Here are two choices for you to consider today:
Choice 1: Retire and live a life that is always constrained by a lack of money
Choice 2: Retire and live like you never stopped getting your salary
The choice matters because if you want to live an “unlimited” retirement, you need not only the right amount of time but also the right kind of investments. Retiring rich means retiring with not just enough to last us for at least three decades, but the kind of money that is not at the risk of “running out”.
There are no real shortcuts when it comes to saving for retirement. The vast majority of us won’t receive fat bonuses or stupendous salary hikes. This means that the investment choices we make will decide how comfortable our retirement is likely to be.
What choice do you have?
The default option for the salaried is their EPF. As far as fixed income goes, this is a good investment choice but the growth rate is less than 9% while inflation is at 4%-5% based on recent data. This means your money grows at around 4% or less. This is still better than fixed deposits which not only provide a lesser interest rate but are also taxed.
Currently, most fixed income options, whether fixed deposits, bonds, PPF or EPF, do not offer a rate of return in excess of 8%-9%. Unless you save substantial amounts (over 50% of your salary) each month, fixed income will barely retain the value of your investments, much less grow your savings.
In order to retire rich, you need an investment option that grows at a rate much higher than inflation.
Equity - Made for retirement?
Equity is after all the only investment option that has a historically proven track record of beating inflation. As an aside, most billionaires hold their wealth in the form of equity. That should tell you something.
It is only in the long term, seven years or more, that equity shows it’s true power. 12% - that’s the average growth rate of equity investments in the recent past. That’s significantly higher than fixed income and the sole reason equity can help you retire “rich”. Equity investing also starts at a level a twenty-something earning an average salary can easily begin with, unlike the ever popular real estate option.
Equity works well only over the long term (for most investors). Saving for retirement is also a long term challenge. No other instrument is so well suited for addressing long term growth needs as equity is.
Without equity, most of us have almost no chance of saving enough, much less retiring “rich”. It’s something that we need to realise earlier rather than later.
A long term challenge needs a long term solution
Equity works well only over the long term (for most investors). Saving for retirement is also a long term challenge. No other instrument is so well suited for addressing long term growth needs as equity is. Even including the Long Term Capital Gains Tax introduced in 2018, the returns are much higher than any other option.
What about the risk of choosing wrong?
The traditional viewpoint on equity that you often hear is that it is risky. Why on earth would someone stake their life savings on a “risky” instrument?
The truth is that more than being risky, equity is volatile. The returns it generates can fluctuate in the short term. Also, if the right company’s shares are not chosen there is a real risk of loss of your savings.
Direct equity investing does carry the risk of making the wrong choices considering for most of us, selecting companies to invest in is not our day job. The solution though is simple. Leave the task of choosing, to professionals who know how.
Enter mutual funds
Equity Mutual Funds are managed by professionals who know what they are doing. When you invest in equity via mutual funds, you are effectively addressing the risk that comes from making the wrong choices. Even if you choose a mutual fund that returns what the market is returning you would, for the most part, be beating inflation handsomely.
The only caveat
Equity needs time to perform. There are no overnight successes in investing, no matter the stories you hear. If you can give equity time to perform, retiring rich will be far more possible than most of us can to imagine.