Retirement Planning: Simple steps to go about building your corpus

A recent survey carried out by Max Life Insurance Company Ltd highlighted how many Indians fail to plan their retirement early. The India Retirement Index Study (IRIS) ranked the country’s retirement index at 44 on a scale of 0 to 100. 

This underscores how many people fail to plan for the future. While health and financial preparedness ranked at 41 and 49, respectively, emotional preparedness remained near about 60, thus, indicating continued emotional dependence on friends and family, post-retirement.

Prashant Tripathy, Managing Director and CEO, Max Life Insurance says, “As India’s life expectancy increases and health trends change, the country’s elderly population is projected to grow nearly 41% to 194 million by 2031. There is also a review underway of the retirement age in India to align it with the increasing life expectancy. As industry and the wider ecosystem take steps in a positive direction, the robust and well-represented study reveals that Indians are also realising the need to plan for retirement early. However, the awareness is yet to translate into action in terms of proactively saving and investing.”

This is absurd considering how investments must be made to secure the future. This is appalling considering how investing without a purpose takes a toll on one’s ability to plan for years ahead. One way to escape this rigmarole and never-ending cycle of inadequate finances post-retirement is to plan early. However, it is not enough to plan. We must be aware of what kinds of investments we are willing to undertake, especially, as the market offers us a host of investments suitable for building a retirement bucket strategy.

Defining bucket strategy

How do we create a retirement bucket? For this, you must be aware of what bucket strategy means. In layman’s language, it means to have enough investments in place to ensure enough income that beats inflation in the long run. Apart, you must have enough liquidity to serve you in the short run, while your long-term investments must be able to generate constant income.

Plan for the first 15 years of your retirement. This also means that you have saved enough by your retirement date for reinvestment. Dividing your bucket strategy into income for the first 15 years and then the later years is important so that you give enough time for your reinvestments to grow and create a corpus instead of being subject to market volatility in the short run. 

Setting aside your money for only two to three years and then relying on reinvested money may backfire due to sudden market crashes or the aftermath of an unprecedented recession-like situation. You may imagine what it would feel to see a major part of your corpus being wiped out due to poor market returns within a few years of retirement.

Planning your retirement

It is not difficult to plan your retirement provided you start early. Plan your retirement within a month of receiving your first pay. This may sound unconvincing but once you realize the consequences of being financially inept, you would consider dividing your retirement money into different buckets, each sizeable to meet different phases of life. These include:

• Emergency corpus: How do you tackle unexpected expenses? Obviously, with the money, you had set aside to pay for your emergencies. Keep some cash in hand and at the bank. Have some short-term and medium-term fixed deposits that you may liquidate as and when you need.
• Guaranteed income sources: You can start by creating a pension income for yourself. If you are wary of annuity pension plans with obscure interest rates and the hefty premiums they charge, go for the government-sponsored National Pension Scheme (NPS). To date, the interest earnings from both Tier-1 and Tier-2 of NPS regulated by the Pension Fund Regulatory and Development Authority (PFRDA) are listed below.

Since its inception, this scheme has earned more than 10 per cent returns for its investors. Assuming a conservative estimate of 10 per cent returns on NPS investments, you may avail a monthly pension of ₹56,983 by just investing ₹10,000 per month for the next 30 years till you retire. More importantly, you avail of this pension only when you opt to convert 50 per cent of your corpus into an annuity. In case, you are inclined to a higher income every month so that you can set aside your remaining earnings for reinvestments for a stronger financial future.

This means that you can earn a monthly income on the entire corpus accumulated or choose to convert only a portion of it into monthly income and redeem the remaining amount in a lump sum.

Apart, the PFRDA is likely to come up with an assured return scheme in the coming months. The scheme is in the final stages of planning and will take a few months before it is launched.

• Debt funds: You have retired, and have a regular income source in hand. However, relying on one income source may not be enough. So, you must plan for the next 10 years post-retirement. How much money would you like to have after 10 years after considering all the ills of inflation and other possible expenses related to growing age? 
• For this, you must aim for a low-risk bucket that will allow you enough income for the coming 10-year period. Start with debt funds or park money in options that invest 30-45 per cent into equity and the remaining in debt for at least 15-25 years. You may opt for a balanced advantage fund or a conservative hybrid fund too, thus, making sure that you earn enough returns without incurring too much on your investments. Then, systematically withdraw your monpey so that you continue to earn on your corpus while not redeeming it completely.

For example, ₹5000 invested every year for the next 30 years in a debt fund at 7 per cent will yield you returns to the tune of ₹43,35,437. This means that by the time you reach 60 years of age, you will have a decent corpus amounting to ₹61,35,437.

Conservative hybrid funds earn up to 8-9 per cent on the investments made. This means that ₹5000 invested every year for the next 30 years in a conservative hybrid fund at 8 per cent will yield you returns to the tune of ₹57,01,476. This means that by the time you reach 60 years of age, you will have a decent corpus amounting to ₹75,01,476.

• Equity funds: This is for the much later phase. Say, you retired at the age of 60 with a life expectancy of up to 80-90 years. At the age of 80, you will again need money. Invest your earnings into an option that allows for 70-75 per cent into equity and the remaining into debt. With the money remaining in equity funds for the next 50 years till you reach 80, there is no way you will ever face a shortage of money in the last years of your life.

You may easily manage your equity investments in two easy steps.

Step 1: Assuming equity funds earn 12 per cent returns in the long run, you can start by putting ₹10,000 every month in an actively performing mutual fund. Say you put money through systematic investment plans (SIPs) in a large-cap fund that grows steadily, sans the extreme volatility in mid-cap and small-cap funds. You put this money for the next 25 years till you turn 55 years old.

Step 2: Now that you have turned 55 years old, stop investing through SIPs. Instead, let your investment corpus grow. Keep this money invested in the fund for the next 15 years, which means that you see your corpus earn more money for you till you turn 70 years old. Alternatively, you may park this amount in a fixed-income plan and benefit from the monthly interest amount earned or you can park a part of the money in your bank and set aside the remaining in the fund for continued returns.

Step 3: Now that you have enough corpus to rely on, keep a small portion of it in fixed-income plans like bank deposits and the remaining in debt funds for the coming 15-20 years. If you are looking for more returns than what fixed deposits yield, you may park your money in corporate bonds too or senior citizen post office savings schemes that give more interest. This way, you will not only have enough in hand to meet sudden expenses but will also see the remaining corpus grow. You can either spend the remaining money on yourself or choose to leave it as a legacy for your loved ones.

Not only do you have enough to continuously pay for your post-retirement expenses, but you will be able to leave behind a reasonable amount for your dependents to fall upon in times of sudden financial crisis.

Planning early

Early planning ensures that you give enough time for your money to grow. Time is an important proponent in investing. The compounding effect on your money is possible only with enough time on your side. It is important that we do away with the tendency to procrastinate our investments. “Earlier, the better”, is the saying that resonates best with investments, especially, when it comes to planning and investing for retirement.

Planning for retirement means planning for days when you would have no access to regular income. Having friends and loved ones by your side is comforting but you cannot expect them to bear your burden when you have nothing to call your own.

As the famous saying goes, “When you have money, people recognize you. When you do not have enough money, you recognize people.”