Investing For Retirement At Different Life Stages
Post retirement life is often termed as 'golden years'. After years of grueling hard work and caring for the family, we would want to slow down, relax, spend more time with our loved ones and explore places after retirement. But, the reality will be quite different if we spend more time on daydreaming than creating and implementing a strategy for building post-retirement corpus.
As the process of creating a retirement corpus can span over several decades involving different life stages, it is important to understand the advantages and challenges of each life stage to create an effective investment strategy.
Young investors (20-40 years):
For those in their 20s and 30s, retirement would seem like a lifetime away. Most would dismiss their retirement contribution as something that can be safely postponed by a year or more. Even for the more prudent ones, imminent financial goals like buying a car or saving for a lavish wedding would receive priority over retirement investing. But retirement is inevitable, and postponing your retirement investment would require much bigger contribution in later years.
For instance, a 25-year old person would have to invest just Rs.1555 per month at an assumed annualized return of 12% to build Rs.1 crore corpus by the time he turns 60. However, a 40 year old would require a monthly investment of Rs.10109 to build the same corpus in 20 years at the same rate of returns. No wonder that the age-group of 20s and 30s is also considered as the "Golden Age" for investment.
What to do:
Consider investing exclusively in equity funds for your retirement corpus at this stage. A longer time horizon will give you more time to recover from market volatility and benefit more from the power of compounding. Opt for the SIP mode of investment to ensure regular investment and financial discipline. SIPs also do away with the perils of market timing as it averages your investment cost during market corrections.
Sandwich generation (40-55 years):
People in their late-30s and 40s are often termed as ''sandwich generation" as they need to take care of their children and aging parents at the same time. A substantial part of their income is spent on servicing home loan EMIs, child's education expenses, insurance premium, etc. and for contributing towards other imminent financial goals. This reduces their risk appetite compared to younger years.
What to do
Despite the steep increase in your financial commitments at this stage, your savings rate would still likely be higher than your early working years. Hence, try to increase your retirement contribution with increasing income to build a bigger corpus for the safer side. Do not sacrifice your retirement contribution for building your child's education corpus. Your child can avail an education loan for his higher education but no lender will lend you to meet your post-retirement expenses. Maintain an adequate emergency fund so that an unforeseen exigency does not force you to withdraw from your retirement corpus. Also desist from using your retirement corpus for making prepayments of home loans and other secured loans. The equity funds in your retirement corpus will in all probability earn higher returns than the interest rates charged on such loans.
Continue to invest your retirement contribution in equity funds. You will still have a long way to go before your retirement and equity as an asset class usually outperforms other asset classes for time horizon of over 5 years.
Golden years (55 years and above):
People approaching their retirement age are often suggested to redeem their equity funds for debt funds and other fixed-income products. Their rationale is to protect their retirement corpuses from the volatility of equity markets. However, doing this can harm your financial health post-retirement as debt and other fixed income instruments rarely beat inflation rates. Rising life expectancy and increasing health costs too may risk you run out of your retirement portfolio. Thus, your retirement corpus will need to keep slogging hard even if you stop doing it yourself in our golden years.
What to do:
Instead of redeeming your equity funds in entirety, create a broad estimate of your mandatory monthly expenditures and short term goals. Once you have the figures, activate systematic transfer plan (STP) in your equity funds to transfer a pre-determined amount to short-term debt funds. Short-term debt funds will ensure principal protection of the withdrawn amount and generate higher returns than bank fixed deposits.
Once you are retired, initiate SWPs in your debt funds to transfer a pre-determined sum from those funds to your bank account. Using this approach will help your retirement corpus last longer as the bulk of the corpus will continue to stay invested in equities, beating inflation rates by a wide margin and outlasting your own life.
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