Retirement is a unique phase in the life of every working individual. Each one of us has a dream about the kind of life we would want to live after retirement – be it simply spending more time with our near and dear ones, pursuing hobbies/ vocations that we couldn’t nurture during our working years or travelling – it’s a long list. A big portion of our earnings are usually dedicated towards ensuring well-being of the family, fulfillment of long and short-term goals, vacations, gifts and planning our children’s future. While retirement is inevitable, the planning for it often starts much later, sometimes as late as our fifties.
For our previous generation,
retirement planning was not critical as there were joint families that one
could rely on. But things have been changing for a while now and there is a
growing trend of nuclear families. Further, medical inflation is high which
means that the cost of treatment keeps increasing. With increasing age, you
cannot ignore the need for healthcare expenses as well as maintaining a healthy
lifestyle. All of these factors have now made it necessary to plan well in
advance for retirement.
The choice of financial product used
for retirement planning would vary for each individual. There is a wide range
of products available – Employee Provident Fund, Public Provident Fund, Life
Insurance, Mutual Funds, National Pension System (NPS), etc. Each product
category offers a unique set of benefits and has its own risk-reward profile.
Retirement is a long-term goal;
hence it is advisable to go for an instrument that offers benefits over the
long-term. Also, you need to be mindful of the fact that the corpus should not
deplete in case of market volatility or due to frequent withdrawals for
fulfillment of short-term goals.
Some of the factors that you need to
keep in mind while choosing your retirement planning product are:
Think long-term
Any product that you choose for
building a corpus needs to be long-term. You are thinking about your life after
you retire – which means that if you are 30 or 40 years old today you will need
to stay invested in this product for the next 20 – 30 years.
Further, you would also benefit from
the power of compounding. If you save Rs.50,000 per year for a period of 25
years – assuming a rate of return of 8% p.a. you could create a corpus of
around Rs.40 lakhs. If you start the same activity from the age of 30, your
corpus would be Rs.25 lakhs, Rs.15 lakhs lesser. So, the sooner you start and
the longer you stay invested, the better it is.
Returns matter
Choose an instrument that gives
potentially higher returns over the long term and beats inflation.
Historically, equities as an asset class have given superior returns over the
long-term. Also, market volatilities get ironed out over a longer period of time
thus potentially increasing your returns.
Charges
There is a fund management charge on
every market-linked investment. Choose a product with low fund management
charges in order to maximise your investment. If your cost of managing money is
higher by 1% over a 25-year time horizon, the size of your corpus would be
10-15% lower. In other words, by saving on the cost of fund management you
could potentially build a corpus that is 12-15% higher, even at a gross
compounding rate of say 8% p.a.
Managing investments
All of us are not equipped with the
knowhow to actively manage our investments. Further, the asset allocation for
each portfolio has to be monitored as per age and the corresponding risk
appetite. It helps to have a product that can support in these areas.
Managing behavioral biases
In order to make money from equity
as an asset class, it is important to stay invested through market cycles and
not succumb to the noise around. A product that enables investment in a
disciplined manner, keeping you committed to your retirement corpus building
goal is a good way to manage human emotions and behavioral biases that
interfere with long term wealth creation.
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