The Smart Way To Build Your Nest Egg

Let us grab the bull by the horns! 

30 years of working and 40 years of retired life!! Yes, that is true. 

A person in India typically starts his or her career at 25 and retires between 55 to 60 years. In 2021, the average life expectancy at birth in India was approximately 67.24 years. Individual experiences though point to a much higher number of about 85 years and in some communities with healthier lifestyles, 90 plus is not uncommon. This means 30 to 35 years of working life and 25 to 40 years of retired life!!

“The current working population will have to bear the brunt of this changing socio-economic scenario – where the disappearance of joint family system will take away the traditional support system available to the previous generation, the economic compulsions of governments will necessitate doing away with the defined benefit retirement plans and increased standards of living will need more money to maintain the standard of living in retirement,” says Renu Maheshwari, Co-founder and Principal Advisor, Finscholarz Wealth Managers.  

But, fret not, because proper financial planning and discipline in your investments will ensure that you spend the ‘golden’ years of your life the way you choose to. 

How Much Do You Need  

Since retirement is a goal that is many years away, making an estimate of the corpus you need for retirement involves several assumptions. Here it is important to remember that inflation, which eats up into the value of money over time plays a big role here. (See How Much Do You Need To Retire)

"To be on the safer side, one is advised to consider higher expenses, higher inflation, higher life expectancy and lower returns from investment while planning for their retirement corpus as that would provide a buffer to avoid running out of money during retirement," says Abhishek Kumar, Founder and Chief Investment Advisor, SahajMoney, a financial planning firm.

For calculations, one can use the online tools available on the net or take the help of a financial planner. "Also, the planner should be able to look at the spectrum of the above variables and provide for even a worst case scenario," says Maheshwari. 

But in reality, such a quantitative approach may not always workbecause retirement is as much about building a corpus as it is about the quality of life. "I would say one needs to give 50 per cent importance to the quantitative aspect and 50 per cent importance to the qualitative aspect," says B Srinivasan, Director and Founder, Shree SidvinInvestment Advisors.

Since retirement requires a big corpus, it is important to invest your money in the right assets, which gives you high returns and most importantly beats inflation.

The Truth Annuity Plans 

You would have seen advertisements of insurance annuity plans that promise guaranteed returns and a secure retirement. 

“Such plans enforce discipline through regular contributions, ensuring a steady accumulation of funds over time. Unlike instruments like FDs, which allow premature withdrawals and can disrupt long-term financial planning, insurance products ensure you meet your pre-defined goals,” says Anup Seth, Chief Distribution Officer, Edelweiss Life Insurance.

Plus, there is the promise of steady income. However, there are several caveats. “Life insurance pension plans usually offer lower returns compared to other investment options. The guaranteed returns might not keep pace with inflation, reducing your purchasing power over time,” says Vinnaayak Mehta, Founder, The Infinity Group, a wealth management firm. 

Also, high fees and administrative charges are common in life insurance pension plans, which can significantly reduce your overall returns. Finally, there are better options available to plan for your retirement.

“You can opt for some guaranteed income plans, but that should only be about 5 to 10 per cent of your portfolio,” says Anand K Rathi, Co-founder of MIRA Money, a wealth tech firm. 

Also, you need to be wary of investing in Unit Linked Insurance Plans (ULIPs). “If you are considering investing in ULIPs, be aware that these are insurance-cum-investment plans that offer both life insurance and investment opportunities. The costs are very high, and the funds are a bit more conservative, so the ideal retirement corpus may not be achieved using ULIPs alone,” says Rathi. 

The NPS Way 

One of the biggest aspirations of people is to have a substantial retirement corpus and also to get regular pension / income after retirement. The National Pension System (NPS) can help you hit two birds with one stone. But the more important thing about NPS is the choice of risk you seek to take. With its tax advantage of up to Rs 2 lakh, NPS can definitely be a part of your retirement plan. 

“Just to give you a heads-up, if you invest Rs 5,000 per month in NPS with a modest 10 per cent return assumption, you will accumulate Rs2.60 crore at the age of 60 when you retire. Instead, if you start at 35, you only accumulate Rs 67 lakhs. The earlier you start; you create a bigger retirement corpus and also get higher pension income,” says Nehal Mota, Co-founder & CEO, Finnovate, a wealth management firm. 

Mutual Funds Sahi Hain 

We have all seen Sachin Tendulkar and Mahendra Singh Dhoni urging investors to invest in mutual funds. And mutual funds are undoubtedly one of the best instruments to invest in for a long-term goal like retirement. 

“For goals that are more than five years away such as retirement, purchase of home, educational needs, etc., equity schemes may be considered. For short-term goals, debt schemes or hybrid schemes may be used,” says R K Jha, MD and CEO, LIC Mutual Fund. 
 

“An ideal asset allocation for investors in their 30s and 40s would be 80:20 in equity and debt while targeting a 12 per cent return for the long-term investments,” says Hrishikesh Palve, Director, Anand RathiWealth. 

Investors in their 30s typically lack the ability to invest a large initial lump sum, so they should focus on building their assets based on regular SIP contributions and complement these with annual step-ups. Investors in their 40s should build a strategy for long-term and realign as required and simultaneously continue with regular SIPs and annual step-ups to achieve their financial goals.

“We recommend an asset allocation of 80:20 in equity and debt, with market cap diversification of 50:30:20 in large, mid, and small caps. Additionally, it is wise to diversify investments across various asset management companies (AMCs) to mitigate concentration risk,” says Palve. 

For retirement, you can craft your own allocation. You need to have a high allocation to equity and diversify it with other assets like gold etc. You may also want to dynamically balance your allocation so that youcan counter the market cycles to your advantages. 

Here, one needs to talk about retirement mutual funds. Chirag Mehta, CEO, Quantum Asset Management Company recommends that one invests in multi-asset funds instead. “In such funds, one can choose the allocation based on what suits them depending on their risk appetite. Multi-asset as a category thus offers many choices to the investors, plus the allocation to gold, thus making it a suitable category to choose from rather than going for standard retirement plans,” he adds. 

Should You FIRE? 

FIRE is a concept that has quickly caught up with the younger generation.

“Let's split FIRE into two halves - the First stands for FI (financial independence) and the second half is RE (retiring early). Financial independence and retiring early are two different concepts,” says Rathi. 

However, retiring early is not the primary goal in people's minds. Yes, they do not want to work as intensively as they would earlier in their careers. Instead, they want to be more financially stable and take up more productive and meaningful roles. They want to work not essentially for money but to do something they love.

That is why financial independence has a lot more meaning than retiring early. 

But how does one figure out if it is realistic? It is quite realistic that FIRE is possible. Achieving financial independence is possible; however, the reality of retiring early can be far from expected. “For instance, recently, I met someone who retired at 52. He told me that he was really getting bored, and he thought he would tour around the world. But even after all that, it did not bring him any satisfaction. He preferred going back to work even if it meant getting paid less,” says Rathi. 

The experience suggests that retiring early is not as realistic as it seems. Your hobbies and passions can become your full-time role, but often, that does not pan out well. 

When one comes to think of it, retirement does not mean the end of one's career. "Also, retirement is not the time when you sit idly at home. The day you cease to work for money, you retire," says Srinivasan. Essentially, you can retire at any age, but you need to plan smartly for that.