Retirement Planning Through SIP

Financial preparedness for retirement often feels unimportant or intimidating. But with increasing life spans, rising medical costs and advent of nuclear families, financial planning for retirement has now become an imperative for the average Indian. Simply put, as the income-earning years come to an end, one must have enough savings to take care of their post-retirement living expenses. Putting a number on this goal, decades ahead can make the target retirement corpus seem enormous and unachievable in the now. But getting discouraged or putting off working towards this goal is not wise. Given the importance and magnitude of a healthy retirement corpus, one should start saving and investing towards this end with priority.

First, one should ascertain their target retirement kitty taking into account one’s current day-to-day expenses and extrapolating it to post retirement years. Current savings rate, big-ticket expenses like children’s education or marriage, lifestyle inflation and rate of inflation post-retirement should also be considered. This can be done with the help of a financial planner.

Next, one should calculate and commit savings specifically for this goal. Since retirement for most savers is at least a couple of decades away, simply saving will not be sufficient. Effects of inflation will reduce the value of your savings over the years, if left uninvested. Hence, the next step would be to identify suitable investment instruments in which savings dedicated to the retirement fund can be deployed.

Equities, whose returns are dependent on the inflation-linked earnings of underlying businesses, have the potential to generate inflation-beating returns in the long term, making them an ideal choice for growing one’s savings over and above inflation. However, equities as an asset class can be volatile in the short term. The volatility can be countered by a long investment horizon, choosing diversified investment vehicles like mutual funds and opting for systematic investments.  

Systematic investment plans or SIPs as they are popularly known, are a way to invest a fixed amount of money into equity-oriented mutual funds at regular intervals. These investment plans are very convenient as they automate the flow of savings from one’s bank account to selected equity funds at stipulated times.

With SIPs, one can get daunting lumpsum investment requirements out of the way and grow their retirement savings one small step at a time. Irrespective of your current income, a SIP is an affordable way to start saving for retirement, breaking down the required savings into small, periodic instalments which take the pressure off the investor to save a large sum of money at once. For example, a 30-year-old investing in an equity fund yielding 15 per cent per annum needs to start a SIP of just Rs 5000 a month to accumulate a Rs 3.5 crore corpus at the age of 60. SIPs can be increased as one’s income increases to create a larger retirement corpus.

Also, because SIP investments are long-term and automated, they eliminate the need to time one’s investments. It also ensures investors are unperturbed by adverse equity market movements and let their retirement savings compound undisturbed. SIPs also reduce the average purchase cost for the investor by enabling him to buy more mutual fund units when equity markets are down. Lastly, a dedicated SIPs for retirement can help investors stay on the retirement planning course and not divert their money to other discretionary uses.