The goal of retirement planning is to achieve financial independence in your retirement years without comprising on your lifestyle. In the absence of a regular monthly salary in your retirement, the income from your savings will have to pay for your regular expenses. In this blog post, we will discuss about the challenges and the key success factors in retirement planning.
Challenges of retirement planning
Unclear retirement goal: How much savings / investment corpus should you have by the time you retire? - It’s time to calculate your retirement corpus. If you save less than what is required, you will fall short of your retirement goals.
Inflation: You can save a fixed amount every month for retirement, but your living expenses will increase over time due to inflation. Assuming at 30 years your monthly expense is Rs 50,000. By the time you retire, - considering an inflation rate of 5%, your monthly expense will be Rs 2.2 Lakhs. You – ought to factor inflation in financial planning for retirement.
Lifestyle progression over working life: As your income increases, your lifestyle improves. It is thus difficult to know what will be your lifestyle then and this makes retirement planning all the more difficult.
Starting too late: Most of us have an active work-life of 35 to 40 years after which our retired lives start. If you begin your retirement planning at the age of 40 or 50, then it’s difficult for 10 to 20 years of savings - to pay for 25 to 30 years of post-retirement expenses. This throws a big challenge.
Multiple goals: Retirement is not the only goal as we’ve-multiple goals at different stages of life like purchasing vehicles, house, children’s education, children’s marriage etc. We often prioritize short term goals, putting our long term goals at risk.
Not enough savings: We often hear from investors that after paying for their regular expenses, EMIs and discretionary lifestyle related expenses, there are little savings left for long term goals. One should note that Retirement planning requires money and if you are not able to save enough then you may not be able to maintain financial independence during your retired lives.
How to overcome these challenges – key success factors?
Have a plan: Financial planning is of utmost importance in meeting different life-stage goals, including retirement planning.It involves defining clear goals, goal time lines, quantifying the goals and developing an investment plan to meet your goals. Financial planning should always factor in inflation. You should keep revisiting your financial plan through different stages of life and save accordingly.
Early start: Though money needs time to grow, but over long periods, investors can create a lot of wealth through the power of compounding. Power of compounding is profits earned on profits and can create wealth exponentially for investors. The chart below shows the growth of Rs 10 Lakh over different investment tenors assuming return of 10% p.a. If you start early you will be able to create your desired retirement corpus with a much smaller investment.
Above chart is for illustration purpose only
Invest through SIP: Mutual fund systematic investment plan (SIP) is the best solution for investors who are not able to save a large amount every month due to financial commitments. You can start your SIP with a small amount as low as Rs. 500 and increase it over time as your income grows. The table below shows the corpus accumulated for different monthly SIP amounts over different investment tenors at 12% return p.a. You can see that you can accumulate a much bigger corpus by investing a much smaller amount through SIP.
Suggested reading: Why you should continue with your SIPs even in volatile or lower market
Invest in the right asset: It’s - not enough to save; you should invest in right asset class to achieve success in your retirement planning. Different asset types have different risk / return profiles. Equity is the riskiest asset class but has been giving - higher returns in long term as per the past records, whereas debt is less risky but gives lower returns comparatively. If you get an early start to retirement planning, you will have a long investment tenor, which will enable you to take more risks and potentially earn higher returns. The chart below shows the growth of Rs 10 Lakh investment over different tenors and rates of returns.
Above chart is for illustration purpose only
Suggested reading: What is asset allocation and the importance of it
The key takeaways for retirement planning in this blog post are:-
- Start your retirement planning early to maximize investments through the power of compounding.
- Optimum asset allocation is important for retirement planning. When you are young, your asset allocation should be mostly in equity, progressively shifting to debt as you near your retirement age.
- Invest in SIP to harness the power of compounding and to create wealth from your regular savings. Increase your SIP investment amount with time.
- Have a financial plan and consult a financial advisor if required.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.
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