To ensure that we live our retired life comfortably, the way we are living today, it’s important that we plan our financial goals prudently during our working life. That’s the key to a happy retired life.
And they lived happily ever after... This is something we often hear in the movies, or in the early days of one’s married life. But, as a matter of fact, one shouldn’t accustom oneself to hearing or thinking about these words just at those instances, but rather strive to ensure that one’s financial goals work out in such a manner that these fond memories continue into their retired life. And as we have said, to ensure that, one needs to have a financially secured retired life and, accordingly, plan for it during one’s work life.
THE REAL DANGER
Life expectancy is on the rise and this means that the non-earning period after your retirement will put that much more strain on your monthly expenses. The danger that lies ahead is obvious and cannot be brushed under the carpet. Your monthly expenses of `50,000 now would balloon to `1.32 lakh in 20 years time at an inflation of 5 per cent a year. The rise in income can offset this inflationary impact, but, maybe, not to that extent.
The solution to having adequate funds in our retired life lies in our present and this also decides the shape of our future. As such, retirement planning becomes an important part of our financial planning during our working life.
Being an early beginner is a good recipe for success in all walks of life, even in investing for our future needs. The bottom line is the time horizon—the longer one remains invested in equities, the better is the return. Thus, if someone has to benefit from investments, one has to make an investment pretty early in life and remain invested long enough so that the investment generates enough funds to meet the goals at the right juncture in life. When it comes to savings, too, the early birds have an advantage over those who are off the blocks late. They manage to save a decent pile for all their requirements with much less fuss. Ironically, when one is young, the reason to save is largely ignored and the focus is always on spending. The general attitude is investing can wait for now and, as such, saving is not top priority. It’s a different matter though that having a clear-cut financial path helps. If you start saving from the age of 25, you can begin with saving 10 per cent of your net income till the age of 30, by when you are likely to be married. Here, even if your savings dip a bit, the head start from your early savings gives you an extra edge.
Power of compounding: The earlier you start investing, the more time your money gets to grow. If you start saving early, even in small amounts, it will help you build a sizeable savings portfolio. The rule is to invest regularly and keep reinvesting the returns. Thus, your earnings will also participate in getting more returns. Take the example of A and B (both aged 25 years). While A invests `2,500 every month, B does not. After 10 years, B begins saving `5,000 each month. When both A and B turn 45, on a realistic 12 per cent per annum return, A’s kitty is a sizeable `22.78 lakh, while B’s is nearly half at `11.09 lakh, despite having invested more than A. Thus, to avoid B’s predicament, start investing early on in life.
Arriving at your pension needs: Consider your monthly expenses at current costs. Assuming an inflation rate of about 5 per cent a year, inflate them for the number of years left for you to retire. This gives you the amount of inflated monthly expenses you would need to survive through your retired years. Estimate how much you need to start saving from now till your retirement age to amass a corpus that will provide you with an inflated monthly amount. Without exactly knowing the monthly savings required, one should not venture into planning and savings for one’s retirement. Illustratively, say someone wishing to retire after 20 years has an annual expense of `6 lakh at current costs. Assuming an inflation of 5 per cent, in order to meet his current expenses, he would need about `16 lakh in the first year after his retirement. And this amount will also keep increasing at 5 per cent per annum for every subsequent year. To meet this figure, he will have to save approximately `25,000 each month from now on assuming the investments grow at 12 per cent a year.
The approach: One may invest in a lump sum at regular intervals. Alternatively, one may even choose to invest through a systematic investment plan(SIP). The latter involves investing a certain fixed amount of money at regular intervals rather than investing a larger lump sum amount in one go. This form of investing is largely suitable for an investor who doesn’t have a lump sum to invest, but wants to regularly keep investing in the stock market. By investing through SIP, you are not attempting to capture the highs and lows of the stock market but rather averaging the cost of your investment over a period of time. The essence of SIPs is that when the stock market falls, investors automatically acquire more units, and vice-versa. In other words, the investor buys fewer units when prices are high and more units when the prices are low. Hence, the average cost per unit drops down over a period of time.
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