensure timely creation of the retirement corpus.
Ensure you have adequate health insurance
Presence of adequate health insurance, along with maintenance of sufficient emergency fund are two vital pillars for a financial steady post-retirement life. Medical expenses tend to increase as you age, indicating that it is important for you to have a health insurance plan in place for handling such expenses. Especially in the current scenario, wherein a single hospitalization bill can eradicate your lifelong savings due to inflation and soaring health care sector costs, make sure you have adequate health insurance which can sufficiently assist you in bearing such expenses, saving you from the need to disturb your retirement corpus or availing a high-interest cost loan.
Consider buying such policies as early as possible, since you would have to serve waiting periods before qualifying for certain treatments or surgeries, and your chances of earning loyalty or no-claim bonus (in the form of increased sum assured) increases when you opt for such insurance early on than in later stages.
Moreover, to financially protect your loved ones in case of your untimely demise, make sure you have an adequate term insurance in place. Ideally, the cover should amount to at least 10-15 times your annual income and must change in accordance with a rise in income. As compared to the offered benefits and huge cover amount, the premium for term insurance plans is relatively very low, making it an even more obvious part of each individual's financial plan.
The writer is CEO and co-founder, Paisabazaar.com