When you think of retirement funds, what comes to your mind? Pension plans, Public Provident Fund (PPF) and Employee Provident Fund (EPF). Typically most people invest in these instruments to save for retirement. Yes, these avenues help you create a fund for your expenses once you retire. But the big question you need to ask is: are you saving enough?
When you retire, your income stops at once. However, your expenses continue in the same way as before. In fact, your expenses do tend to increase once you retire. For instance, medical bills can create a big hole in your savings.
In this article, let’s see why your regular savings may not be enough. Also, let’s explore some options to help you earn higher returns.
Inflation is the enemy
Only a few years ago, a litre of milk cost around Rs 20. But now, you need to pay around Rs 50-60 for the same quantity of milk. How did the price increase so much? The simple answer is inflation.
Inflation is the rate at which the price of goods and services increases over a period of time. As a customer, your purchasing power diminishes as inflation increases.
Now, think about it. Even if you peg inflation at a conservative rate of 5% per year, you would have to pay a lot more for regular commodities once you retire. This could impact your retirement savings in a big way. In theory, you hope that your retirement fund lasts for at least 25 years but in reality, your fund could get over much sooner than you expect.
What can you do?
As an investor, your basic goal should be to earn returns that beat inflation. Only then can you comfortably meet your expenses and enjoy the lifestyle that you desire. This is possible through equity investments.
Now, you might say that investing in equity is risky. Yes, there is a possibility of losing your capital when you invest in equity. However, when you invest for the long term, you can minimize your losses and maximise your returns. For instance, if you think that stocks are not your cup of tea, you can consider investing in mutual funds. They are less risky when compared to stocks.
Importance of SIP
Systematic Investment Plans (SIP) is a simple and exciting way to invest in mutual funds. All you need to do is invest a specific amount of money at regular intervals. This could be weekly, monthly or quarterly. And the best part is you don’t even need to bother about timing the market. Through constant investments, you can steadily increase your corpus and create a large amount for retirement.
But for this plan to succeed, you need to start investing as early as possible.
Slow and steady wins the race
Most people assume that retirement planning is for people who are going to retire. This notion could not be farther from the truth. Instead, you need to start planning for your retirement as soon as you begin your career.
Take the following example:
Kalyan is a 30-year-old banker. He invests Rs 5,000 each month in an equity mutual fund in order to create a retirement corpus. The fund offers a return of 13% per annum.
Satish is another banker. Only difference, he is 45 years old. He has only 15 years of active service before retirement. At this age, Satish starts investing Rs 10,000 per month in an equity fund. This fund also offers a return of Rs 13% per annum.
By the time Kalyan retires at the age of 60, he manages to create a corpus of Rs 2.2 crore.
On the other hand, Satish manages to create a corpus of only Rs 56 lakh. A delay of 15 years means that Satish lost out on Rs 1.6 crore even though he invested a larger amount each month.
Many people think that you need to have a lot of investment acumen to earn good returns. That is not true. Anyone can earn high returns. The trick is to identify good equity funds and invest for the long term. This way, you can create a large corpus of money by the time you retire.