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How to build your retirement corpus

For a comfortable retirement, it's essential that you start saving early, choose good products, avoid debt and review your retirement plan from time to time


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Still reeling at the number of zeros you've found in your retirement goal? Don't get your heart rate up. While the corpus you're targeting may seem daunting today, it is well within reach with some disciplined investing. Here's a five-step recipe to building the corpus you need.

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Start young
It may be a little odd to start thinking about hanging up your boots when you are just putting them on for your first job. But an early start makes the difference between sprinting towards your target like Hima Das and huffing and puffing towards it like an octogenarian.

Let's see how much a 25 year-old (let's call her Alyssa) will need to invest at different points in her life if she wants to get to the retirement kitty of Rs 12.5 crore. If she starts off immediately at 25, she has 35 years to go to retirement and a monthly SIP of about Rs 22,690 in an equity fund earning 12 per cent will get her to her goal. But if she waits until 35, the SIP amount she needs shoots up to Rs 73,430 at the same 12 per cent return to get her to it. This demonstrates that starting early is the single most important thing you can do to scale the Mount Everest that is your retirement goal.

Step up
What if the Rs 22,690 monthly savings we mentioned is a tall order for Alyssa to save in her initial working years? That problem is quite easily solved by starting off with an affordable number and stepping up one's SIPs as one's career takes off. If Alyssa starts with a Rs 10,000 SIP in her first year and increases it by 10 per cent every year, she can get to Rs 11.3 crore, which is within touching distance of her retirement goal (Rs 12.5 crore) by the time she retires. Apart from raising your savings with your income levels, ploughing any windfalls or bonuses that you receive in your working years into your retirement kitty can help you get to your goal faster.

Apart from stepping up your savings in a disciplined fashion, it is important not to stop your SIPs or make abrupt changes to your asset choices if the equity markets go through a bear phase or a prolonged period of low returns. Persisting through these phases is in fact what reduces your acquisition costs and bumps up your long-term return from equities.

Don't stick to EPF and PPF
Many folks make the mistake of thinking that the monthly contributions they're paying into the Employee's Provident Fund or Public Provident Fund will comfortably take care of their retirement. After all, where else do you get tax-free returns of 8 or 8.65 per cent?

But the main competitor that you're trying to race against when planning for retirement is inflation. And EPF and PPF may not be the best investments to stay ahead of inflation in the long run. Inflation rates in India may be lying low for now. But over the past decade, investors have had to live through whole decades of 8 per cent plus inflation. Both the EPF and PPF invest much of their funds in government securities, which offer the lowest interest rates in the market. Therefore, expecting these vehicles to consistently beat inflation is unrealistic.

You should also note that the 8 per cent plus interest rates you're seeing today on the PPF and EPF are rates that apply to the current year and are not guaranteed for perpetuity. If interest rates in India fall in the long run, the returns you earn on these vehicles will plummet, too.

Equity investments, in contrast, benefit from falling rates and offer you a better shot at beating inflation in the long run. A rolling-return analysis on the Nifty 50 Total Return Index shows that over five-year holding periods, equity markets beat a 6 percent inflation rate a good 68 per cent of the time in the last twenty years!

The reason why most folks hesitate to include equities in their retirement portfolios is that they're spooked by the wild gyrations of the indices from day to day. But the daily movements of the indices detract from the steady upward climb that the Indian indices have managed over the last 25 years.

Therefore, think of your PPF and EPF investments as just the safe debt component in your retirement portfolio. The bulk of this portfolio, ideally 80-90 percent if you are below 50, should be in equities. For the equity portion, start SIPs in two-three multi-cap funds with a good track record. If you're a newbie investor who isn't sure about choosing the right funds, don't delay. Start off with SIPs in a Nifty 50 and Nifty Next 50 fund.

If you are wondering about the tax exemption that the EPF and the PPF get you, you can consider the tax-saving variant of multi-cap funds: equity-linked savings schemes. They have also moved in line with the multi-cap category.

Stay off savings destroyers
Starting early and getting a good dose of equities gives you an early advantage in retirement. But meeting that target still isn't easy. We suggested that Alyssa either save Rs 22,690 a month starting now or start at Rs 10,000 and step it up by 10 per cent every year until 60, to get close to her target (based on a moderate return assumption of 12 per cent on her portfolio).

But to save so much of her income throughout her career, Alyssa will also have to be careful about not wasting any money or investing in the wrong products.

EMIs on loans early in your career, especially high-cost personal loans or credit-card loans, can be a big drain on your finances, preventing you from making any meaningful savings towards your long-term goals. So can over-investing in property or land. Many young folks in their 20s and 30s believe that buying a luxurious home is a sign that they've arrived. But stretching your budget to buy a home can rob you of not just your mobility and flexibility but also your savings potential during the best years of your career. Even at the current reasonably low interest rates, a Rs 50 lakh home loan comes at an EMI of Rs 49,390 per month. At the end of 15 years, you would have paid back the bank nearly Rs 90 lakh to the bank. Had you rented a similar home at one-fourth the cost, you'd have a lot of that money sitting in your retirement portfolio!

Folks in their 40s or 50s often decide to buy their second or third piece of property as their income levels rise. But given the abysmal rental yields in India and uncertain capital appreciation, leveraged property investments often prove wealth-destroying rather than wealth-enhancing moves. At this stage in life, you should be avoiding EMIs and putting that money to work on your retirement.

Steering off poor investments that vacuum up your savings is equally important, too. This means staying off high-cost investment-cum-insurance plans and other opaque options.

Review and adjust
Finally, no piece of financial advice given to you today, including that on retirement, may hold good for all times. Folks who retired in the nineties could afford to live entirely off fixed-income investments that paid them double-digit returns, without any need for equities. Those who did so after 2000 had to face the double whammy of high inflation and low rates and couldn't do without equities.

Therefore, the size of investments, asset-allocation plan and choice of avenues that we suggest today for your accumulation phase will change if inflation rates, interest rates or equity returns change dramatically. This makes it imperative for you to review your retirement portfolio twice a year to see if you are on track.

 
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