The when and how of retirement planning

Financial planning involves a systematic approach to fulfill various life goals. While these goals may vary from one individual to another, retirement is one goal that is common for everyone. In India, where around 62.5% of the working population is between 15 and 59 years, retirement planning is even more crucial.

However, retirement planning is one element of financial planning that is often overlooked or put off until too late. This delay could be a costly mistake because starting retirement planning late may lead to a loss in terms of market-linked investment returns and tax benefits during your working years.

By planning your retirement prudently, you can provide a comfortable life after your working years. So the question arises, when and where to begin? Let’s find out.

When to start retirement planning?

The short answer is - as soon as you get your first paycheque. Your 20s or 30s are the best years to start retirement planning because you get to enjoy the power of compounding. Compounding is essentially the phenomenon where you earn interest on interest, allowing your money to grow exponentially rather than linearly. And the longer you remain invested, the more the power of compounding helps your funds grow.

When you are younger, you have lesser financial responsibilities allowing you to save and invest more. With time on your hand, you can afford to invest in potentially rewarding instruments like equities. While the equity market may be volatile in the short run, the data shows that you can offset this volatility in the long term to earn stable, inflation-beating returns.

Starting a SIP in your 20s or 30s can pay off significantly over the long term. Here’s how: A monthly SIP of Rs 5,000 at 10% per year, from age 30 to age 60, creates a corpus of Rs 1.13 crore. But even a higher monthly SIP of Rs 10,000 at 10% per annum, from age 40 to age 60, creates a corpus of only Rs 76 lakh.

Putting off your investments just by a couple of years can affect your retirement corpus. So, get a head start on your retirement plan in your 20s or 30s to make the most of your earning years.

While starting the retirement process sooner has its advantage, there is no need to panic, if you are late. If you are closer to your retirement age, all you need is to modify your retirement planning. The most critical aspect of late-stage retirement planning is risk reduction. Your focus needs to shift from aggressive capital appreciation to calculated capital preservation.

Reduce your exposure to volatile assets like equity gradually, and increase your fixed-income exposure. This way, you can have a steady source of income to replace your primary income once you stop working actively. You can consider options like debt funds, fixed deposits, gold, and other safe investment avenues to achieve your goal.

Where to invest

The Indian financial market has a wide range of investment options to help you build your retirement fund. Some of them are as below:

Equity Funds

Equity funds are mutual funds that invest in direct equity assets. Mutual funds give you a head start if you begin investing in them when you are younger since they have the potential to generate better returns. And equity mutual funds generate the highest returns with the additional benefits of professional management and ease on the pocket.

Debt Funds

Debt funds can help middle-aged investors build their retirement corpus without taking on high levels of risk. These mutual funds invest in debt market instruments like government bonds, corporate bonds, and other debt securities.

National Pension System (NPS)

The NPS is a government-backed initiative that helps you voluntarily save for your retirement during your working years. You can withdraw a portion of your corpus at retirement and use the remaining funds to receive a steady pension.

Public Provident Fund (PPF)

PPF is another long-term investment option with tenure of 15 years. You can invest any amount from Rs 500 to Rs 1.5 lakh each year, and you earn interest on these investments at 7.1% per annum. You receive your capital and the interest accumulated when you retire.

Conclusion

The bottom line is that retirement planning is not an exercise to be put off. By carefully planning your retirement, you can lead a comfortable and financially independent life in your golden years.