Financial planners insist on having a target retirement kitty in mind. If you have a target retirement nest of Rs 10 crore, that’s great. But remember that just because you have a common goal post, the investment approach need not be similar to others.
A lot depends also on the following factors:
At what age are you fixing this target and by when do you plan to retire? If you are starting in your 30s, getting to Rs 10 crore requires relatively lesser investments than those in their 40s or 50s (see table below). That is because starting early helps you reap the benefits of the power of compounding.
A 30-year old retiring at 65 years effectively has an investment horizon of 35 years as against 20 years for a 40-year old retiring at 60 years. If you haven’t yet started investing, consider delaying the age of retirement. By doing that, you can elongate your investment horizon and do the ‘catching up’.
The ability to reach your financial goal post of Rs 10 crore is also a function of the asset allocation mix. For a 30-year old investing it all in debt investments will require a monthly investment (or SIP) of Rs 27,050 till he turns 60 years of age. It is relatively lesser at Rs 18,080 if he chooses a hybrid portfolio comprising 40% in debt and 60% in equities.
It is the lowest (Rs 13,330) when one opts for a 100% equity portfolio. Why is that so? Equities while subject to a lot of volatility in the short-term – also reward patient investors with superior growth. One can reasonably expect 11% annualised returns by investing in equities as against 9% and 6% returns from a hybrid and pure debt portfolio respectively. For all these calculations, a retirement age of 60 years has been assumed along with 10% annual step-up in SIP amount.
In short, more the exposure to equities, lesser is the SIP requirement. People who are beginning their investing process in the 40s and 50s can also invest in equities to do the ‘catching up’. For instance, a 40-year old has to invest Rs 90,460 every month if he is investing it all in debt. However, if he opts for 100% equities, then he needs to save only Rs 55,890 a month. Thus, investors can calibrate their exposure to equities so that they could reach their retirement target without a glitch.
Reaching the target is not only a function of the number of years of earning but also how much one earns and with what consistency. Focus on building and growing a stable career.
If you already have investments in mutual funds, bank deposits, PPF or provident funds, factor it while computing your investment requirements. For instance, a 50-year old might have an investment portfolio worth 10% of the target kitty or Rs 1 crore. He needs to figure out how much monthly investment is required to get from thereon. Since his existing investment will grow to nearly Rs 3 crore when he turns 60, if invested in equities, he needs to plan only for the rest (Rs 7 crore).
Thankfully all of it need not be saved as investments grow over a period of time. A 35-year old looking to hit the Rs 10 crore retirement target should invest only 32% of it (or Rs 3.2 crore) while the rest will happen through wealth creation. Those choosing debt will have to plough 57% of the target in the form of savings (see chart).
While Rs 10 crore might seem a formidable target, all need not aim for that. If you have lesser years left to retire, you can do so with a lesser target. Moreover, it is a function of the retirement lifestyle you choose. Anything up to 25 times of one’s annual household expenses at the time of retirement should suffice to retire peacefully.
You need not save all of Rs 10 crore and only need to let it grow. Start early as possible to let the power of compounding work its wonders. Also, an equity portfolio works faster in getting you there than debt-oriented portfolios.