Everyone likes to make plans for the future. Planning ahead of time is an excellent idea for anything, from daily tasks to vacations. We even make an effort to arrange our yearly or monthly budgets. But not everyone is equally motivated to make retirement plans. A lot of us overlook the significance of retirement planning and put it off until later in life.
Retirement is one of the most distant financial objectives, yet we should not overlook it. Instead, starting early for this far-off objective is simpler to manage than a goal that would arrive suddenly.
In this blogpost, we’ll look at some of the reasons why it’s important to make plans for one’s golden years, particularly when one is still earning money in their early stages of their career.
Overall increase in Life expectancy:
As life expectancy rises, so does the amount of time that people spend not generating money. After 30 years of employment, a person who retires at age 60 may live for another 30 years or more. In other words, thirty years of earning time feed thirty years of non-earning time. When it comes to retirement planning, this is basically called the 30-30 rule (30 years of work life and 30 years of retired life).
FIRE:
Early retirement is becoming more and more popular (Financial Independence Retire Early – FIRE movement). However, a greater retirement corpus would be required to retire early. In the past, individuals would usually retire at age 60, but many people now hope to do so by the time they are 50 or even sometimes in their 40s. Many may be compelled to retire by the time they are 45 or 50 due to the shifting corporate work ethos. Thus, this is one of the strongest arguments for people to start saving for retirement early in their careers.
Inflation:
The expense of living keeps going up every year. For instance, if yearly inflation is 5%, family costs of Rs 50,000 per month will be nearly equal to Rs 1.70 lakh (3.5 times) after 25 years. Even in the years after retirement, inflation will be present and more noticeable because there won’t be any income during this time, making you more vulnerable to extra expenses, particularly those associated with medical care. Just as an example, at a rate of 5% inflation, Rs. 1 crore’s purchasing power will depreciate to Rs. 48 lakh in 15 years.
Opportunity cost of delay:
Delaying the commencement of retirement investments might have significant consequences. There are two elements to it: first, early savers can benefit more from the force of compounding than late investors, and second, the early savers need to invest less when compared to the late comers. An early investor can save 50–75% less and yet build up the same corpus. Additionally, it is seen that profits (the interest component) make up approximately 90% of the final wealth, but for investors who begin later, this percentage drops to 75–85%. This is made feasible by compounding.
How much is required:
Determine how much you’ll need before you begin saving for retirement. Do not invest before you have determined how much needs to be saved. First, look at your existing monthly spending at current prices. Inflate them for the number of years you have left to retire, assuming an inflation rate of around 6%. This indicates how much you would need to live on in retirement, with inflated monthly costs. To build up a corpus that may give you the inflated monthly amount, estimate how much you will need to start saving from now until you reach retirement age. These calculations can be easily done through free online retirement calculators these days.
Expenses might not always decrease after retirement. While certain cost-heads may decrease, retirement-related expenses such as health or travel-related expenditures may rise. In your retirement years, it’s just as crucial to keep an eye out for growing medical expenses.
Which asset class to invest-in:
Selecting the appropriate investment instrument is just as crucial as starting your investments early. Invest in equities when you have at least ten years till you retire. Past study has demonstrated that, over an extended period of time, equities have produced a better inflation-adjusted real return than any other asset type, be it gold, debt, or real estate. Having said this, it is impossible to downplay the importance of debt-assets in retirement planning. As one approaches retirement, begin transferring money from equities to less volatile debt assets by means of de-risking in order to protect the accumulated capital.
Additionally, the amount of money you transfer to debt assets will depend on your risk tolerance as well as if you want to pursue a second profession after retirement. If it’s the latter, and you intend to keep earning even after others have retired, you may be taking on more equity risk than is recommended for your age group. But if you plan to live off your investments, debt will be a substantial component of your portfolio.
Create your retirement portfolio:
Each investor may have a different proportion of their money allocated to equities. One’s age and risk tolerance would play a major role here. Youngsters who have more free time may decide to invest heavily in equities at first. The traditional strategy is that the longer the retirement time, the higher the equity allocation. It is assumed that at least 40% of an individual’s income is allocated to investment products, and that those under 40 should have around 80% of their retirement assets in equities.
To invest for retirement, use the SIP strategy. It is best to invest regularly and hold onto your investments for a long time in order to build corpus over time. The SIP investment plan is ideally the most appropriate choice for generating long-term wealth. Diversification among large, mid, and small caps is also necessary for an equity-backed retirement strategy. One’s equity allocation may be reduced in favour of debt assets as they get older. While calculating your final retirement corpus, keep in your mind that if you are salaried, you already pay aside a percentage of their earnings for provident funds, which are debt assets.
When you near your retirement:
As you get closer to retirement, the view opens up and you can see the years that are ahead. In fact, you can see a radical shift in lifestyle on both sides of the retirement trench. By now, with the exception of retirement, most of your significant financial objectives would have already been fulfilled. And making sure you have a safe and comfortable retirement becomes your primary goal. To support you during your golden years, you must make the most use of the money you have saved up throughout your earning years, including your retirement corpus such as Provident Fund, NPS funds, etc.
Post-retirement actions:
Initially, place the retirement fund, comprising gratuity, provident fund, and the corpus built over time from equities and mutual funds, in short-term bank deposits. Spend some time outlining and figuring out the last-minute investing opportunities. In addition to security and liquidity, consider taxation to minimize post-retirement tax liabilities.
First, establish an emergency fund to cover unforeseen costs, such as medical expenses. After that, find resources that can assist you in creating a baseline monthly income for everyday expenses. To help your retirement corpus outpace inflation, invest 10–20% of your capital in equity or equity-linked funds, if at all possible, depending on your risk tolerance.
Additionally, you can choose for the systematic withdrawal plans (SWP) if you don’t want to sell your current mutual fund investments.
Final words:
In cricket, scoring early in the game or in the Powerplay overs usually helps to keep the asking rate under control. In the same way, if you begin saving early, you will need a lot less money for retirement than if you begin later in life. Therefore, “Just Start early.” The best time to begin is during your first year of employment.
