Whether you have already started saving or are about to begin, one thing’s for sure: to keep pace with the escalating cost of living, individuals must keep monitoring their savings pace and fine-tune that habit.
The key to a successful retirement lies in three areas: the rate of your savings, the returns they generate, and the cost of living. Of the three, the latter two are market dependent and fluctuate according to the economic environment. These are the two areas where none of us has a say. But one area where you do have a firm handle on is your savings rate.
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Salaried people have a basic provident fund but are otherwise left to fend for themselves. If you factor in the increasing life expectancy, then your retirement dynamics change further. But individuals still have to prepare for at least 25 years of retirement. Says Swapnil Pawar, Park Financial Advisors: “Plan for a retired life at least till the age of 85, if not more. Assuming a retirement age of 60 or 65, this is a good 20-25 years that has to be planned for.”
It’s not that difficult to have a comfortable retired life. It all boils down to how you begin your journey. It depends on factors like the standard of living one wants to maintain after retirement, expenses one will incur then, medical costs, the effect of inflation and age of your retirement. Even if you have begun late, you might be able to manage your retirement comfortably.
Says Viraj Ghatlia, Head, Financial Planning and Wealth Advisory, ASK Wealth Advisors: “At the very least, investors can start saving 10-15 years prior to retirement.” But the earlier you begin, the easier it is on your pocket, and the better your chances of riding out the ups and downs of the economy and the market. Time is the key to creating the targeted corpus. Says Hemant Rustagi, CEO, Wiseinvest Advisors: “Look at it another way, for every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up. Simply put, the sooner you begin saving, the better.”
You need to factor in inflation as well. If your current expenditure is Rs 1 lakh annually, then at an inflation rate of 5 per cent, your expenditure at the time of retirement will increase to over Rs 4.35 lakh per annum to maintain your current standard of living. A higher inflation rate will result in increased post-retirement expenditure. So, if one plans to save just Rs 1 lakh for retirement, he may fall short of the ideal target amount.
There’s no denying the fact that people who start late have to save more. As our chart demonstrates, those who start saving in their fifties need to save almost five times the amount per month than those who start in their early thirties. In fact, you also have to factor in the different stages of your life. For instance, people who are married with children have to save more than those who are single.When it comes to investing your savings, experts say you should keep it simple. Says Surya Bhatia, Asset Managers Private Wealth Management: “Divide your investments in to two asset classes—debt and equity. Within these two asset classes, you can earmark the time horizons of when you want the money to flow in.” Factor in the average returns of both these asset classes to arrive at a target return.
Up in smoke
How much it costs to spend on vices?Many of us are aware of the cost of daily living. Few of us have, perhaps, done the math on some of our favourite vices: alcohol and cigarettes. Some of us may have even included these costs in our daily budgets. But when you consider the cost of these habits, the amount you spend on these delights could instead help you reduce your retirement corpus considerably. Consider this, a packet of cigarettes cost approximately Rs 50, which amounts to around Rs 18,250 per annum. If the same is invested in the Public Provident Fund account for 30 years at an interest rate of 8 per cent, it tantamounts to burning Rs 20.7 lakh up in smoke.
If you have two beers a day, your bar bill amounts to approximately Rs 250, plus some tips, which amounts to Rs 91,250 per annum. The amount can easily finance an annual weekly holiday for two in South-East Asia. Yet, if you stash away that amount for your retirement in the safer tax-free PPF at 8 per cent per annum, your corpus can easily increase by over Rs 1 crore.
For our calculations, we have assumed that debt will give a return of around 7 per cent per annum. But there are many instruments whose rates are marginally above this like the public provident fund, post office instruments and fixed maturity plans. When you are investing in equity, plan for the long term. Systematic investment plans or SIPs, which encourage regular monthly savings, are perhaps the easiest way of accumulating wealth with a longterm view. This will also reduce the risk of equity holding. Financial advisors say that individuals should hold a large chunk of their corpus in large caps and a lower proportion in mid- and small-caps. Says Bhatia: “A few investors may want to go active in equity trading. While you can go ahead, it is preferable to set up a limit within which you will trade. This will create your own stop-loss mechanism.”
Pace your innings
Given the investment options available, the key then is to decide what proportion of your income you should set aside to maintain your present lifestyle after retirement. Broadly, investors need to save a certain percentage of their annual income and invest in instruments that have the potential to give the desired results over different time horizons. For different age groups, the rules of the game change.
The opening overs: Age 25 to 40. Depending on the age, 15 to 25 per cent of the annual income should be saved. For example, a 25-year-old should save around 15 per cent. Says Rustagi: “Equities and equity funds should dominate the portfolio in this age group and make up 70 to 80 per cent of investments. To balance out the portfolio, one should rely on other tax-efficient investments such as PF, PPF and debt and debtoriented mutual funds.”
The middle overs: Age 41 to 50. Around 25 to 35 per cent of the annual income should be saved. As the time horizon to retirement is still long enough, equity and equity funds should continue to be a crucial part of the portfolio—around 50 per cent or more. The balance can be invested in tax-efficient instruments providing steady returns.
The slog overs: Age 51 to 60. At this stage, the time horizon before retirement is shrinking, therefore, one should consider taking a conservative approach. The aim should be to save almost half of the annual income. Says Rustagi: “However, it is important to remember that it may only be a few years before one retires. Therefore, the key is to maintain a portfolio that will continue to grow for many years after one retires. Equity should still be a part of the portfolio, though in a more moderate percentage.”
You can fine-tune your savings habit to suit your risk profile and style. Direct your savings to an investment plan. And don’t shy away from equities. Says Ghatlia: “What is ideally required in order to create the nest egg is an investment strategy that focusses on building a large corpus. This is possible only when the asset allocation and the investment plan is overweight towards equity-related instruments.” In fact, a 2 per cent difference in returns per annum in your investments can alter the corpus that will vest on retirement by over 40 per cent over a horizon of around 20 years.
Monitor your investments, and increase and decrease your savings rate according to where your targets have reached. Says Ghatlia: “The savings target must ensure a regular stream of income, and it should have enough for medical emergencies. Yet, it must also allow once-ayear vacations to exotic locations.”