Understanding Retirement

Retirement doesn’t mean to stop working at the age of 60 years. The age of 60 years is not set in stone for retirement. Simply put, retirement is a stage of your life where you have either have a sufficient corpus, assets or inflows, which will be sufficient to take care of all the expenses for the rest of your life. Retirement should ideally be taken once you have sufficient income that meets your expenses going forward. This could be before 60, at 60 or after.

The question is how to make your retirement life enjoyable?

Believe it or not, it can be done only by creating good amount of wealth and that wealth will take care of all your future requirements. Here some tips are highlighted which you may consider for your retirement planning.

Set your retirement goal today

Knowing how much you will need is the vital question and another one is determining your retirement age. Everyone wants to retire early instead of the universal retirement age of 60 years. Requirement of retirement corpus depends on the tenure of retirement life, life style and spending habits. Longer the retirement life, larger the retirement corpus required (and vice versa) for an assumed fixed spending behaviour.

The following steps should be carried out by you or your financial planner:

  1. Analyse your current spending habits and identify your expenses which are likely to be continuing in with your retirement phase.
  2. Identify what are your inflows during retirement phase like any rental income, annuity income, have any pensionable income or not and any other inflow.
  3. Check the gap between your retirement inflows and outflows. If there is deficit then you need to plan your investment to meet that gap.

Start investing early

Planning your retirement is not an old man’s game. Early investment itself has some big advantages such as power of compounding, better risk management, better investment opportunities and most importantly more number of compounding years.

Compounding effect plays a vital role in accumulation of retirement corpus. Defined simply, compounding means “earnings on earnings”. It enables you to earn a return on the return previously earned.

You need lesser capital to achieve your targeted retirement corpus if you start investing early.

The following case study will help you to understand the advantage of early investment and power of compounding:

Let’s consider two friends of different age group 30 years and 40 years. Both of them wish to create their retirement corpus of Rs 5 crore by their age of 60 years.

Investor Age in years Investment period in years Rate of return assumed Monthly investment required Target corpus Total capital invested Total earnings
Mr A 30 30 12% p.a. 16,230 5 Cr 58,42,800 4,41,57,200
Mr B 40 20 12% p.a. 54,356 5 Cr 1,30,45,440 3,69,54,560

 

Mr B needs a monthly investment of Rs 38,126 more than what Mr A invests to achieve the same retirement corpus, because he delayed his investment by 10 years.

We can see from above table that one should need less investment capital to achieve his target corpus because of starting early investment and power of compounding.

Asset class selection

Asset class is the most important factor which affects one’s investments. Choosing the right asset class is the key factor of an investment strategy. Your corpus accumulation will depend on the asset class you have chosen.

Equities have a potential to outperform other asset class. However it also carries higher risk. On the other hand, debt instruments come with little or minimal investment risk and have the potential to add stability to your portfolio, but it will generate lower return on your capital invested.

Selecting an asset class depends on your risk apatite, tenure of investment, market volatility etc. It is advisable to speak to your financial adviser or financial planner for the right asset class.

Following table helps you to understand how the asset class will affect your corpus:

Assuming Rs 1 lakh invested annually over 30 years.

Portfolio A (Pure Debt) Portfolio B (Debt with some equity exposure) Portfolio C (Equity is more than debt)
7% 10% 12%
1.01 Cr 1.81 Cr 2.7 Cr

 

3% extra returns increases the corpus by 80% (Compare between portfolio A and B).

5% extra return increases the corpus tremendously by 170% (Compare between portfolio A and C).

It doesn’t mean that debt cannot be a part of retirement portfolio. Debt instruments have the potential to add stability in portfolio. It helps to protect the corpus on a later stage of life i.e. when we near retirement. One should start diverting his retirement corpus towards debt instrument when he is nears to his retirement.

Debt management

It is a good practice to pay off all your EMIs before retirement. In earning phase EMI is the largest component of our outflows. It may be in the form of home loan, a car loan or a personal loan EMI. We as Indians are more attached to real estate investment and everyone wants to purchase his/her house. On the other side, we also have tendency of spending more during festivals. What happens, during festivals we forget about our income and start shopping through credit cards and other EMI options because of festive offers. Some time unplanned debts will hamper our investments because we try to pay our debts first instead of investing. Carrying your debts to retirement life will make terrible impact on your retired life. Either, you will use your retirement inflows to pay EMI or use a part of your retirement corpus to settle down your debts in one short. In both cases will create hurdles for your happy retired life.

Avoid withdrawal from retirement corpus

Retirement is the farthest goal in our life and generally we think that we have enough time to create retirement corpus. Some time we utilise our retirement corpus to fulfil our immediate requirement like purchase of house, car and child education etc. Normally people are not transferring their EPF contribution during job a switch; they withdraw their EPF and consume it. This habit will never make you to create your retirement corpus. Filling a pitcher with water that have hole in it bottom is really impossible. So don’t make holes of withdrawal in your retirement corpus pitcher.

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Samnivesh is a web portal through which it seeks to connect to individuals and families that are looking to invest in the Indian Capital Markets. An initiative by Elite Wealth Advisors Limited is an effort to disburse knowledge regarding Financial Planning, Investments in different products and Insurance. Today, there are a plethora of products that are available for the retail investor to invest his hard earned money: Secured and Unsecured NCDs, Debt and Equity Mutual Funds, ULIPs, Taxable and Tax free Bonds just to name a few...Read More

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