Many young people cherish the dream of retiring from their nine-to-five job by the time they are in their 40s or 50s and then spending the rest of their lives travelling the world or pursuing hobbies. But it is when you sit down to calculate how much you'd need to save to achieve this dream that reality hits you hard. Use any online retirement calculator and you will find that your mind boggles at the size of the corpus you will need to build for a comfortable retirement.
Estimating the target sum you would need for your retirement is a tricky task because the number depends on so many moving parts - your lifestyle, inflation rates, investment returns, longevity, etc. But using a simple calculation, if you are 30 years old and today spend Rs 60,000 a month, you'll need to build up a retirement corpus of nearly Rs 12 crore to generate the income you will need to meet your expenses (assuming inflation at 7 per cent a year, retirement at 60 and life expectancy of 85 years).
Now any investment goal of a crore or above flashing on the screen usually prompts young investors to simply give up and stop thinking about retirement. But the truth is that the retirement targets you see on these calculators are easily attainable provided you are disciplined and start early. The above investor will, for instance, need to save about Rs 17,200 a month and invest it in a vehicle earning an annual return of 15 per cent to get to that Rs 12 crore corpus.
But implementing such a strategy is easier said than done, given the many uncertainties of life. So here are five factors to keep in mind while constructing your financial plan for retirement.
First, retirement is a financial goal where it is absolutely imperative for your investments to give you returns that beat inflation. Given that most of us have to fund about 30 years of retired life (assuming you retire at 60 and live until 90) during a 35-year career (starting at 25), our retirement goals would be simply unattainable if we rely only on 'safe' fixed-income investments to accumulate enough towards retirement. This makes equity investments an essential component of your investment plan.
Two, while textbooks may recommend complicated asset-allocation plans that keep changing with your life stage as you work towards retirement, a heavily equity-tilted portfolio is really your best bet to get you to a comfortable corpus by the time you hang up your boots. In the illustration above, if the 30-year-old invests in an 8 per cent return debt option instead of an equity fund to save towards retirement, she would have to save over Rs 70,000 a month, an impossible task! Return data from the Indian markets shows that it is nearly impossible to make a loss from your SIP investments in an equity fund if your SIP runs for a minimum of four years. Therefore, we recommend that any investor who has five plus years to retire should rely heavily on equity mutual funds to build a retirement corpus.
Three, while the financial industry will bombard you with many special 'retirement' plans, a majority of them are sub-par choices to get to your goal. Deferred pension plans from insurers deliver very low returns; ULIPs tend to be opaque and rigid; retirement plans from mutual funds carry long lock-in periods. One of the key attributes you should look for from a market-linked product when you are saving towards such a critical long-term goal is transparency and the flexibility to move out if the product doesn't deliver. An SIP in a set of plain vanilla open-end equity mutual funds is therefore your best bet.
Four, don't be daunted by the high monthly savings target you see on retirement calculators. If you can't afford to save the sum they throw up, start an SIP with whatever sum you can manage to save. But do not forget to diligently step up your SIP amount every time you get an increment, switch to a better job or see a jump in family income. If you get a windfall, plough it into your retirement kitty through an SIP. Stepping up your SIP every year can work miracles for your retirement target. Tune out all noise about where the Sensex is and stick with your SIPs through market ups and downs, no matter how violent they are.
Five, no piece of advice in the financial world holds good for all times. Therefore, both your retirement targets and the funds you choose to invest in will need regular reviews (at least twice a year) to ensure that you are making adequate progress towards your goal. Your retirement target may change if you upgrade your lifestyle, add dependents to your family or witness a rise or fall in the inflation rates that you factored into your retirement target. The funds you chose will need to be replaced if they consistently lag behind benchmarks or peers. Therefore, do review your retirement portfolio at least every six months to verify if the funds need changes.
So if you've arrived at your retirement target, what investments should you choose to get to it? Well, if you are already contributing to the Employees' Provident Fund (EPF) through your employer, consider that to be the fixed-income portion of your retirement corpus. But don't rely on it to see you through your retirement. Start SIPs in three other equity funds to make up the bulk of your retirement kitty.
If you have over 10 years to retire, having a mid-cap and small-cap component to your retirement investments can add a kicker to your returns. Go for two multi-cap funds and one mid/small-cap fund. However, if you can't stand volatility, stick to two to three multi-cap funds. If you have less than 10 years, do not look beyond multi-cap funds.