While the vast majority of Indians are monetarily unprepared for retirement, many are actually unaware of the gravity of the situation. According to a poll, just 20% of individuals believe that real retirement planning should begin before the age of 30, and many of them have no clue how much retirement corpus they would need when they retire.
Existing needs can function as impediments to retirement planning. Most of what individuals make goes largely towards repaying debts taken out to buy cars or homes, resulting in them having little savings for retirement. Many people also take money out of their Employees’ Provident Fund (EPF) account.
How much should be your Retirement corpus?
The majority of individuals have no idea on how large a corpus they will need to live a decent post-retirement existence. Young individuals and those in their mid-20s, particularly those having several decades till retirement, should strive to save 30 times their yearly income (that is, annual income at the time of retirement).
For example, if your average monthly expenditure is Rs. 50,000 (which equates to Rs. 6 lakh per year), then you would require Rs. 1.8 crore to retire comfortably at this point in time. The idea that living costs decrease with ageing is incorrect. Most individuals anticipate a decline in lifestyle costs and spending demands upon retirement, resulting in decreased actual cash flow requirements. However, as you age, you will incur more expenditure such as medical bills, children’s higher education, marriage expenses, and so on.
If in 20s, you will have the advantage of starting early:
Specify your target for retirement and calculate how much money you’ll need to save to reach it. The sooner you begin saving, the longer your money has time left to grow and accumulate value. Even if you can just save a small sum each month, the force of compounding will be working in your advantage over time.
People in their twenties who have a long investing horizon might devote more to risky assets such as equity mutual funds and stocks. Make use of tax-advantaged retirement savings schemes like the EPF and the National Pension System (NPS). Purchase health insurance to shield yourself from unanticipated medical costs that might deplete your retirement funds. Create an emergency fund as well.
Be consistent in your savings when in your 30s and 40s:
When you reach this age bracket, you should have a definite retirement target in mind. Strive for a corpus that will enable you to continue living your existing way of life. Boost your investments steadily to 20-25% of your income. After assessing your risk assets such as stocks and equity appetite, diversify your investments among mutual funds, gold, Infrastructure Investment Trusts (INVITs), and Real Estate Investment Trusts (REITs).
Continue to contribute to NPS while increasing your payments to EPF and Voluntary Provident Fund (VPF) as well (as these are pre-tax investments, and hence will have a dual-advantage of reduced tax outgo fro your salary). Establish debt repayment measures as soon as possible. Individuals in their 30s and 40s reach a certain amount of stability in their professional as well as personal lives. As a result, people must begin saving for retirement at this point.
Catch-up game in your 50s:
This is the age period to make up for whatever retirement goals you may have fallen behind on. Get a precise assessment of your retirement capital requirement and make any required modifications to the amount of money you save. Experts recommend looking into pension plans that offer annuities, which are the only instruments that may provide an assured income stream for lifetime. Consider reducing your other risky assets (such as small-cap stocks and cryptos) in order to increase your nest egg for retirement. The 50s are a pivotal age for saving for retirement, because it is now or never. Those who are still providing to their children’s education expenses or caring for ageing parents, may find it difficult to increase their savings. Individuals in this age group must exercise caution when it comes to child marriage. Trying to avoid extravagant weddings for your children, over and above your means is a good idea to follow.
Those who have missed their retirement deadline can think about prolonging their working life by a few years. Set aside around 30% of your salary for retirement savings and emphasise debt reduction.
You can invest in retirement savings instruments such as EPF and PPF, as well as in large-cap and hybrid mutual funds (such as equity savings funds). You should keep in mind that ‘as you approach retirement, shift majority of your capital towards fixed income investments’.
Thumb rule for Retirement Portfolio:
When you retire, you should not have more than 100 minus your age in equities. That is, investors in the age of 60 should invest no more than 40% of their portfolio in equities and the remaining 60% should be in debt instruments. Furthermore, investors should only make this type of allocation if their risk tolerance allows. With time, your retirement savings portfolio should shift more towards debt instruments and should become less risky. If investors are cautious and risk averse, they can invest up to 80% of their capital in debt instruments and only 20% in equity when they retire.
