Retirement planning isn’t necessarily for those who are in their 50s. Rather, you should start planning for your retirement when you are in your mid 20s (or at least by the time you are in your early 30s).
Of course, putting away a small portion of your income in a Savings Account or a Fixed Deposit regularly will help you save for your retirement. But, investing too conservatively, without taking any risks isn’t a great idea.
Factors such as increasing costs and inflation will affect the purchasing power of the rupee. So, by the time you retire, the amount that you once thought would be enough to sail through your retirement years smoothly will seem just adequate to make ends meet.
This is one of the reasons why investment experts advise that you give importance to Mutual Funds in your portfolio. Equity Mutual Funds come with their own set of risks but in the long-term, say 10 to 15 years, they have a greater chance of providing better returns than any other investment product in the market. If you invest wisely in Equity Mutual Funds retiring rich will no longer be a dream because you could actually retire a crorepati.
Additional Reading: Understanding Mutual Funds
Asset allocation is the key here. While building your portfolio, you need to consider all the asset classes. However, you should keep aside a certain portion of your income for Equity Mutual Funds. If you’re in your 20s or early 30s, you should put at least 30% to 40% of your portfolio in Equity Mutual Funds. As you grow older, you can slowly reduce this percentage and invest more in Debt Funds, which carry relatively lesser risk than Equity Mutual Funds.
Also, it is better to start planning for your retirement as early as possible, probably as soon as you get your first job. The reason being that the more you delay your retirement investments, the lesser your returns will be.
The Step-Up Approach To Investing For Retirement
As an investor within the age bracket of 25 to 50 years, you probably have many other financial goals apart from retirement planning, right? In such a case, the step-up approach is a great method to determine how and how much you should be stashing away in your retirement fund.
Investing via the step-up approach means that you increase your quantum of investment every year. With 25 to 30 years until your retirement, you have enough time to slowly increase your retirement corpus. Also, you will have other financial goals to achieve such as buying a house, buying a car, children’s future, etc. And you’ll have to allocate a certain percentage of the total corpus in your portfolio towards these goals too. So, dedicating 10% to 15% of your total corpus towards retirement planning is a good start. This way, you won’t have to compromise on your other financial goals or your current lifestyle demands.
Additional Reading: How To Build A Rs. 10 Crore Retirement Corpus
The best way to invest in Mutual Fund schemes is via an SIP (Systematic Investment Plan). With an SIP, you can invest a pre-determined sum of money in your Equity Mutual Fund scheme at regular intervals – weekly, monthly, quarterly, etc. Here are the benefits of investing via an SIP:
- When it comes to investments, discipline is key. Following the SIP method will inculcate the habit of saving regularly in you.
- SIPs are flexible. Though not recommended, you are allowed to discontinue the plan at any time. In addition, you can increase or decrease the investment amount whenever you wish.
- The long-term gains are good, thanks to the benefit of compounding and rupee-cost leveraging.
- It is a convenient option. You can give standing instructions to your bank to allow auto-debiting of a pre-determined amount from your account.
We hope that you’ve understood the advantages of investing in Equity Mutual Funds for your retirement days. The key learning here is to start focusing on retirement planning along with your other financial goals. With the power of compounding, you’ll surely be able to retire rich. Good luck!