Like it is said, “retirement is the longest coffee break”. To enjoy that break,you need a guaranteed source of income. Your income source is atleast equal to your current monthly expenses adjusted for inflation and should be good enough for a peaceful retired life. Itpresupposes a corpus built for the retirement goal.The best Mutual Funds helps build a corpus for your retirement.
Critical factors for retirement plan
Factors that decide corpus include monthly expenses, years till retirement, and inflation. Post-retirement people prefer maintaining theircurrent standard of living. Therefore, inflation is the most significant factor as it reduces the buying power of money with time. It causes the current monthly expenses to be higher in future.
Impact of inflation
For example, the monthly expenses of Rs.50,000 assuming an inflation of 5% and a time of 20 years to retirement equals Rs.1.3 lakhmonthly or Rs.16 lakh per annum. This means, 20 years later, Rs.50,000 will be Rs.1.3 lakh due to inflation. With this, we have arrived at the monthly expenses post-retirement.
The corpus required to generate Rs.16 lakh per annum for an assumed number of years of life expectancy of 25 years with a 7% interest rate and a 5% inflation would be Rs.3 crorebased on the formula of the present value of an ordinary growing annuity. The formula is:
Corpus required= AE[1-((1+i)/(1+r)) ^n/(r-i)]
AE= annual expenses
r= rate of interest
n= number of years
The investment required will be Rs.8,600monthly or Rs.1,03,000 per annum to build a corpus of Rs.3 crore at an interest rate of 12% for 30 years. There are a lot of online calculators available to calculate the retirement corpusand the monthly investment to be made for that.
Allocation for corpus
There is no dispute that the best Mutual Funds to investin provides a lot of flexibility and choice. Starting early is ideal to build a retirement corpus as it is a long-drawn process and demands a large corpus. During the initial years,you can emphasise investing in either Equity or Mutual Funds with maximum equity allocation.
During the intermediate retirement stage, re-balance by combining fixed income and equity. However, a few years before retirement, re-balance into more Fixed Income Funds. You also choose to invest in a Balanced Fund that automatically adjusts allocation.
Use either the lump-sum method or the Systematic Investment Plan. SIPs have their benefits. Firstly, it brings about discipline and secondly, it bestows the benefit of averaging. More units are bought under the same amount when the market is down and less when the market is high. This helps in averaging the overall buying price. The power of compounding is visible as the corpus grows.
Other related goals of retirement
Medical expense and inheritance planning are subsidiary goalsafter retirement. Medical expenses are sudden and eat up your savings or put a hole in the corpus if not considered. Plan a larger corpus to take care of medical contingencies. As for inheritance planning, where the individual wants to leave funds, a larger corpus is required.
Be it any method, the retirement goal is long term and should not be overlooked. It is a parallel and continuous goal that requires workwith other short-term goals. Discipline is key as the impulse to prioritise other short-term plans can be high.
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