There are many who believe retirement is a distant reality, planning for which can be pushed to much later. What this usually means is that in your 20s you feel you are too young to plan for your retirement, while people in their 40s feel that they are too late!
However, once you understand that eventually, you will have to think about retirement, here’s what you can do:
Starting at 25: Start an SIP in equity mutual funds. The amount you invest at this stage doesn’t matter because even Rs 1000 invested every month will grow substantially. This amount will compound for the next 35 years (60-25) and beat inflation - which is the whole point of planning for retirement early on.
Starting at 35: At 35, your savings towards retirement get 25 years to grow. Once you have taken care of your emergency fund, allocate at least 50% of your savings towards retirement. The goal is to beat inflation and create a corpus that will generate an income for you in retirement. Equity mutual funds are again an excellent option here apart from your EPF savings.
Starting at 45: You have about 15 years left to retire. You need higher savings and a higher return on those savings. Do not shy away from Equity Mutual Funds, and plan to invest 50% of your income. If that seems high, remember that you don’t really have an option. Even with these savings, you may need to work beyond 60 to maintain a good lifestyle...
Prioritize your expenses based on how time sensitive they are. If you have to pay for your children’s higher education and you are yet to start saving up for retirement, then do take education loans, so that your other savings are not spent on it. Your children can eventually pay off these loans.
What smart people do
#1. Increase the amount invested every year, in tandem with the appraisal or hike in salary you receive every year.
#2. If you already have an EPF (Employee Provident Fund), you will still need to actively save extra towards your retirement, because even though an EPF does serve as a cushion, the rate of return on your contribution is not enough to beat inflation. Equity will help here.
Find the right balance between your current needs and preparing for the future and most importantly, start ASAP if you haven’t already.
This 10 part weekly series helps you identify and complete a single task every week to take charge of your financial life. Over these 10 tasks, you will know more about your money and how to make it work harder, while having to do less work and also worry less.