Retirement planning – Invest early, invest wisely

In my previous article I had discussed how to use our retirement corpus. Now we also need to understand, as young professionals how to build up the retirement fund. The 2 basic rules to follow would be:
1. The earlier you start the better as you have more time to save money.
2. Have the right mix of debt & equity in your portfolio, debt investments have low returns while equities carry higher risk ( though in the long run, equities always gives positive returns)
Some of the basic steps to follow are as follows:
1. Save 20% of your income of which atleast 10% would be for retirement and would not be withdrawn earlier.
2. Start an SIP in a mutual fund and automate the process by giving an ECS mandate to your bank. In this way, your retirement planning will stay on track.
3. Whenever you get a raise, allocate half of it to savings. You might not notice the change since you will be enjoying the other half of the raise.
4. Instead of withdrawing your EPF balance when you change jobs, transfer it to the new account by filling 'Form 13' and submitting it to the new employer. This should be at the top in your list of priorities at the new workplace.
5. Buy a health insurance cover that continues till you are 70-75 years old. It is difficult to buy one afresh when you are older and not so healthy.
6. Withdraw 5% a year initially, and then step up, save 24 times your annual expenses- as discussed in my last blog.
Link: How much should one invest for a comfortable retirement today?
Now let us see how much money you need to save for retirement assuming you are 35 years old, spending Rs.30,000 per month currently, retiring at 60 and life expectancy of 85 yrs age. Assuming a inflation of 6% your monthly expense is likely to be Rs.1,28,756 after 25 years when you retire. And you would require a corpus of ~Rs.3,55,00,000. Assuming your post retirement funds give you about 8% returns, you should have a comfortable retired life.

Year
Monthly expense (Rs.)
Yearly expense (Rs.)
Corpus Fund (Rs.)
Yearly Returns (Rs.)
Today
30,000
3,60,000
0
25
1,28,756
15,45,073
3,70,81,763
29,66,541
30
1,72,305
20,67,657
4,43,57,126
35,48,570
35
2,30,583
27,66,991
5,16,21,422
41,29,714
40
3,08,572
37,02,858
5,77,10,831
46,16,866
45
4,12,938
49,55,260
6,05,23,444
48,41,876
50
5,52,605
66,31,256
5,64,46,448
45,15,716
* Assuming a corpus of 24 times current yearly expense, inflation @6% & expected return @ 8% on investment
 The power of compounding: Invest early, invest wisely
Rs.5000 invested in a monthly SIP with expected returns of 15% over the next 25 years will give you a corpus of Rs.1.6 cr. If you started investing earlier by the age of 25 a similar investment would yield Rs.7.4 cr. The same amount of Rs.5000 invested every month in a debt instrument giving 8% returns will give you a corpus of only Rs.47.9 lakhs. Thus it always makes sense to start investing as early as possible & invest a part of your corpus in equity funds.

Monthly Expense:
30000
Current Age
35
Annuity Rate
8%
Retirement Age
60
Inflation
6%
Life Expectancy:
85
INVESTMENT CALCULATOR
Monthly expense at retirement
₹ 1,28,756.12
Monthly expense at life expectancy
₹ 5,52,604.63
Corpus required
₹ 3,54,75,633.82
SIP Required
8%
₹ 37,302.47
12%
₹ 18,881.60
15%
₹ 10,937.35
Lumpsum Required
8%
₹ 51,80,077.73
10%
₹ 32,74,259.03
12%
₹ 20,86,794.08
EPF/ PPF is possibly one of the best debt tax saving tools available. With returns of 8-8.5% p.a and fully tax exempted it offers the highest post tax returns among debt tax saving instruments and also has a lock in period of 15 years extendable by another 10 years.
Other investment options are as follows:
Small savings & bank FDs: A favourite for investors, returns are guaranteed but very low, post tax returns hardly beat inflation with returns of 7-8%
National Pension Scheme: A new option that can give good returns & tax benefits. One should choose an asset mix according to his/her profile and expect returns of 9-10%.
Life Insurance & Pension Plans: Pension plans are a good option but have very high charges and very little flexibility. LIC endowment plans are again a favourite for investors; returns are low at about 7% but tax free.
Find below a link to my retirement calculator. Please download the file to find your requirements.

Link: Retirement Calculator

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named 'The Tortoise' 

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