Updated: Oct 19, 2022
When beginning our financial journey, we all budget for emergency cash and invest for our wants and needs, but we give our own retirement the lowest priority. We believe we can postpone it for the time being and do it later. However, the time to start saving for retirement never arrives tomorrow; it begins now. The difference between the haves and the have-nots is compound interest. The first stage in building long-term wealth is compounding.
The eighth marvel of the world, according to Einstein, is the ability to compound. Those who comprehend it earn it, while those who do not pay a price. People who take advantage of the power of compounding build wealth over time. You'll be astonished to learn that a little investment of Rs. 25,000 compounded at a rate of 14% over 25 years will yield a sum very close to Rs. 25 lakhs. Whether you start working at age 20, 30, 40, or later, saving money for retirement should be a major focus of your working life. The most crucial thing is to save, regardless of how you do it.
Understanding the accumulation phase is essential to making the most of your retirement strategy. You need to know why you're saving and the best ways to save money. Setting objectives and learning about various investment vehicles are required for this. Additionally, you'll need to comprehend compound interest as a technique for rapidly building money.
Here's a summary of what to anticipate during your accumulation years and how everything fits together to create a pleasant retirement.
What Does Retirement Accumulation Cover?
Estimating Future expenses Post Retirement
Calculation of the required amount for retirement corpus
Putting a Savings and Investment Program in Place
Creating and managing a retirement income distribution
Are your children your Retirement Plan?
The value of family is among the core traditions and fundamental principles upon which Indian civilization is built. Because of this, Indian parents frequently believe that by caring for and 'investing' in their kids as they grow up, they can be certain that when their kids become older and become financially independent, they will take care of their parents.
However, because parents are retiring at younger ages than in the past and having children at later ages, it frequently happens that their children are still in school or attending college when they retire. As a result, their offspring are unable to provide for their ageing parents financially. In such circumstances, the child's education is generally given precedence over retirement plans in India, which may be the reason that 71% of Indian parents are prepared to incur debt in order to pay for their child's college education. You may therefore believe that setting money aside for your children's education, marriage, careers, and other necessities is a wise investment in your future. It's not a good idea to use your child as your retirement fund. They'll be happy to help out wherever they can, but you need to set aside money just for your retirement.
Power of Compounding in Retirement:
Earning interest on interest in addition to your principal amount is referred to as compound growth. Savings will grow more quickly with compound interest than with simple interest, which is interest computed simply on the principal.
With compound growth, your money increases more quickly the longer your interest has the opportunity to generate interest. In other words, you have greater room for improvement the more time you have. The longer compound growth may benefit you, the earlier you should begin arranging your retirement investments. As an illustration, if you invest Rs. 9,000 per month for the next 35 years, assuming a return of 14%, you will have Rs.10 crores when you retire.
Factors to consider for Retirement Corpus:
1. Determine how many years you have left until retirement.
When choosing the ideal retirement age, there is no hard-and-fast rule. Every person has a unique circumstance, with a distinctive set of liabilities and a different amount of money for their goals in life. Therefore, each person will have to decide which retirement age best meets their needs. Generally, the retirement age is 60 years.
While many people would desire to retire early, doing so has its own set of difficulties. Your post-retirement life will be longer the earlier you decide to retire. As a result, you will need to set aside a larger retirement fund in order to live a longer retirement, also you will also have less time to save the necessary sum. It is only doable if your income and savings is quite high; otherwise, you will need a lot of time to save up. As a result, you will need to experiment with several time periods to see which one suits you the best.
2. Inflation Pre-Retirement
It is one of the most overlooked areas of retirement planning, and if you disregard it, the consequences might be severe. One of the biggest life goals is saving for retirement, and if inflation is not properly taken into account, the years of sacrifice could go in the drain. Your expenses will increase significantly over the course of the many decades when you will be planning and saving, thus your savings strategy must be adjusted to cover these increasing costs. A general rate of 6% was used in the calculation; however, if the nature of your lifestyle and expenses calls for it, you can adjust it lower or higher.
3. Calculate your desired monthly outgoings for retirement.
Only your savings from the accumulation period will provide you with a steady income during retirement. Therefore, the larger the corpus you will need to establish, the higher the revenue you would like. It might not be enough to cover your retirement needs if you maintain the income criterion too low. The simplest way to calculate your monthly expenses during retirement is to relate them to your existing way of life and take the effects of inflation into account over time. You can subtract investment and other unnecessary expenses like school fees of children, loan repayments or any other expense that won't be there at the time of retirement.
4. Inflation Post-Retirement
The average rate of inflation may differ slightly because planning may span five decades or more when pre- and post-retirement eras are taken into account. In a growing nation like India, increased inflation is anticipated throughout the period of rapid economic expansion, which is likely to keep inflation high. As the growth rate slows over time, inflation can decrease. You might try a lower inflation rate during the post-retirement phase if it is more than 20 years away, keeping this in mind.
5. Asset Management Pre/Post Retirement
It's one thing to invest, but quite another to keep it under observation. Managing Assets and Risk Until Corpus Accumulation. Time and knowledge are needed for asset management. If you have the time and knowledge to research various retirement programmes, you can do it yourself. If not, you can ask a financial advisor to handle it for you.
In the accumulation phase, you can afford to take on more risk in exchange for a larger return because you will have more time to make up for any losses by increasing your income, delaying retirement, and other measures. You can move a larger portion of your savings towards equity through mutual funds and the National Pension System to boost your returns on investment. AIFs, gold, silver, commodities, REITs, and other alternative assets are frequently chosen by investors with a higher risk tolerance. However, your risk tolerance will decline after retirement.
Therefore, it is preferable to opt for a conservative return during the post-retirement phase of one's financial plan because the majority of investments will be made in safe, regular income products like fixed deposits, the Senior Citizens' Savings Scheme (SCSS), the Pradhan Mantri Vaya Vandana Yojana (PMVVY), the RBI Floating Rate Bond, and Monthly Income Schemes (MIS) of banks, mutual funds, and post offices.
The final step entails splitting the accumulated fund while taking the need, the timing of withdrawals, market volatility, etc., into consideration. You should allocate the funds so that you can achieve both short-term and long-term goals. If no health/critical illness/personal accident insurance is purchased, a medical corpus should be kept separate from the corpus.
Retirement Distribution Strategies
Strategies to avoid the shortfall
1. Prevention Method:
Closer to retirement, needs and expenses, especially aspirations for retirement lifestyle, tend to become more apparent.
It is crucial to reexamine the assumptions made from time to time, such as the inflation rate and expected returns, to enable revisions in the elements assumed for calculation.
Reworking the corpus target whenever a life event occurs that has an impact on income or expenses is another strategy to prevent shortages.
A rise in income that will affect one's lifestyle or a physical problem that will result in higher medical expenses are two examples.
The alternative, if raising the corpus is not a practical option, is to reduce non-essential spending to fit the remaining resources.
Delaying retirement and pursuing a second career:
Delaying retirement is an option to think about if the corpus appears insufficient and new savings and investments are insufficient (Specially if there is an early retirement)
A second career to make money in the early years of retirement should be taken into consideration if delaying retirement is not an option.
Any area of interest that the retiree may like to follow in retirement is acceptable.
The income may be sufficient to cover all of the early retirement years' expenses or it may only be sufficient to take a minimal amount from the corpus.
2. Protection Method
The greatest threat to the retirement objective is longevity. If you're retiring early, the corpus may seem insufficient to cover your expenses.
Inflation is the second issue that requires careful consideration. There is a discrepancy between the income that the corpus can create and the required income because the majority of guaranteed and fixed income remains fixed during the retirement period.
Utilizing growth and inflation protected investments is one strategy for doing this.
There is room for growth and inflation because not all of the money is needed at once; certain portions will be needed 15 to 20 years after retirement.
The Bucket Strategy
The majority of investors' principal objective is to accumulate enough capital in the market to support their retirement years. However, once they are in retirement, many investors are unaware of how to appropriately withdraw money from their accounts. One of the numerous withdrawal techniques that investors might adopt is the retirement bucket strategy. However, it's crucial to actually learn how to apply this tactic.
The retirement bucket technique is a method of investing that divides your income sources into various buckets. Depending on how long the funds will be needed, they are divided into different categories: emergency, immediate short-term, short-term, intermediate, and long-term.
The theory behind this method is that since you'll have access to cash immediately, you won't have to worry about stock market volatility. Theoretically, you ought to be able to pay your annual withdrawals without having to sell your investments in a bearish market. The money from interest payments, dividends, and the success of your investments fills the buckets.
For any emergency expenses
Running expenses for the first 3 years
Running expenses for the 3 years after initial 3 years
Running expenses for the 3 years after initial 6 years
Running expenses for the 3 years after initial 3 years
Month 1 to 36
Month 37 to 72
Month 73 to 120
Month 121 onwards
Joint SB Account / Liquid Funds / Arbitrage Funds/ Fixed Deposit
Low Duration Funds / Liquid Funds / Arbitrage Funds
SCSS, Hybrid (Debt- Oriented) Mutual Funds, Debt Mutual funds, Fixed Deposits
Dynamic Asset Allocation funds, Balanced Funds
Flexi Cap / Multi Cap / Equity Mutual Funds
Refill from Bucket 2, 3, 4 and 5
Refill from Bucket 3, 4 and 5
Refill from Bucket 4 and 5
Refill from Bucket 5