To recap, we determined that in order to have a comfortable retirement, we will need to build up a retirement corpus of 7Crs. We have defined ‘comfortable’ as having an income of Rs.50,000/- per month for the span of the next 20 years after retirement.
Figuring out how to create your retirement corpus is the next step in beginning your journey to save for retirement. You have 300 months, or 25 years, to build this savings goal.
We shall plan to invest in an equity mutual fund systematically and regularly to accumulate a retirement corpus. To carry this out, we must assume certain factors:
– We can depend on a stable income each month, thanks to our job.
– We work up until the time of our retirement.
– We primarily save by investing regularly in equity mutual funds.
– Every 12 months, there is an increase in our remuneration.
– Each year, we will see a 10% rise in investments in equity mutual funds.
– Every January, we see an increase in savings.
I guess many people would be sceptical about my assumptions related to jobs and hikes here. However, let’s consider it as an assumption for now.
Here’s how it would look when these assumptions are turned into actions:
Let’s understand the table better.
In the 1st row, I’m committing Rs.5000/- as my first-ever investment. I won’t be accessing it until the time I retire, which is about 300 months down the line or 25 years into the future.
It’s February, and I’m making my second savings contribution for this year – Rs. 5000/-. With retirement now 299 months away, it feels like the time to start planning is near.
Realising the potential of ‘months away’, your money can grow when you make a deposit. Every instalment will have a different ‘growing season’; the first payment can compound for 300 full months, while the second has 299, and so on. This is an excellent opportunity to build up the amount of money that you’ve set aside.
As of now, the fifth and sixth assumptions state that we will up our savings rate by 10% each January. Therefore, if we begin with Rs.5000 in year one, in the second year, we would contribute Rs.5500.
Here’s how it looks:
The monthly count persists in the same manner. Take, for instance, the Rs. 5,500/- we put down in the 2nd year of January; this has only 288 months to amass growth or accumulate interest.
Once we have made our investments, the projected growth rate for each month is 11% per annum, as assumed.
To illustrate, we will invest Rs.5000/- at a rate of 11% over the course of 300 months. At the end of this period, how much value would our investment have accumulated?
We have determined that the future value of money can be determined with the formula. All we need to do is input the relevant numbers.
Future value = P*(1+R)^(n)
Principal (P) = Rs.5000
Growth rate (R) = 11% per annum
Time (n) = 300 months, but this formula is based on years. To convert the 300 months into years, divide by 12, which yields 25.
Let us repeat this for the second time; all elements remain the same apart from the timeframe.
This is how the table looks –
What is your guess as to how much money you would have saved for retirement if you began with Rs.5000/-? Will it be enough to reach a target corpus of Rs.7Crs?
If you are uncertain, then you are correct. This does not meet the standard. It is far from it.
What should we do now? How can we reach our target of the total retirement corpus?
Here are 3 things that we can do:
– We can plan to save for a much longer period, such as 30 or 35 years. However, this may not be feasible since we won’t have a consistent source of income throughout those years.
– Raising the rate of return from 11% to 14%, would be a mistake; We would be robbing ourselves of the future.
– Increasing savings leads to a frugal lifestyle today that can result in a more comfortable and financially independent tomorrow. This is something we should definitely consider.
Let us increase the amount to Rs.15,000 per month. This is how the figures appear –
A substantial improvement has been made, yet it still isn’t anywhere near the 7Cr target. We can try achieving this with Rs.20,000/-
It’s clear that beginning at Rs.20,000/- payment each month, after retirement, we can expect to receive Rs.50,000 for a period of two decades. That will bring us close to the 7 Cr mark.
Saving Rs.20,000/- each month may seem far-fetched to those just beginning their professional journeys. After all, you have only recently started receiving a consistent income and yet you should consider investing most of it for your future.
Isn’t that unfair?
Don’t let your motivation dip; it isn’t that bad after all.
Assuming you are just starting out in your career, it is likely you are 24 or 25. This gives you a substantial amount of time before retirement. Even if you decide to retire at 60, that will leave you with 35 years ahead of you.
For 30 of the 35 years you could invest, you will reach a higher level. Begin with Rs.10,000/- per month and review the below picture to see this in action.
By beginning your career early, you can access two strong tools: time and money. You can get started with a minor sum, gradually increasing it and ultimately achieving success.
If you anticipate retirement in the near future, then unfortunately, your only real option is to save a significant portion of your income.
Remember, this is just a basic overview and does not even begin to scratch the surface- there are many other routes for you to explore. For instance, you may acquire assets through inheritance which will give you a recurring cash flow throughout your life.
Alternatively, when you retire, you can receive a large sum of money secured by PF and other investments, which could be deposited into a savings or fixed deposit account – offering more yearly cash flow.
This module is designed to assist you in working out the solution to this puzzle so that you and your family can effectively plan your finances.
No matter if you end up with a lump sum of money or a yielding rental property upon retirement, it is vital not to overlook investing in equity. I am confident that ‘equity’ will yield the highest returns compared to any other asset and surpass them. Therefore, equity has to form an integral part of your long-term portfolio.
Investing in mutual funds via a systematic investment plan is an excellent way to gain exposure to equity, and there are various other techniques available too.
In the upcoming chapters, we will explore mutual funds comprehensively. We’ll cover topics like formulating an approach to mutual fund investing, constructing a mutual fund portfolio, goal-based portfolio building, analysing funds, direct versus regular plans, as well as growth and dividend options.
Once we get our heads around mutual funds, it will be easier to tackle other important aspects of financial planning such as life insurance, health insurance, pension funds, Employee Provident Fund and Exchange Traded Funds.