There is nothing like it. Many of us get overwhelmed by the very thought of retirement. It makes us wonder: How to go about building a retirement corpus? This dilemma often deters us from planning for it.
True wisdom, however, is in planning as ahead as possible. Considering that building a corpus is not an easy and a short-term task, it is vital to have strategy in place. Remember, creating a corpus not only goes a long way in helping you identify what you need to do in the present (so that you can lead a particular lifestyle in retirement), but also helps in avoiding unanticipated pitfalls during your retirement. You must take into account when you plan to retire and the number of years you have to grow your corpus. Overall, the focus should be on saving as much as possible, so that you can retire when you want. Also, ensure that you never run out of money.
If you happen to belong to that class of investors who never envisaged retirement planning, you must make amends now. Start, on a monthly basis, by setting aside whatever you can from your income. However, make sure that once you start the process, it remains a priority above all other goals.
The problem is that young people don't usually consider retirement, either mentally or financially. The fact, however, remains that starting early makes a huge difference. For every 10 years you delay, you will need to save three times as much each month to catch up.
Therefore, if you are young, don't hesitate. Start investing small sums. Remember, smaller contributions made regularly, over a period of time, to a high potential asset like equity can produce spectacular results. Needless to say, the longer you stay invested, the more you tend to benefit from the power of compounding. Of course, to get best results, you will have to stick to the plan. This way, ups and downs would even out over the years.
Selecting the right investment options holds the key to retirement planning. Investing too conservatively can seriously devoid your corpus. From a long-term perspective, your portfolio must have a significant portion invested in equity and equity-oriented options. The presence of tax-efficient options like mutual funds can help you a great deal in improving the post-tax returns.
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It is equally important to understand the impact of inflation on your retirement nest. Many investors make the mistake of not factoring in inflation while planning. For the sake of understanding, let us take an example of someone 30 years away from retirement. The question arises, what will be his annual expenditure then, given the increased cost of living? If we assume a five per cent inflation rate for 30 years, Rs 100,000 annual expenditure will increase to Rs 435,000 by the time he retires. Therefore, if he plans Rs 100,000 per annum for his retirement, because that is how much he needs today, he would be having less than 25 per cent of what he would actually require.
Then, there are investors who make the mistake of withdrawing amounts during building of the corpus. While at times it might become necessary to do so, making it a habit can negatively affect retirement.
The author is the CEO of Wiseinvest Advisors. The views expressed are personal