Your financial planning is incomplete if you haven’t given a thought to retirement or don’t have any saving for retirement. Most of us live today as if there were no tomorrow, we splurge today and don’t save for tomorrow. If you don’t save and invest for your retirement, remember that you are the one who is going to lose out in the long run as you will be left with little help from your children, will have a depleted kitty to take out expenses from and your health will be challenging you more often than not.
So what are the top things to keep in mind when saving for retirement ?
What risk can I take ?
The amount of risk you can take while planning for your retirement is dependent on when you started saving for it. Remember that the early morning birds get the first worms to eat. Similarly, the early savers get a larger corpus at retirement to spend from.
If you begin saving for your retirement early in life, then it becomes a long term goal for you and the best place to park your money is equities. Over a long period of time, equities are literally risk-less, so you end up taking no risk at all. Isn’t that too good a motivation to invest in equities ?
Compare this scenario with another where the investor wants to retire at say 58 and starts investing at 50. In such a case, he cannot afford to take too much risk as a capital loss would mean he has less time to recoup his losses and build a corpus.
Your risk taking capability is dependant on when you start saving for retirement.
Which are the right products ?
Assuming that you are using goal based investing strategy, retirement should ideally be a long term goal for most investors. As discussed above, equity investment is your best bet as over a long period of time, returns from equity are mouth watering.
To take the equity route, you could use diversified equity mutual funds or direct stocks. For the latter, you need to possess the ability to be a good stock picker which most investors are not. The former is the best method to save in equity. Using the systematic investment planning route of mutual funds can be a very easy, disciplined and rewarding method.
Apart from equities, fixed income instruments are a must too. The favourite among all is the Public Provident Fund (PPF). It is the best debt instrument to invest in for retirement. Other debt products could be bank fixed deposits and debt income mutual funds held for the long term.
Remember that a house that you own will provide a huge relief in terms of rent saved each month after you retire. Real estate also appreciates well over a large span of time, so exposure to real estate is advisable.
Remember that your health insurance will play a very critical role after you retire as the number of ailments you will suffer from will increase. But you must not depend on only your health insurer to pay up for your treatments every time – they could reject it as well. Look to save for a large corpus to cater to your illness in old age. This money should be parked in liquid cash when you retire.
How much should I save each month ?
An often asked question is how much money do I need to save each month for retirement ?
This is dependant on your current expenses, your retirement age and how much time you have left till you retire and the monster called inflation which eats away into the corpus that you build.
You must hop over and read how much money do you need to retire to get an idea.
When do I start saving for Retirement ?
The earlier the better. The power of compounding works it magic over large time spans to multiply your corpus and make it a huge amount. The earlier you start, the better.
What is earlier ? Is it at the age of 25 or 30 or 35 ?
There cannot be a simple answer and everyone’s monetary position will dictate this. The famous Peter Lynch quoted that the first investment one must make is buy a house to live in. If you do that at a very young age, you are left with little or no money for saving after paying your EMIs and taking care of your expenses. But start saving whenever you can and as little as you can.
You should not wait for the day when you think you will have a large enough take home salary to start the process. With a large enough take home salary comes an equally large EMI and expenses. This is a constant catch up game where you will never have enough to save. Start now with whatever little you have.
What should I steer clear of ?
You need to be aware that there are many unwanted products and a band of people out to sell them to you in the name of retirement. Products like market linked pension plans, NAV guaranteed products, capital protection plans and other Unit Linked Insurance Plans (ULIPs) that are sold for retirement are best avoided. Steer clear off them.
You are better off with a portfolio comprising of direct equity, mutual funds and fixed income instruments.
Avoid buying into just one asset class. You need to diversify. You often come across retirees who are loaded with real estate investments with no other liquid investments to cater to emergencies.
Wishing you a happy planning and saving for retirement !
Chirag says
Thanks a lot Radhey, for this wonderful article.
It cleared all few remaining doubts about retirement saving. Really helpful. Keep up the good work, keep writing. Don’t want to miss any of your article :).
Radhey Sharma says
@Chirag, Glad it helped Chirag.
financial retirement planning says
Go with the mutual funds. It is the best middle ground path you can take. You don’t want to lose money day trading, and you also don’t want inflation to eat up all your gains either. Inflation is a silent killer, making prices rise like 1-3% annually.
Jaswinder Singh says
I understand the risk involved with equities, but then taking a well-informed and conscious exposure to stocks should not be ruled out in our planning. Given the right mind-set and time available to reach the goal, stocks (the large caps, to begin with) should be given a good hard thought.
ANIL KUMAR KAPILA says
@Jaswinder Singh,
I think asset allocation and diversification are the key points to be considered while doing investment planning for retirement.
Radhey Sharma says
@ANIL KUMAR KAPILA, Yes sir agreed.
Rahul Oswal says
Hi radhey,
I am a regular visitor of your website and it has helped me understanding small aspects of basic investments. Thank you for that.
I am 26 now.. I will get married in Nov’2012. I haev my own house. So, I save on rent.
I earn 53k per month from my salary. I have started investing frm last year.
SIP – 3k per month HDFC Prudence
SIP – 2k per month HDFC Tax Saver
PPF – 2k per month
PF – 2k per month
I am planning to have 2 more SIP’s in equity for my retirement.
I am also planning to invest in Gold SIP 2k per month.
I need to understand 2 things:
1) How do I manage my expenses? – I admit that I am unable to write them down and track them.
2) What percentage of my salary should be into SAVINGS, HOUSEHOLD, EMI and DISPOSABLE (For my personal life)
Thank you.
TheWealthWisher says
@Rahul Oswal,
Vivek/Rakesh/Minku/Chirag/Sudip – Who wants to answer to this – should be easy and interesting.
Vivek K says
@Rahul Oswal, Good to know Rahul that you are a regular reader of this blog. How come never saw you contributing before? You should, your basics of financial planning seems to be solid.
I can share what I follow and if it suits you, you may try it. Even I don’t track my expenses, I just use a simple formula: –
Disposable expenses = Income – Fixed expenses [bills, groceries etc] – Savings [emergency funds, investments, insurance etc]
As far as EMI is concerned I read that it should not be more than 40% of your gross monthly income. But in reality not sure if that amount is enough. But you can use it as a thumb rule.
You may read this article to get some more tips: –
https://www.thewealthwisher.com/2012/01/25/how-to-manage-you-personal-cash-flow/
Feel free to ask any questions you may have on this. It will be an interesting discussion 🙂
Rakesh says
@Rahul,
Vivek’s advise is very good. For your MF requirement you can invest in DSP Top 100 and HDFC Top 200. These are very good funds and its in my portfolio for the last few years and have earned my good returns.
As for Gold ETF’s you can read the below article –
https://www.thewealthwisher.com/2011/09/25/what-is-gold-etf-and-how-to-invest-in-it/comment-page-1/#comment-12140
As for tracking expenses you can maintain an excel sheet. I used to maintain one and note down my daily expenses.