Authored by DP Singh
Retirement is often referred to as the “golden period” of life, considering that you have successfully shouldered most of your responsibilities by then and finally have the time to pursue what you truly wanted. However, the main challenges you may face in your retirement age will be financial in nature. This is because you no longer have a regular income, especially if you do not receive a hefty pension. Thinking about retirement may seem far-fetched when young. However, with increasing life expectancy, rising inflation, and escalating medical costs, it may never be too early to start planning for the sunset years.
How much do you really need?
Consider this: With an average inflation rate of 6 percent in India over the last decade, if you need Rs.20,000 for basic monthly expenses today, you will need Rs 1,15,000 a month after 30 years. This excludes the emergency and discretionary spending that you may incur. Therefore, proper planning for retirement is a necessity and not a luxury. Starting early towards your retirement goals will help you enjoy the benefit of compounding, which is earning a return on already accumulated returns. Hence, you must have clear retirement goals early on and invest consistently towards them.
Mutual Funds for Retirement Planning
Retirement planning is not a short-term exercise, but rather a long-term journey. Mutual funds can perfectly fit the bill in this case. This is because mutual funds provide exposure to a variety of asset classes such as equities, debt, gold, among others. Diversifying your investments across asset classes will help you beat inflation and create wealth over the long term.
You can also choose to invest in funds more suited to your risk profile. A key advantage of mutual funds over traditional retirement products such as pension plans is that the former offers the flexibility of full or partial withdrawal in unfavorable circumstances, subject to the lock-in period.
Moreover, you may choose to invest in lumpsum, say when you receive a bonus, or opt for a systematic investment plan (SIP). SIPs are a disciplined approach wherein you invest a chosen amount periodically. The amount can be increased or decreased depending on your preference. SIPs also spare you the hassle of timing the market and offer the advantage of rupee-cost averaging. Long-term investments in mutual funds offer your investments more time for compounding.
Several fund houses offer dedicated retirement funds. Such funds aim at delivering capital appreciation and offering a consistent income in line with your retirement goals. They typically come with a lock-in of 5 years or retirement age, whichever is early, to encourage savings.
Retirement funds are usually hybrid, that is, they invest in a mix of equity, debt, and money market instruments. Some funds may be predominantly equity-oriented and more aggressive, while other conservative schemes may invest more in debt and money market instruments. You may choose a suitable plan based on your needs and life stage.
Some of these funds also allow you to switch between variants based on your age. In fact, some funds even come with a trigger option, that is, they automatically shift your investment to another plan (with a more conservative asset allocation) as you grow older. Thus, by changing the equity-debt mix, you may be able to better protect your corpus as you near your retirement age. You can even easily draw a fixed amount from your mutual funds regularly via the systematic withdrawal plan (SWP) route.
Retirement planning is one goal that is often ignored when you are young and caught up with other life goals. However, beginning to invest towards retirement goals offers you more time in hand to grow your investments to a sizeable corpus and enjoy stress-free retirement life.
Plan your retirement with mutual funds today. It’s never too early to begin!
DP Singh is Chief Business Officer at SBI Mutual Fund. Views are personal