It’s commonly said, life begins at retirement! After working for a long career, one reaches the age of superannuation, one wants it to be a golden period to sit back, relax, focus on personal hobbies, and enjoy their hard-earned money. But it’s an overwhelming feeling when you think about it today in your 20s or 30s, about life at 70-something.
When it’s about planning your retirement it’s not one-size fits, several factors come into play and hence one should customise their plan rendering to goals, risk-taking and investing capacity, expected regular monthly expenditure, rising inflation, one-time expenditures such as holidays, life expectancy, etc.
A few other factors to consider are the ones that can erode one’s lifelong savings such as inflation, unplanned expenses, and sudden illness. Such factors can swipe off lifelong savings if not well planned. Once these values are determined one should define an investment corpus.
Defining an investment corpus in your early 20s is known to be beneficial. While doing so we must all factor in the inflation. Calculating the inflation rate helps us target our estimated retirement amount. We must also be mindful to consider education and healthcare inflation. The rising inflation often puts a squeeze on retirement corpus funds. Hence, it’s important to build an inflation-proof retirement plan, the thumb rule is to make sure that your investments earn more than inflation rates to last for several decades.
Also Read: Retirement Planning: How much money does a family of four need for retirement?
For investors who are planning retirement, below are a few tips to manage the eroding inflation effect on retirement:
The magic of compounding is a process that aids you to multiply your potential earnings from an investment. It also enables you to earn interest not only on your original invested amounts but also earn interest on your returns. Hence, investing time usually equals money, if you start investing early you will have more years to be benefited through compounding interest, which will allow you to accumulate the desired corpus for your retirement. This allows your money to grow, for instance, Lata is now 20 years old, and Asha is 30 years old. Both have 40 and 30 years of investments ahead of them until retirement. They both plan on investing 5,000 annually until retirement. This gives Lata a total return of 13,98,905/- after 40 years of investment and Asha receives 6,11,729/- post 30 years of investment.
Amount Invested Per Year5,0005,000Investment Period (Years)3040Rate of Return (%)88Total Returns (Rs.)6,11,72913,98,905
This proves that the key to a beneficial investment is to start early. The earlier one begins their investments, the greater is their total returns.
In today’s day, there are a plethora of investment tools beyond FDs offering better returns that beat inflation such as life insurance products like ULIPs, and more. Don’t shy away from equity markets, it is historically proven that they generally outperform inflation in the long run and hence make a compelling choice for wealth multiplication. If you can stomach the high risk, you can directly invest in equity markets. If you prefer low-risk, then invest indirectly through market-linked products like Unit-linked life insurance plans. However, factor in your financial goals and risk tolerance before investing.
While considering new financial instruments one should not forget the time-tested mantra of diversification. Inflation impacts different asset classes differently, and diversification across financial tools like equity, debt, and real estate can help distribute risk. For example: if you plan to invest Rs 100 today invest 40% of it in equity-led options like stock markets, ULIPS, ETFs, Index funds, etc. If you have a low-risk appetite but you want to give the equity market a try, the best option is to invest in ULIPs, they provide a significantly higher return than traditional investments, and the returns are linked to funds chosen by you which can be managed and revised with flexibility solutions given by insurers.
The next 40% in guaranteed return options which also can beat inflation like savings plans, guaranteed return income plans, gold bonds, retirement plans etc. and 20% in your security nets like life insurance & health insurance. Investing in a diverse range of financial instruments creates a comprehensive portfolio with the potential to outperform inflation and mitigate the risk of loss in the single fund in a longer-term scenario.
Also Read: Fixed Deposit vs Debt Funds: Which is better for you after the recent change in taxation?
Certain guaranteed and unplanned expenses come up in every person’s life. For example: planning for child education, marriage, retirement, etc are guaranteed milestones in one’s life. But unpredictability is the nature of human life, whether it’s a medical emergency, unexpected purchases, sudden demise, etc. In such a situation one needs to be better prepared to meet economic requirements. Some of these can be handled easily if well-planned. One can secure their family from such unplanned expenses by investing in guaranteed plans. These savings plans are designed to help you save regularly; such plans also offer additional death benefits which can be 10X the money one puts in.
Another investment avenue is retirement plans which help one generate regular income after retirement in form of a pension. With these different life insurance products one can attain financial security through meticulous planning for different life stages which also beats inflation.
Retirement is a much-awaited golden period in one’s life. Therefore, it is a must to have a financial security net as there will be no steady income source and rising inflation can jeopardise your retirement plan. Hence, it’s advisable to start financial planning early and regularly monitor financial health based on changing market conditions and your life stages. Periodic re-evaluation of your portfolio at regular intervals is a must to live a peaceful and enjoyable retired life.
The author of this column is Anup Seth, Chief Distribution Officer, Edelweiss Tokio Life Insurance
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of https://www.financialexpress.com
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