FINANCIAL PLANNING: Start early, invest in equities for retirement

FINANCIAL PLANNING: Start early, invest in equities for retirement

We have been increasingly hearing of people passing away in their mid-’90s or their 90 plus birthdays being celebrated. Owing to medical advancements and increasing consciousness about fitness and wellness, we may very well end up pushing our individual mortality to nineties.

Most of us begin work around 25 years of age and may continue to work till 60. Surviving till 95 would mean an equal proportion between our working and post-retirement years. In these 35 years of earning, one has to plan for other goals, besides retirement, like kids’ education, their marriage, home, car purchase, vacationing, funding expenses involved with fulfilling basic needs, dreams, etc.

Retirement is, in fact, our surest goal if we live to see it. All of us would rather have our money outlive us, rather than the other way around. Retiring from ‘working for money’ means that after retirement one has to live-off assets accumulated during the working years.

I regularly come across people (and they aren’t few in number) who are well in their ’40s and are yet to start planning for retirement. It is concerning to see people prioritise their daughter’s lavish wedding, a bigger house, spending unwarranted sums on vacations without a care for tomorrow over their certain retirement.

Our retirement expenses are likely to balloon owing to high inflation and increased longevity, which in turn would mean that we would need to invest bigger sums, for longer time-periods at higher rates to accumulate appropriate size of funds needed for retirement.

Let us look at case studies of three people who have just started investing for their retirement. Inflation has been assumed at 7%; the investment portfolio generates returns at 12% per annum before retirement and 8 % per annum post-retirement. Also, it has been assumed that expenses at retirement will be 70% of today’s expenses (after being adjusted for inflation).

For someone currently spending Rs 12 lakh annually, the monthly investment required as a percentage of current expenses will be 54% for a 30-year old, to accumulate a corpus of Rs 19 crore at retirement.

For a 40-year old, this percentage goes up to 98% to generate a corpus of over Rs 9 crore, while for a 50-year old this percentage goes up to 214% to generate a corpus of almost Rs 5 crore.

It is tougher, if for building one’s retirement corpus one is relying solely on EPF/ PPF where the current returns are 8.55%/8.00% per annum respectively. Equity has to be part of one’s retirement planning. From April 1979 till date, the S&P BSE Sensex has delivered returns close to 16% per annum (excluding the dividend earned).

The two clear lessons one can draw while planning for one’s retirement are; start early and invest in equities. Starting later in life might get too late to catch up, and avoiding equities could leave you with returns lower than inflation. “A stitch in time saves nine”, couldn’t have been apter.

If you haven’t started walking the road of retirement planning yet, get going before it’s too late.

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