How to fund your post-retirement life

Start building your retirement corpus early to enjoy the power of compounding.
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First Published: Tue, Feb 12 2013. 05 44 PM IST
Hemant Mishra/Mint
Hemant Mishra/Mint
Updated: Tue, Feb 12 2013. 07 42 PM IST
Many of us dream of being able to travel with no worries of work or responsibilities to bog us down. And some of us work solidly all along dreaming of a retirement where travel is the work. But how much thought do we give to that future in terms of money? How will the current lifestyle sustain at the minimum? Pensionable jobs are getting rarer and most people have to depend on their own savings pool for their silver years at a time when life expectancy rates are steadily going up, as are healthcare costs. Look at your parents—don’t their medical needs point to a future we all face? Remember, mediclaim will not fund the shooting costs of consultancy, diagnostics and medicines themselves.
Scared? Great. That was the intent. So now that we have your attention, let’s get down to some serious math. You’re 30 years old and you think that retirement is something that happens to your dad. Sure, it does. But you’ll get there. What you may not know is that delaying investing till you see the first thread of white in your head may cost you big bucks. For every 10 years you delay, you will need to save three times as much each month to catch up. Anil Rego, chartered accountant and CEO, Right Horizons Financial Services Pvt. Ltd, a financial planning firm, says that one should never under-estimate the power of compounding: “The amount you could have saved, say, if you had started saving at 30 would be significantly higher than if you start when you are 40.”
Let’s take the case of a person who starts investing at age 30 and another at age 40. They both invest steadily through to age 60. Both invest Rs.5 lakh a year that grows at a post-tax return of 8%. The 30-year-old would sit on Rs.5.6 crore at age 60 and the 40-year-old would have less than half at Rs.2.2 crore. A difference of just 10 years. Think about that.
What? You’re 40 and think you’ve missed the bus? Do you know what will happen if you wait till 50 to start? Why, you’ll have just Rs.72 lakh at age 60 for the same annual savings and the same growth rate. So here’s the deal. If you start early, you need to save less. The later you begin, the more you will have to allocate to savings. And a second problem is that your freedom to be aggressive with your investments plunges with age. “Someone who is in their 20s can take higher exposure to equities. Whereas, someone in their 40s will have more of fixed income, which will give them returns that could just about equal inflation,” says Prateek Pant, director, products and services, Royal Bank of Scotland Pvt. Banking.
What to invest in?
The biggest question when we begin investing for the long term is what to invest in?
EPF: The first product in your portfolio is the trusted Employees’ Provident Fund (EPF). Suresh Sadagopan, a Mumbai-based financial planner, says that one should consider their EPF as a long-term investment. Every month you park 12% of your basic plus dearness allowance in your account and your employer matches the investment. Currently EPF earns 8.25% tax-free annually.
“Let this be a forced investment. Whenever you change a job, unless it is absolutely unnecessary to withdraw, transfer your PF to the new place. Do not withdraw it,” says Sadagopan.
PPF: Instrument two is the good old Public Provident Fund (PPF). You can invest between Rs.500 and Rs.1 lakh a year and earn tax-free returns on a 15-year guaranteed product. PPF currently returns 8.80% per annum. You can open an account with the post office, public sector banks and certain private sector banks such as ICICI Bank Ltd. Did you know that you can make national electronic funds transfers into your PPF account with a bank? And that private sector banks offer online access and maintenance facilities for your PPF account?
Equity: But long term investments need a return kicker and for that your portfolio would need equity exposure. The BSE Sensex has given 19% and 11% an annualized basis, respectively, in the last 10 and 20 years.
In fact, even managed equity funds have done very well over the long term in India. There are 92 equity funds that are more than 10 years old and they have returned 13-32% on an annualized basis over the last 10 years.
“Equities give good returns over the long term. Start investing small amounts when you initially start earning. You can start with as low an amount as, say, Rs.1,000. And as your pay increases, increase the amount of your systematic investment plan,” says Sadagopan.
Very well, you say, but what to buy? There are more than 2,823 schemes in the market. Well, the answer is at hand. Look at Mint50, our curated list of investment-worthy mutual funds. Choose a mix of large-cap, mid-cap and sector funds that total no more than five to seven.
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First Published: Tue, Feb 12 2013. 05 44 PM IST