Will Your Retirement Be Financially Comfortable?

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

"It is equally important to understand the impact of inflation on your retirement needs. Many investors make the mistake of not factoring in inflation while planning. "

Many of us get overwhelmed by the very thought of retirement. It makes us wonder: How to go about building a retirement corpus? This dilemma often deters us from planning for it. In reality, one must plan for retirement as early as possible. Considering that building a retirement corpus is a challenging task, it is vital to have a strategy in place. In fact, having a plan and an effective strategy in place not only goes a long way in helping you identify what you need to do in the present to lead a particular lifestyle in retirement, but also helps in avoiding unanticipated pitfalls during your retirement. 

Your retirement plan should take into account factors such as when you plan to retire, the corpus you would require and the number of years you have to build a retirement corpus. Your current age plays an important role in retirement planning. Before arriving at a figure of how much you must have at the time of retirement, the key is to consider when you intend to retire so as to figure out how much time you have to build the retirement corpus. Overall, the focus should be on saving as much as possible during the accumulation stage so that you can retire when you want. If you are one of those who haven’t yet taken steps to plan for your retirement, you must make amends now.

Start, on a monthly basis, by setting aside whatever you can from your income. However, make sure that once you start the process, you remain committed to it through your defined time horizon. The problem is that young people don’t usually consider retirement, either mentally or financially. The fact, however, remains that for every 10 years you delay, you will need to save three times as much each month to catch up. Therefore, if you are young, don’t make the mistake of thinking that you have enough time to plan for retirement. Remember, smaller contributions made regularly, over a period of time, to a high potential asset like equity can produce spectacular results.

Needless to say, the longer you stay invested, the more you tend to benefit from the power of compounding. Of course, to get best results, you will have to stick to the plan. This way, ups and downs would even out over the years. Selecting the right investment options is another factor that holds the key to retirement planning. Investing too conservatively can seriously hamper your efforts to build a retirement corpus. From a long-term perspective, your portfolio must have a significant portion invested in equity and equity-oriented options.

The presence of tax-efficient options like mutual funds can help you a great deal in improving the post-tax returns. It is equally important to understand the impact of inflation on your retirement needs. Many investors make the mistake of not factoring in inflation while planning. For the sake of understanding, let us take an example of someone 30 years away from retirement. The question that arises is what will be his annual expenditure then, given the increased cost of living?

If we assume a 7 per cent inflation rate for someone who has 30 years to retire, Rs 3 lakhs annual expenditure will increase to Rs 22 lakhs by the time he retires. Therefore, if he plans an expenditure of Rs 3 lakhs per annum for his retirement, because that is how much he needs today, he would be having around 15 per cent of what he would actually require. Then, there are investors who make the mistake of withdrawing amounts during building of the corpus. While at times it might become necessary to do so, making it a habit can negatively affect retirement. Hence, withdrawing money out of retirement kitty must be avoided.