Category: Retirement Planning

Building a retirement corpus


Many people work diligently, fueled by the dream of eventually retiring in peace. As you strive to attain your objectives, conquer new heights daily, face competition, shoulder responsibilities, and journey towards the elusive "retirement" phase, you must confront an undeniable reality: your monthly income will cease at some point. Therefore, it's imperative to begin actively investing for retirement as soon as your very first paycheck arrives.

On average, an individual's prime earning years span about 30 years. With life expectancy reaching 80 to 90 years, your retirement phase may extend from 20 to 30 years. This raises pertinent questions:

Have you saved enough to retire with dignity and financial security?

What constitutes a genuinely "sufficient" amount?

Have you created and adhered to a retirement plan with unwavering commitment?

Have you been conscientious in managing expenses and savings?

Have you made informed choices rather than relying on luck?

Have you taken corrective measures concerning your savings and investments?

To build a substantial retirement fund, you must align your investments with your risk tolerance and investment horizon. Essentially, starting early and periodically reviewing your portfolio are paramount. Balancing your portfolio too frequently should be avoided.

That said, what investment instruments should you choose, and what costs and timeframes are ideal? When should you evaluate your investments?

In summary, we will explore various secure and lucrative options available in today's market to make your savings work for you.

Benefits of Early Saving and Compound Interest: Compound interest can work wonders. For instance, investing Rs. 100 with a 10% annual compounding interest would double in 7.2 years (by the rule of 72). If you apply the same principle to a larger sum like Rs. 10 lakhs, it would grow to Rs. 20 lakhs in about 7 years. Keep in mind that you'll continue to make regular contributions, so if you plan to retire 60 years from your initial investment, your savings could grow to around six times the original amount. This is the compounding "avalanche" effect, often referred to as the Power of Compounding. Compound interest is akin to fine wine; it delivers better results when money is saved over extended periods. By starting early, your savings and investments can multiply exponentially even before you fully comprehend the impact of the Power of Compounding.

Invest Wisely, Not Just Saving: Inflation can erode your money's value if it doesn't grow sufficiently to outpace it. Money stashed at home, in your bank account, or even in fixed deposits can fall victim to inflation along with the time value of money. Hence, investing in the market is crucial, aligning with your risk tolerance and time horizon. It's worth noting that the risk of investment tends to decrease over time as it spreads out.

Review, Reassess, Redesign: Don't let your investments become idle. Every 3 to 6 months, evaluate your portfolio, looking at returns and market value. If your investments stop yielding value or erode the value of your assets, seeking professional advice on potential replacements is advisable.

Time-Tested Investments for a Secure Retirement:

  • Public Provident Fund (PPF): PPF is a government-backed, long-term debt scheme open to all individuals. It offers regular interest and tax-free returns, typically higher than those from bank fixed deposits.

  • Mutual Funds: Managed by asset management companies (AMCs), mutual funds funnel investments into equities, debt, and other financial products. Mutual funds are categorized into equity and debt funds, with varying levels of risk. Equity funds are riskier but offer higher returns, while debt funds are less risky but provide lower returns.

  • National Pension System (NPS): The NPS is a voluntary, defined-contribution retirement savings scheme. It offers choices for active or automatic investment based on your age profile. NPS provides appealing tax benefits, but the maturity proceeds are taxable.

  • Insurance: Insurance plans, when initiated early, can serve as tools for both wealth creation and protection. These policies enable individuals to transfer risk to insurance companies for a cost. While some, like LIC, enjoy government guarantees, others do not.

In conclusion, regardless of your present financial status, the objective is to attain financial independence during retirement. Thus, planning your retirement from a financial perspective is a crucial part of your overall financial strategy.

Sneha Ramamurthy