There are many differing opinions on when you should start saving for your retirement, and how you should go about it. Some people say it is too early to start at 30. Some others say if you haven’t started by the time you’re 30, it’s already too late. But to simplify, it is never too early to start saving for retirement and it is also never too late.
Instead of despairing over how much time you might have lost, it is better to take a step back and formulate a well-thought-out plan that works for you.
How To Plan For Retirement?
The first step is to set a deadline for when you plan to retire. The standard age for retirement is 60, but you can customise this based on your life goals.
For example, if you are a self-employed individual like a doctor or a litigator, you might want to continue practising even after the age of 60. After all, if you like what you do, and if you can control how much time per day you spend on work, why stop doing what you do best?
On the other hand, many individuals in high-stress, high-paying jobs prefer to retire early. So if you’re an investment banker or a business consultant, for instance, you might want to retire by the time you’re 45.
So, pick a timeline that works best for you, based on your plans.
Once you have this time limit set, now the second step is to work out how much you need to save.
To calculate this, you will need to consider the standard of living you are accustomed to. Take stock of how much you spend in a year, making allowances for an extended family. Once you have this estimate, you will then need to adjust it for inflation, keeping a healthy margin.
At present, the rate of inflation in India is around 7%. This means the value of your money decreases by 7% every year. So if you keep Rs 100 in a box under your bed today, a year later, it will only be worth Rs 93.
Say, you require Rs 5 lakhs per year to maintain the standard of living you are accustomed to. Let’s assume you will retire at the age of 60. Now, your grandparents lived till an average age of 85. This means you have to save for 25 years of retirement.
Rs 5 lakhs per year, multiplied by 25 years, amounts to Rs 1.25 crores. This, however, is the gross amount.
When you account for inflation, it means the value of Rs 5 lakhs a year later is lower than Rs 5 lakhs. This means, that in order to get 5 lakhs of real value, you’ll need Rs 5.35 lakhs one year later, Rs 5.73 lakhs two years later, and so on. The longer the time difference, the higher the difference in amount.
So, in order to save Rs 1.25 crores adjusted for inflation in 25 years time, you will actually need about Rs 3.4 crores.
EXPERT TIP: It is always easier to save towards a target, rather than just saving blindly. This calculation may seem tedious, but it will help give you an actual goal. It will make the saving process easier.
Once you have this figure set, the third step is to work out a saving and investment plan that works for you.
Investing for your retirement is always a good idea. If your money can grow, with no active effort on your part, you would be foolish to say no to that, wouldn’t you?
Smart investment plans ensure that the amount you save every month gets utilised in a variety of assets that generate capital gains. The kind of asset will depend on your risk appetite, of course. For long-term horizons, a healthy mix of equity and debt, with a preference for high-quality value stocks is a good idea.
Making investments has become much easier now. Various asset management companies offer ready-made retirement plans for your convenience. All you have to do is choose one that suits your needs, and you are good to go!
How To Invest For Your Retirement?
When you have a longer time horizon in mind, nothing beats the returns that equity provides. The increased time dilutes the potential for risk, leaving you with a very solid investment strategy. Choose a basket of high-quality blue-chip stocks — companies that have stood the test of time and will continue to weather all storms — and invest in them.
Over time, strong fundamental stocks will increase in value, giving you a multi-fold return on your investment.
Mutual funds are the easiest option for those who don’t take an active interest in investments.
Managed by a team of experts, mutual funds invest your money in high-quality equity and debt instruments, with the intention of increasing the base amount. Essentially, you hand over your savings to a team of experts, let them do what they do best, and forget about the amount until you require it.
Bonds and Fixed Deposits
Equity investments aren’t for everyone. But don’t worry because there are investment instruments for everyone.
Bonds and fixed deposits are ideal for those who want to explore a safe investment option that gives sure returns. Secure and certain, these instruments provide interest income with very low-risk exposure.
For more such finance tips, stay tuned to HerZindagi.
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