The Corpus That Must Fund Decades Without a Salary

After working hard in your profession or day job for the better part of four decades, you want a peaceful and enriching retirement. Taking regular international and domestic vacations, pursuing hobbies, buying a house of your own in a hill station for the summers etc. could be some of your dreams planned for your silver years. Additionally, you need to plan for two types of inflation, lifestyle and healthcare.

All of these goals require a substantial corpus that must last for a good 25-30 years after your retirement. A survey by Grant Thornton Bharat shows that while 55% of the respondents wanted more than Rs 1 lakh a month as pension, only 11% felt they were saving enough to achieve this amount.

The key lesson for investors is that the planning for retirement must be done very carefully over the long term. Most employees, especially those in the private sector, do not enjoy pension benefits. The corpus from provident funds or fixed deposits may not be enough, especially in countering inflation.

Therefore, one of the best ways to secure a comfortable retirement is by investing regularly in mutual funds via systematic investment plans (SIPs) over the long term.

A smart stepwise approach

When SIPs are started early on the career and the amounts are stepped up over long timeframes of decades, the compounding power of diversified equity mutual funds can ensure healthy accumulations. For example, an investment of Rs 25,000 a month for 25 years in a mutual fund that potentially delivers 12% on an average, would ensure a corpus of Rs 4.26 corpus at the end of the period.

To make SIPs work well, it is necessary to follow a methodical approach.

First, you must decide how much corpus you would need over the course of your retirement. This calculation must incorporate all your current and future expenses, and must be extrapolated to the time you retire.

Second, you must factor in inflation (the rate of price rise) in your calculation as this eats into money’s purchasing power. In case you have any lifestyle diseases such as sugar or blood pressure or other ailments, you need to factor in medical costs as well. Healthcare inflation is generally twice that of regular inflation and is generally around 12-15%. Any potential lifestyle upgrade needs to be accounted for as well while making the calculations.

Third, if you are not a well-informed and resourceful DIY (do-it-yourself) investor, you must definitely take the help of a registered investment advisor (RIA) or a mutual fund distributor. An expert would help assess your risk appetite, available surplus, time horizon etc. and help you plan your SIPs smartly.

Fourth, once the target corpus and the SIP amount are decided with expert help, the next step would be to decide the right set of mutual fund categories to fit your retirement requirement. If your retirement is at least 20 years away, you can take a relatively aggressive approach (with midcaps and small caps) apart from core large and flexicap investments, for example.

Fifth, closer to your retirement, you must preferably reduce the equity portion of the portfolio and shift to hybrid and debt fund options so that any drawdowns at the time of hanging your boots does not hurt your portfolio.

If you do not have the monthly surplus needed for your intended final corpus, you should look to increase your SIP amounts after every salary hike.

Also, retirement SIPs must not be clubbed with any other financial goal such as children’s higher education, home loan down payment etc.

Disclaimer: This article is written by Davinder Sethi, Founder, Moneycount India Pvt Ltd. The views expressed are his own. This is partner content and not an Outlook Money editorial feature. Outlook Money does not provide investment advice or endorse any products or services mentioned. Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.

Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature