Prepare for retirement while young

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Retirement is a stage of life which everyone goes through. The continuous flow of money through salary stops but the expenses remain almost at the same level. So, how does one manage expenses? This is a question that is on the minds of every middle-class family in the country.

ICICI Prudential Life Insurance found in its retirement survey that retirement is a major concern for 83% of people. In the survey, 67% of people identified that the biggest risk to their retirement savings is the increasing cost of living e.g. inflation and rising healthcare expenses. If one wants to combat inflation, then, it is not just essential for him to invest, but also to select the right investment options. Let’s understand what should be included in one’s financial planning?

Required corpus

The first calculation should be to determine how much money is needed for retired life. For example, a person Rahul is currently 32 years old and plans to retire at 60. Assuming he lives until 85, he will need to arrange for expenses for 25 years after retirement. He spends  60,000 rupees on ration, household bills, fees, and EMI. Assuming an average inflation rate of 6%, Rahul will need  3,06,701 rupees in the year 2051 to meet these expenses. He will need to accumulate a corpus of approximately  Rs 7 crore to meet these expenses for 25 years.

Why will expenses worth  Rs 60,000 become Rs 3,06,701 in the future?  Why are we assuming that the expenses will remain the same even though some expenses may reduce with age? However, it is important to note that the cost of living increases with time, and healthcare expenses usually increase with age. Therefore, it is essential to consider the effects of inflation and rising healthcare expenses while planning for retirement.

Source of funds

Rahul’s goal is to accumulate a corpus of Rs 7 crore for retirement. So how will he arrange this money? Let’s reduce Rahul’s tension a bit. Rahul has already arranged Rs 1.5 crore out of Rs 7 crore corpus. Rahul is salaried and 24% of his basic salary is deposited every month in his Employee Provident Fund or EPF account. (Show this EPF:- 12% of employee contribution+ 12% employer contribution)

He will receive this money when he turns 60. With Rs 1.5 crore arranged, the remaining Rs 5.5 crore needs to be arranged. Experts suggest that when you have a long time horizon, you should choose equity-related investments. Because these are more useful in beating inflation than other investment alternatives.

Rahul has 28 years to invest. If he starts investing in equity mutual funds at this point of time. He can easily accumulate a corpus of Rs 5.50 crore. If he invests Rs 29,000 every month through a systematic investment plan in equity mutual funds. With an estimated return of 10.5% he will accumulate Rs 5.90 crore in 28 years. If Rahul is not in a position to invest 29,000 rupees, he can start with rs 11,000 per month and gradually increase it to reach a corpus of 5.50 crores with an estimated annual return of 10%.

NPS vs MFs

Mutual funds  returns are subject to ups and downs of the market. Therefore, it is important to keep an eye on performance. If Rahul cannot track his investments regularly, he can invest through the National Pension System  in Mutual Funds. In NPS, Pension Fund Regulatory and Development Authority has created special fund for retirement. You can start investing by registering online on the eNPS website. Pension funds invest in equity, corporate debt, and government securities based on the investor’s age. Pension funds have provided a return of 9-10% in the last five years. Even if Rahul invests  Rs 29,000 in NPS instead of mutual funds, he will accumulate a fund of  Rs 5.30 crore. However, the drawback of NPS is that the investor does not receive the full amount at maturity. The money remains locked until the age of 60, and after that, only 60% of the amount is tax-free when you withdraw the money from NPS. So, Rahul will receive  Rs 3.18 crore, and he will have to buy an annuity of Rs 2.12 crore. The annuity is fully taxable. On the other hand, when you invest directly in Mutual Funds instead of NPS, you have the flexibility to withdraw the entire corpus.

Crucial steps

There are three important steps in retirement planning. The first is to understand how much capital is needed, the second is to choose where to invest, and the third is to start investing, and the best time to start investing is now. The longer you wait, the more you will need to invest to reach your goal. As long as you are earning, banks will be eager to offer you credit cards for shopping.  you will have a queue of lenders for every small or big need. But unfortunately, retirement loan providers won’t be available to you. Therefore, retirement planning is the most essential planning for your financial life.