Let’s say Ramesh starts investing Rs.5,000 per month in his mid-20s and increases it by 10% each year. By retirement age of 60, he would have an accumulated corpus of almost Rs.5 crores! But if he started 10 years later in his mid-30s, keeping all else equal, his retirement corpus would be lower at just Rs.1.7 crores. That’s the power of starting early!
Retirement planning? Yawn, that’s like decades away for most of us busy middle class Indians, right? Who has the time to think about retirement when we are hustling to build our careers, raise families, and try to enjoy the good life today?
But Nooo!! Retirement has a unique habit of coming up faster than we expect! And unlike our parents’ generation which could depend on their children for support in old age, the dynamics are changing.
The Indian middle class is growing rapidly and has increasing aspirations. However, we don’t have a strong social security system like in the West. Also, very few of us would have pensions from employers. So effectively, we are on our own when it comes to funding our golden years.
But don’t worry, with some smart planning and investing, we can totally do this. The key is to start early, be consistent, and use the power of compounding to grow our retirement corpus.
In this article, I’ll share some practical options tailored for the Indian middle class to help you effectively save and invest for retirement. Whether you are in your 20s or 40s, it’s never too late to put a plan in place for your future retired life. Trust me, your older self will thank you later!
So grab a cup of chai and let’s get started on planning for a comfortable retired life!
Also Check:
– Basics of Stock Market | Imp. Terms and Definitions
– What is Capital Adequacy Ratio (CAR)?
– What is Cash Reserve Ratio (CRR)?
– What Is Statutory Liquidity Ratio (SLR)?
– What is an IPO? | IPO Meaning, Types, Allotment Process
– Difference between Bid Price & Ask Price
– Difference between Market Capitalization, Free Float Market Capitalization
– Difference between DVR Shares and Normal Shares
– सेंसेक्स क्या होता है? – Hindi Mein
Challenges for Retirement Planning in India
But Why So Serious About Retirement Planning?
Well, let’s get real – we Middle class Indians face some challenges when it comes to planning for our golden years:
– Retirement Savings Options are Limited: Unlike the West, we don’t have too many retirement-specific savings instruments. No 401Ks or IRAs for us! Our options are basically PPF, EPF, NPS, mutual funds, and real estate.
– Kids May or May not be with us: We can’t rely on our children to fully support us in retirement, as was expected traditionally. With nuclear families and kids moving abroad, we need to build our own retirement funds.
– Financial Literacy is Low: Most of us find finances confusing and have very little formal education in managing money smartly. We gotta educate ourselves!
– Pensions becoming Rare: Except for some government jobs or corporate roles, pension plans are rare. You are unlikely to get a fixed monthly income for life after retirement from your employer.
– Costs Pile Up: With increasing life expectancy, healthcare costs, and inflation, we need a substantial corpus to last 25-30 years in retirement. Inflation of India, being a developing country, is likely to grow in coming years.
– Planning Takes Time: We can’t build an adequate retirement fund in just 5-10 years before retirement. Need to start early and give it time to grow.
So in summary, it’s critical for us middle class folks to take charge of our own retirement planning, coz no one else will! Time to get serious about it.
Tips for Saving and Investing for Retirement
Start Early
When it comes to retirement planning, time is your biggest buddy! Starting to save and invest early in your career is key to building a sizable retirement corpus.
Here’s why you should start ASAP:
- Time = Money Growth: Your investments grow over time due to compounding. The earlier you start, the longer your money can compound and grow.
- Retirement Needs Time: Retirement funds are not built overnight. Starting early gives your investments sufficient time to grow to the required corpus.
- Power of Compounding: Einstein called compounding the 8th wonder of the world! Your money earns returns, which also starts earning returns. This compounding effect leads to exponential growth over long time periods.
- Every Year Counts: Starting retirement investing even 5-10 years earlier makes a huge difference to your eventual corpus due to compounding. Don’t waste time!
Let’s say Ramesh starts investing Rs.5,000 per month in his mid-20s and increases it by 10% each year. By retirement age of 60, he would have an accumulated corpus of almost Rs.5 crores!
But if he started 10 years later in his mid-30s, keeping all else equal, his retirement corpus would be lower at just Rs.1.7 crores. That’s the power of starting early!
So even if you can invest only small amounts to begin with, start as early as possible. Be consistent, and increase your investments as your income grows. Time and compounding will work wonders!
Benefit from Tax-saving investment options
- ELSS Funds: These are equity mutual funds that invest across sectors and companies to provide market-linked returns. As per current tax laws, investments up to ₹1.5 lakhs in ELSS offer tax deduction under Section 80C. Since ELSS funds have a lock-in of only 3 years, they are one of the best tax-saving options for retirement planning over the long term. Historically, they have delivered inflation-beating returns of 12-15% over long periods.
- PPF: The Public Provident Fund is backed by the government and offers guaranteed tax-free returns of 7-8% currently. The maturity proceeds and withdrawal amounts are also completely tax-exempt. The 15 year lock-in period with option to extend makes PPF ideal for retirement investing. One can invest up to ₹1.5 lakhs in PPF each year.
- NPS: The National Pension System offers market-linked returns like mutual funds but with additional tax benefit of up to ₹50,000 under Section 80CCD(1b). NPS invests across equities, debt and other assets as per your chosen allocation. Starting NPS early in your career ensures retirement savings grow tax-efficiently over the long term. Minimum of 40% of corpus must be annuitized on maturity.
- Sukanya Samriddhi: This government-backed scheme can be opened for girl children and offers sovereign guaranteed tax-free returns of 7-8%. Maximum annual contribution allowed is ₹1.5 lakhs and account matures at 21 years. Good for building a retirement corpus for the girl child.
- Bank Tax-saving FDs: These fixed deposits offered by banks for a tenure of 5 years offer guaranteed returns of 6-7% currently and qualify for deduction under Section 80C up to ₹1.5 lakhs. Useful for conservative investors but returns are lower than other instruments.
Maintain Asset Allocation Principles
When investing for long-term goals like retirement, having the right asset allocation or mix of investment asset classes is crucial. This helps manage risk and optimize returns over time.
The key aspects to keep in mind regarding asset allocation:
– Balance across asset classes like equity, debt, gold etc. based on your risk appetite and investment horizon.
– Equity provides growth but is volatile in the short term. Limit equities to not more than 60% if your retirement is more than 10 years away.
– Debt funds like FD, PPF provide stability but lower returns. Keep some portion in debt for balance.
– Don’t ignore gold. Keep 5-10% in gold ETFs or funds to hedge against inflation and market corrections.
– Rebalance portfolio periodically to maintain target asset allocation. For e.g. if equities have done very well, trim it and move some gains to debt.
– Asset allocation should evolve with age and risk capacity. As retirement nears, reduce equity and increase debt allocation.
Here’s an example asset allocation model for different age groups:
– 30s: Equity – 60%, Debt – 30%, Gold – 10%
– 40s: Equity – 50%, Debt – 40%, Gold – 10%
– 50s: Equity – 40%, Debt – 50%, Gold – 10%
Don’t try to time the market or chase hot assets! Maintain discipline in following an asset allocation that matches your risk profile and retirement timeline.
Consider Annuities and Other Retirement Income Products
Especially in India, as retirement approaches, it’s good to start including some retirement income products in your portfolio along with the typical accumulation plans. These can provide steady cash flows to meet expenses during your golden years.
Some popular retirement income products to consider:
– Annuities: These provide guaranteed income for life or for a set period in exchange for a lump sum amount. Helps cover fixed expenses in retirement. Types include immediate, deferred, fixed and variable annuities.
– Systematic Withdrawal Plans: This allows you to withdraw a fixed sum periodically from your retirement mutual fund corpus. Allows liquidity while preserving principal. There are some such schemes from LIC.
– Senior Citizen Savings Schemes: These government-backed schemes offer guaranteed quarterly payments for 5 years post retirement. Current interest rate is around 8% per annum.
– Fixed Deposits: Bank FDs can provide periodic interest payouts to take care of regular income needs. Useful for stable cash flows.
– Post Office Monthly Income Scheme: Offers assured monthly payouts for 5 years at 7-7.5% interest on deposit amount. Suitable for conservative investors.
Evaluate all risks, returns and costs involved before choosing any retirement income product. Have a mix of fixed and market-linked income sources for stability and growth. Speak to a financial advisor if needed.
The key is to have a plan for predictable cash flows during retirement years, so you don’t have to dip into your principal assets frequently.
Health Insurance mat bhulo !!
Healthcare costs are shooting up faster than a rocket! Just look at how much hospitals charge us even for basic treatments nowadays. Not to mention long-term care if needed.
As we grow older, health issues also start cropping up leading to higher expenses. Like they say – health is real wealth!
So make sure you get a solid health insurance policy for yourself and your spouse well in advance of retirement:
– Take at least Rs.10-15 lakh coverage to be safe. Higher the better.
– Go for floater plans that cover entire family under same policy.
– Get coverage for major illnesses like cancer, heart disease, diabetes too.
– Check for no co-pay or low co-pay clauses. You don’t wanna be paying 10-20% of massive bills!
– See if you can get cashless claim settlement across major hospitals. Reduces hassles.
– Compare inclusions and exclusions carefully before buying a policy.
– Review and enhance your coverage every few years.
– Don’t forget critical illness and personal accident covers.
Having insufficient medical insurance during retirement can drain your savings pretty fast.
Seek Expert Advice
With so many options, tools, regulations etc. retirement planning can seem overwhelming for regular folks.
It’s perfectly okay to ask experts for help. You want qualified and ethical advisors – check their credentials and client reviews before engaging them. SEBI Registered Investment Adviser (RIA) is a good credential.
Other Aspects to prepare
But Mitron, Retirement Planning Is NOT All About Investments!
You need to prep in other ways too for your carefree wealthy, blessed life!
- Make a Will: Settle your assets and succession planning in advance through a proper will. Saves nasty family fights later.
- Insure Family: Have adequate life and health coverage for spouse and kids so they are provided for.
- Get Documents in Order: Consolidate all property papers, investment details, bank accounts etc at one place for ease.
- Lifestyle Planning: Will you relocate? What hobbies will you pursue? Discuss with family.
- Health Checks: Go for regular full body check-ups. Maintain fitness through exercise, diet etc.
The key is to have plans not just financially but also socially, mentally, emotionally, and spiritually for a fulfilling retired life.
Conclusion
- Chhoti-chhoti sums bhi chalegi shuruat ke liye.
- Choose the right tax-saving instruments like EPF, PPF, ELSS funds. Let sarkar uncle help grow your money.
- Have the right mix of equity, debt, gold in line with your risk appetite and years to retirement. Avoid trying to time markets or chase fads.
- Include some retirement income products closer to retirement for steady cash flows. Annuities, SCSS, PMVVY type government schemes work well.
- Insure health risks adequately. One major illness can wipe out savings if uninsured. Prevention is better than crying later.
- Take professional guidance if needed especially on complex areas like asset allocation, withdrawal strategies, annuities etc. SEBI registered advisors are good.
- Beyond investments, also prepare mentally, socially, emotionally for your golden years. Pursue hobbies, make friends, spend time with family. Have purpose.
With some smart planning, middle class Indians like you and me can also enjoy a financially secure retired life. Just need to start early, stay invested, and leave rest to compounding!
Jai Hind!
Also Check:
– Basics of Stock Market | Imp. Terms and Definitions
– Artificial Intelligence – AI Analytics for Sustainable Success
– Internet of Things (IoT) Analytics
– Real-Time Analytics in E-Commerce
– Top Listed Companies by Market Capitalization
– Top 7 Investors in India in 2022 – Big Bulls of the Dalal Street