It is easy to assume that the lifestyle you maintain today will continue for the rest of your life. ‘The rest of your life’ includes the time period post retirement. How do you plan to maintain the same lifestyle with a fixed income? Let us rephrase the question a little. How do you plan to maintain a steady income when you retire? You might have an idyllic image where you see yourself spending leisurely hours with your near and dear ones or enjoying yourself on a lovely cruise. The bottom-line is you want to retire rich, rich enough to grab all that life has to offer. If your savings or investments are working on the assumption that it will be enough or it is too early then you may not have sufficient funds for retirement.
Retirement planning is one those financial goals that cannot be fulfilled through any alternative means. The goal of higher education or buying a house can be fulfilled through loans because you borrow from your future income. However, retirement does not provide you with that luxury. This goal entirely relies on your present income to build a future, a future in the absence of steady income. This does sound a little scary but stories around you or your grandparents who may be living a fantastic life in their retirement want to make you believe even you can retire rich. Let us see how this scary looking goal can be made possible in the long run.
This is the easiest and a sure shot way to achieve your retirement goal. Unfortunately this step is followed by few. Investors in 20s and 3os have a tendency to assume that they have a long investment horizon ahead of them and delay retirement planning or focus on other goals. This ensures that they lose out on time value of money. If you start early it does not matter if the amount invested is a small sum as it will still generate a substantial inflation adjusted corpus. Let us see an illustration.
Source: Advisorkhoj SIP Calculator (Retirement Age considered as 60)
In the table above it is seen that the investor who started investing at the age of 20 is clearly the winner. The investment may have been the least but it was able to benefit from the magic of compounding over an investment horizon of 40 years. The older investors may have invested double, treble or six times the amount, their investments lagged behind. Hence, the need to start early has no substitute and most crucial for building your retirement corpus.
You may have been scared off by your well wishers who made equities sounds like gambling. They told you equities are risky, barely produces returns and an investment goal like retirement should not depend upon the volatility of equities. It could not have been further from the truth. Investment in Equities or Equity oriented mutual funds are your best friend in this long journey. Equities are risky in the short term. However, if you are not getting bothered by the daily fluctuations in the stock market you are good to go.
Historically, equities as an asset class has given decent inflation adjusted returns over a long period of time. If your investments have been parked in fixed deposits or public provident fund or even worse savings accounts then your returns are far behind the steeply rising inflation. Let us compare the returns between PPF and Equity Mutual Funds -
Source: Advisorkhoj SIP Calculator & PPF Calulator
From the table above the difference in both the returns is glaringly visible as to which investment is going to be retirement friendly. Equities have been consistently known to beat the inflation and a steady option for investors in the long run. Hence, make equities your best friend to fulfill the dream of retiring rich.
Putting a price tag on all that you want to achieve brings you a step closer to achieving it. The inflation is the silent monster that comes and declares your savings and investments as not enough. This could be extremely demotivating if you are close to your retirement. Hence, calculating the future price is crucial to achieving it. Prices in the economy rise as a result of inflation. The future cost of your goals is going to be much higher than the present cost of the same goal. Your investments must be aimed at covering the future cost. If Rs 40,000 is enough to cover your present monthly personal and miscellaneous expenses then 10 years from now on, assuming inflation stays at 7.5%, the future expenses will be Rs 82,441 monthly. Therefore, your investments should be aimed at generating this future cost and not the present cost.
Assets are those possessions that are capable of generating income in the long or short run. Assets can be in the form of gold or possession of precious metal, property or land and anything that can provide liquidity. Investors who take retirement planning seriously or have funds lying around tend to incline towards purchase of properties to reap returns in terms of appreciated property prices. These properties (if you have more than one) may be capable of generating fixed income in the form of a rent. In the eve of the sale of a property the appreciated prices ensure a lump sum which may probably be above the original invested amount. However, it is advisable not to invest much in properties while planning for retirement. Instead you should explore other avenues of investment apart from equity mutual funds like National Pension Scheme which provides exposure to debt and a fixed income from the age of 60 onwards. To know more about National Pension Scheme read here. Remember, assets can be your pillars in the retirement phase and the ones you can comfortably lean on.
Money cannot buy happiness but with the right price it can bring you closer to that. Hopefully retiring rich will not be a wishful dream anymore but a palpable reality, the one that you had set out to achieve and hopefully will. Do not underestimate the value of time and let it pass by. If you have let some of it go may be its time to start working towards fulfilling your dream and save for the retirement life you have dreamt of.
An Investor Education Initiative by ICICI Prudential Mutual Fund to help you make informed investment decisions.
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