How to build your retirement corpus
For a comfortable retirement, it's essential
that you start saving early, choose good products, avoid debt and review your
retirement plan from time to time
Still reeling
at the number of zeros you've found in your retirement goal?
Don't get your heart rate up. While the corpus you're targeting may seem
daunting today, it is well within reach with some disciplined investing. Here's
a five-step recipe to building the corpus you need.
Start young
It may be a little odd to start thinking about hanging up your boots when you
are just putting them on for your first job. But an early start makes the
difference between sprinting towards your target like Hima Das and huffing and
puffing towards it like an octogenarian.
Let's see how much a 25
year-old (let's call her Alyssa) will need to invest at different points in her
life if she wants to get to the retirement kitty of Rs 12.5 crore. If she
starts off immediately at 25, she has 35 years to go to retirement and a
monthly SIP of about Rs 22,690 in an equity fund earning 12 per cent will get
her to her goal. But if she waits until 35, the SIP amount she needs shoots up
to Rs 73,430 at the same 12 per cent return to get her to it. This demonstrates
that starting early is the single most important thing you can do to scale the
Mount Everest that is your retirement goal.
Step up
What if the Rs 22,690 monthly savings we mentioned is a tall order for Alyssa
to save in her initial working years? That problem is quite easily solved by
starting off with an affordable number and stepping up one's SIPs as one's
career takes off. If Alyssa starts with a Rs 10,000 SIP in her first year and
increases it by 10 per cent every year, she can get to Rs 11.3 crore, which is
within touching distance of her retirement goal (Rs 12.5 crore) by the time she
retires. Apart from raising your savings with your income levels, ploughing any
windfalls or bonuses that you receive in your working years into your
retirement kitty can help you get to your goal faster.
Apart from stepping up your
savings in a disciplined fashion, it is important not to stop your SIPs or make
abrupt changes to your asset choices if the equity markets go through a bear
phase or a prolonged period of low returns. Persisting through these phases is
in fact what reduces your acquisition costs and bumps up your long-term return
from equities.
Don't stick to EPF and PPF
Many folks make the mistake of thinking that the monthly contributions they're
paying into the Employee's Provident Fund or Public Provident Fund will
comfortably take care of their retirement.
But the main competitor that
you're trying to race against when planning for retirement is inflation. And
EPF and PPF may not be the best investments to stay ahead of inflation in the
long run. Inflation rates in India may be lying low for now. But over the past
decade, investors have had to live through whole decades of 8 per cent plus inflation.
Both the EPF and PPF invest much of their funds in government securities, which
offer the lowest interest rates in the market. Therefore, expecting these
vehicles to consistently beat inflation is unrealistic.
You should also note that the
interest rates you're seeing today on the PPF and EPF are rates that apply to
the current year and are not guaranteed for perpetuity. If interest rates in
India continue to fall in the long run, the returns you earn on these vehicles
will plummet, too. Equity investments, in contrast, benefit from falling rates
and offer you a better shot at beating inflation in the long run.
The reason why most folks
hesitate to include equities in their retirement portfolios is that they're
spooked by the wild gyrations of the indices from day to day. But the daily
movements of the indices detract from the steady upward climb that the Indian
indices have managed over the last 25 years.
Therefore, think of your PPF
and EPF investments as just the safe debt component in your retirement
portfolio. The bulk of this portfolio, ideally 80-90 percent if you are below
50, should be in equities. For the equity portion, start SIPs in two-three
multi-cap funds with a good track record. If you're a newbie investor who isn't
sure about choosing the right funds, don't delay. Start off with SIPs in a fund
that tracks the Sensex.
If you are wondering about the
tax exemption that the EPF and the PPF get you, you can consider the tax-saving
variant of multi-cap funds: equity-linked savings schemes. They have also moved
in line with the multi-cap category.
Stay off savings destroyers
Starting early and getting a good dose of equities gives you an early advantage
in retirement. But meeting that target still isn't easy. We suggested that
Alyssa either save Rs 22,690 a month starting now or start at Rs 10,000 and
step it up by 10 per cent every year until 60, to get close to her target
(based on a moderate return assumption of 12 per cent on her portfolio).
But to save so much of her
income throughout her career, Alyssa will also have to be careful about not
wasting any money or investing in the wrong products.
EMIs on loans early in your
career, especially high-cost personal loans or credit-card loans, can be a big
drain on your finances, preventing you from making any meaningful savings
towards your long-term goals. So can over-investing in property or land. Many
young folks in their 20s and 30s believe that buying a luxurious home is a sign
that they've arrived. But stretching your budget to buy a home can rob you of
not just your mobility and flexibility but also your savings potential during
the best years of your career. Even at the current reasonably low interest
rates, a Rs 50 lakh home loan comes at an EMI of Rs 49,390 per month. At the
end of 15 years, you would have paid back the bank nearly Rs 90 lakh to the
bank. Had you rented a similar home at one-fourth the cost, you'd have a lot of
that money sitting in your retirement portfolio!
Folks in their 40s or 50s often
decide to buy their second or third piece of property as their income levels
rise. But given the abysmal rental yields in India and uncertain capital
appreciation, leveraged property investments often prove wealth-destroying
rather than wealth-enhancing moves. At this stage in life, you should be
avoiding EMIs and putting that money to work on your retirement.
Steering off poor investments
that vacuum up your savings is equally important, too. This means staying off
high-cost investment-cum-insurance plans and other opaque options.
Review and adjust
Finally, no piece of financial advice given to you today, including that on
retirement, may hold good for all times. Folks who retired in the nineties
could afford to live entirely off fixed-income investments that paid them
double-digit returns, without any need for equities. Those who did so after
2000 had to face the double whammy of high inflation and low rates and couldn't
do without equities.
Therefore, the size of
investments, asset-allocation plan and choice of avenues that we suggest today
for your accumulation phase will change if inflation rates, interest rates or
equity returns change dramatically. This makes it imperative for you to review
your retirement portfolio twice a year to see if you are on track.
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