Here is why you need to start retirement planning at an early stage

May 7, 2021

Retirement planning

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New Delhi: It is a dream of many of us to quit their regular 9-7 job as early as possible so that they can pursue their interest for the rest of their life. But the main thing that stops most of us from doing so is our retirement corpus. With rising life expectancy we need to plan for at least 20 years of retired life (from 60-80 years). Your retirement savings during your working life should be sufficient enough so that we can enjoy a worry-free retired life.

The easiest way to create a large retirement corpus is to start investing early. The main advantage of starting early is that you have to invest less every month for your goal as the power of compounding works in your favour and swells your savings.

The second thing that you need to do is to start some number crunching to find out the amount that you need at the time of retirement so that it can generate a regular income for you during your retirement years. For example, if you are a four-member family and your monthly expenses are Rs 50,000 at present, then the bare minimum retirement expenses for two (you and your spouse) at present cost should be Rs 25,000 as by that time you won't have any loan to repay and no other liability such as children's education and marriage. Now take a long-term inflation rate of 3% and inflate the amount by the number of years after which your want to retire. For example, your present age is 29 years and you want to retire at 55 then your expected monthly expenses at the time of retirement will be around Rs 54,000.

To earn this annuity at a rate of 2% (factoring in inflation of 3% during the retirement years and an expected annuity income of 5%), you need Rs 3.24 crore as retirement corpus at the time of retirement. To accumulate this amount you need a portfolio consisting of investments in equity mutual funds, NPS and EPF/PPF so that you get exposure to both debt and equity and tax benefit as well. Assuming an expected return of 10% from your investment over the entire investment tenure you need to invest Rs 16,000 every month from now. This amount can be divided in the ratio of 50:30:20 between three diversified equity mutual fund schemes, NPS and EPF. 

However, assuming that you want to retire at 55 if you delay your retirement investment by five years (if you start investing at the age of 34) then the required monthly investment will go up to Rs 27,000. So it is essential that you start investing for retirement as early as possible. Further, you can reduce your monthly investment requirement (for retirement) if you include some multicap or midcap funds in your portfolio. This will increase the overall return from your portfolio so that your required investment will come down.