Simply because you’ll find a bank providing you with a loan for all of life’s luxuries, be it a car or a home or a vacation. But picture yourself reaching retirement age & being short of funds. At that point, no bank will give you a loan to help you tide those sunset years.
They say that “well begun is half done”. We believe this saying applies very well to all those young investors who want to start early & start right in planning for their retirement. In this article, we share a clear step by step guide to help you start investing for your retirement today.
Step #1: Find your retirement number
- Your present & post-retirement expenses and lifestyle
- Plans to cut down on certain expenses, make lifestyle changes or explore other income avenues post-retirement
- Estimated inflation rate & the rate of return on the investments
We agree. It’s a complex calculation. But it is not that difficult if you have a working knowledge of MS Excel. You need to make certain assumptions on inflation, rate of return etc. & create a retirement cash flow chart in Excel. Using the Goal Seek function, you find how much money you need on the first day of retirement. That, my friend, is your retirement number.
Regarding things like cost of living after retirement, it is best to consult families in your network who’ve recently retired or have been into retirement for a few years. They will give you a much better & holistic perspective on the financial alignments that one needs to make in this phase.
Step #2: Tag your existing assets to this goal & arrive at the monthly saving amount
The total corpus requirement less the value of tagged investments is the total money you need to save & invest in your working years. Use the +PMT function in MS Excel to find how much you need to invest per month.
Step #3: Decide on the Right Investments
For the equity portion, you can consider equity mutual funds. For the fixed-income portion, you can choose debt mutual funds (or fixed deposit, if you fall in lower tax brackets) & PPF. For mutual funds, finalise 2-3 schemes from each category having a decent performance track record.
Another great option is National Pension Scheme (NPS). It has a lock-in up to 60 years of age, making it a true-blue retirement product. Apart from ultra-low fund management charges, it helps you get an additional tax deduction of INR 50,000.
Step #4: Start Investing
Once you’ve decided on your investments, the next step you need to take is to schedule the investments for every month. Regularly investing a fixed amount helps save you from the worry about timing markets. Over the long run, it also helps you to average out the overall cost.
SIP in mutual funds is a great way to get into the investing habit. It also helps to put your investments on auto-pilot. Try to schedule SIP in the first week of the month so that once the amount is debited from your account, you are clear on balance & can plan your spending accordingly.
Step #5: Track the progress of your plan
- Check the performance of the schemes you’ve invested in. If there are any sharp drops in performance or events like a change in fund manager, you can change the scheme.
- Check the asset allocation & see if there is a variation between your actual & ideal allocation. If yes, you need to re-balance by buying/selling investments, as applicable. Be mindful of exit loads & tax implications.
- Don’t forget to Increase the SIP amount if you have got a pay raise/ bonus.
Some additional tips to help you in your retirement planning:
- Make your retirement goal your number one goal. Don’t use the money earmarked towards retirement for any other financial goal.
- Purchase good Life, Personal Accident & Mediclaim insurance & also maintain a contingency fund for at least 6 months’ worth of expenses.
- Irrespective of your age, make a clear will to avoid financial disputes after your death.
- The calculations above can be quickly done in MS Excel. If you are not well versed with MS excel, or if all this seems overwhelming, don’t hesitate to consult a financial planner.
Conclusion:
