Ashu Suyash, CEO at L&T Investment Management, wrote this piece for the India Markets Observer.
Right from childhood, we have heard our parents talk about doing things post retirement. We’ve heard them talk about travelling abroad for that one exclusive holiday or taking up gardening or doing something different. Once we started working, many options started throwing up in our own retirement plan.
Why is so much attention given to retirement?
Because leading a good life post retirement is the most rewarding time of life. After you have worked hard for all those years, this is the time you want to put your feet up, relax and unwind in ways you had not done in your working life. It could be a holiday abroad, pursuing a passion like golf or wanting to eat out at restaurants.
What is retirement for us in terms of our finances?
Most associate retirement with that one fat number that we would have available to sustain through our retired life and at some point of time, we can associate ourselves with the fear of running out of that money or not having a big enough sum. Rightly so, in the last decade or so, India has seen a big change in the lifestyle of its working population. Purchasing power has increased and so have the expenses. Furthermore, improved medical facilities and better access to healthcare has meant an increase in the life expectancy. In that sense, after retirement, a person would need more money to be able to lead a comfortable lifestyle.
How does one get this big fat number right?
There is no magic in this and retirement planning is beyond numbers. There is only one way you can get it right – plan your retirement well and early.
Just like the early bird gets the worm, investing early and when you have time on your side, you can benefit from the power of compounding and the length of time until retirement. A key tool which allows you to invest regularly, smoothen out market volatility and benefit from the power of compounding is systematic monthly investments which could help in building up a sizeable corpus over the years.
Take an example of a person investing Rs 10,000 per month at the age of 30. Assuming he invests every month till the age of 60 and at the rate of 12% p.a., his investments will grow to Rs 3.53 crores by the time he retires. On the other hand, a person who starts investing the same sum at the age of 40 at the same rate will only be able to grow Rs 99.91 lakh by the time he retires. No wonder Albert Einstein once said: “The most powerful force in the universe is compound interest”.
For people who started saving late, there is no reason to panic. It’s never too late to start. Disciplined and systematic investing can help you amass a good amount for retirement. Follow a smart financial plan wherein you are aware of what you can save and where you should invest for returns.
Have an overall mix of assets like equities and equity funds, bonds and bond related funds, and other types of deposits. The key is to have retirement income from a variety of instruments and sources. Equity offers potential for both growth and income, while bonds would provide
stability and income and insurance would provide a life cover.
A point to note is that equity as an asset class tends to outperform other asset classes over a longer period of time. Today, a lot of people go for
fixed deposits and insurance products as these are perceived to be the safest bets. However, in most of these products the compounding is far less. Let’s take an example of a person who has invested Rs 1 lakh in March 1980. His investment of Rs 1 lakh would have grown to approximately Rs 2.14 crores by December 2014 if invested in equity, approximately Rs 19 lakh in gold and approximately Rs 22 lakh if invested in fixed deposits. This is the wealth generation potential of equity which has delivered exceptional returns of over 16% p.a. during this period. The actual choice of mutual funds depends upon the individual’s objectives and risk appetite. One can take the help of a financial advisor to understand these and chalk out a suitable investment plan.
Do not forget to boost your contributions in small, steady increments and time the step-ups to your annual increments and bonus. Also include tax-saving strategies in your overall financial plan.
As mentioned earlier, many of us put our money in savings account or fixed deposits without realising that these investments yield low post-tax returns which may be not even sufficient to preserve the value of our money, after adjusting for inflation. Even if you invest in liquid funds or fixed maturity plans, you could end up earning better post tax returns than these savings avenues.
Another important aspect of financial planning is planning for critical illnesses. This is one of the least planned aspects as one generally discounts illnesses as an event that can happen to someone else but not them. Having a long term insurance or a critical illness cover can provide financial support to the families during the worst of times. Forget the critical illness cover, most of us do not invest in a basic health cover.
Successful financial planning not only entails investing regularly but also analysing investments every few years as goals could need to be re-prioritised with changing lifestyles and age. Instead of looking at the end goal, take stock of how far you have come and what changes you need to make to your portfolio. If invested in equities and equity related mutual funds. do bear in mind that you should not react to short term fluctuations. Systematic investing would not only make you financially secure and prepare you for important or unforeseen events in life but most importantly ensure that you have a better life after you retire.
After all we retire from work, not life.
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