BackAccount for inflation when saving for retirement
As you get closer to your retirement age, you should reduce your exposure to equity
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I am 41 years old and have systematic investment plans (SIPs) in the following mutual funds (MFs): 5,000 per month in a large-cap fund, 2,500 in a mid- and small-cap fund, 7,000 in another mid- and small-cap fund, 6,000 in a large- and mid-cap fund, 2,000 in a pharma fund and 5,000 in New Pension Scheme (NPS). I have lump sum investments as well: 73,000 in a mid- and small-cap fund, 1.81 lakh in two income funds. Will these SIPs take care of my retirement at the age of 55 years? I also have 10 lakh in fixed deposits, post office National Savings Certificates, which should take care of my child’s educational expenses. I have three life insurance policies, one child plan and a unit-linked insurance plan. I also have a medical floater policy for my family. I have opened a Public Provident Fund (PPF) account in my wife’s name. And I have around 3.5 lakh in my Employees’ Provident Fund.
—Jayaram Nag
You are currently investing 27,500 per month in MFs and NPS. The question is whether it is enough to provide for your retirement? There are few assumptions which you need to consider. With a working life span of 14 years you need to be disciplined in savings and need to increase it every year. We have assumed an average increase in savings of 10%. Average inflation and earnings on the savings are assumed to be 8% and 10%, respectively.
With the above assumptions, your principal savings will come to 92.31 lakh and corpus at the time of retirement will be 160 lakh. The critical point, i.e., the year when you start withdrawing from the principal corpus is when you turn 70 years. And by the time you turn 75 years you virtually are running out of corpus. This is what inflation can do. Hence, you need to ensure how the corpus can be increased. This can be done by either increasing your retirement age from 55 years to 58 years and/or by increasing your savings either now or on a regular basis. If you increase your retirement age from 55 years to 58 years, your principal corpus becomes 124 lakh and your retirement corpus will reach 257 lakh. The critical point becomes 83 years.
You also need to weed out those investments from your portfolio which will not be able to generate the desired returns. Review the five insurance policies and in case of underperformance and high recurring charges, it may be time to surrender the ones that are below the mark. The premium can then be added to savings to enhance the retirement corpus. Also, you need to increase your life insurance as the cover appears inadequate. Similarly, you need to review your MFs on an ongoing basis. You should continue with the PPF account.
As you get closer to your retirement age, you should reduce your exposure to equity and gradually increase the exposure to debt.
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