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Build your nest egg

In a recent online survey conducted by Money Today, inflation was listed as the biggest retirement worry by respondents.

  • October 2, 2010  
  • |  
  • UPDATED   12:05 IST

Impossible!" That's how Noida-based schoolteacher Maria Amin assesses the chances of reaching her retirement target. The 22-year-old has just been told how much she needs to save for retirement and is suffering from what can be described as sticker shock. "Rs 5.22 crore is too huge a figure. Do I really need to save T-H-A-T much?" she asks in disbelief as she sizes up the cavalcade of zeroes in the amount. Yes, she does.

By the time she retires in 2048, Amin's modest requirement of Rs 30,000 a month would have burgeoned to Rs 2.74 lakhs. This, if we assume a moderate inflation rate of 6%. Inflation eats into your wealth, reducing its value over time. "Though people are aware of inflation as the biggest hurdle to retirement planning, not many do much about it," says Mahhendra Jajoo, executive director & CIO, fixed income, Pramerica Asset Managers. This is true.

{mosimage}In a recent online survey conducted by MONEY TODAY, inflation was listed as the biggest retirement worry by respondents. Ironically, the most popular instruments used for retirement planning were the PPF and bank deposits.

Who advised them to invest in these low-yield options when inflation is raging in double digits? Nobody. That's who 73% of the respondents turn to for advice on retirement planning. Little wonder  that 55% don't even know how much they will need on retiring. Use the table above to find out how much you will require and the amount you need to save every month to reach this target.

The quantum of savings depends on the option chosen by you. Safe options (PF, PPF, bank deposits) earn less, so you need to pour in a bigger sum. Risky options require you to put in less, but these can be volatile. Your retirement plan should be a mix of safe, moderate and risky investments. On the other hand, 13% of respondents who consulted a financial planner made fewer mistakes, such as withdrawing prematurely from the retirement corpus, and had a better idea of their needs.

"Retirement planning should be a comprehensive process and average investors should also seek professional financial advice," says Arindam Ghosh, head of retail sales, J.P. Morgan Asset Management. Taking the help of a financial planner is important because traditional advice on retirement tends to be too conservative and is often out of sync with the market realities.

The Employee Provident Fund Organisation (EPFO) and the PPF are not allowed to invest in equities. The National Pension System (NPS), in which the growth fund option invests up to 50% of its corpus in equities, offers this choice to investors.

The NPS has earned handsome returns in the first year of its operations. Perhaps it is time to let EPFO and PPF subscribers to take a call on the asset allocation they want. In the following pages, we tell you how you can use different financial tools to build a sufficiently big nest egg, the investment strategy to use and how your asset allocation should change with age.

 Retire with ease even if...

...your income is low
Chinese philosopher Lao-tzu said the journey of a thousand miles begins with a single step. Start investing Rs 1,000 a month and increase the amount by 10 per cent every year. If your investments earn 12 per cent annually, in 32 years, you will have Rs 1.03 crore.

...you can't find time
Automate your investments. Give the mandate for an ECS to invest in a mutual fund or Ulip. No need to write cheques or fill up forms every time you want to invest. This will ensure you continue to save and your retirement fund continues to grow.

...you need a big sum
Don't underestimate the power of compounding. Regular and disciplined investment can yield good results over the long term. A monthly investment of Rs 30,000 in an option that earns 12 per cent annually will grow to Rs 3 crore in 20 years.

...you have started late
If you don't have too many years left to retire, maximise your savings by cutting down on discretionary expenses. Don't go for high-risk investments just to make up for the lost time. Instead, consider postponing retirement by 2-3 years.

...you can't monitor
You don't have to. There are options that reset asset allocation as the investor grows older and his risk appetite comes down. So, even if you don't know how much to invest in equities at 30 or how much to shift to debt at 55, your fund will.

...you don't know how
Go to an expert for advice. A financial planner will tell you how and where to invest to reach your retirement target as well as other financial goals comfortably. Sure, you have to pay him, but you will realise that it is money well spent.