Today, retirement is viewed from a very different lens. First and foremost, if you are a 25-year-old who has just received her first big paycheque, retirement is probably the farthest thing from your mind. The only things that you are probably thinking about are where and how to spend your first major income. As you grow older, stepping into your 30s, money starts taking on a different meaning. Now, in addition to spending and consumption, you start thinking about savings and investments. You focus on building an investment corpus that can help you achieve your myriad goals. At this stage, you may or may not think about retirement.
One of the following thoughts might come to your mind.
- “I am still too young to start retirement planning. Instead, I should focus on my near and mid-term goals.”
- “I don’t want to hang up my boots. I want to continue doing some kind of work till my last day.”
- “I should start planning for my retirement now, but I don’t know how.”
The Only Answer Is To Start Early
Even if you want to continue working in your 60s, 70s, and even 80s, it is always best to build a retirement corpus to take care of the rising medical inflation and even ensure that you are able to pursue your chosen path. Now, the thing about retirement planning is that this corpus influences how comfortably you spend your life after you retire, ie, after your regular income either stops or reduces significantly. Considering this, it is important that you ensure that the money that you save for retirement grows into a sizable corpus by the time you retire and is safe. To achieve this, can do the following:
- Start as early as possible
- Start with a good allocation to equities. Keep reducing this exposure as you approach retirement and finally bring it down to less than 10 per cent.
Gain From Equities
Equity investments are considered as long-term vehicles of growth. In the short term, equity prices tend to fluctuate as they respond to both company fundamentals as well as market noise. However, over the long term, they can potentially generate good returns and help you create a sizable corpus. Here is how you can build a retirement corpus using equity investments.
If you are in your 20s or even early 30s, it is likely that you have minimal liabilities. Further, your investment horizon is long-term. Both these factors indicate that your ability to absorb risk would be on the higher side. Hence, good exposure to equities can be considered. You can invest in equities directly or you can invest via equity mutual funds. Here’s why.
Knowledge Is Key: While direct equity investing can be value accretive, it does require an in-depth understanding of equity markets, stock selection, and regular monitoring and review. So, if you are going to buy some stocks for your retirement corpus, make sure that you do in-depth research and buy fundamentally strong companies that have good growth potential. Also, try to curb your behavioural biases and stay invested unless there are some fundamentally negative changes in the stocks. Remember that this investment is for your retirement so you need not react to every short-term news or development. Also, ensure that your direct stock exposure is not more than 10-15 per cent of your total equity exposure.
Invest Systematically: Equity mutual funds can be an ideal choice as these funds give you the desired exposure to equities and take away the burden of investment selection. They are managed by expert professionals who invest as per the scheme mandate. The best part is that you can choose to start a retirement systematic investment plan (SIP) in an equity fund of your choice. This way, every month, you invest a fixed sum of money in an equity fund. If your income is not very high then you can start small and then increase the SIP amount with an increase in income. Here you will not only benefit from the growth potential of equities but will also gain from the compounding, which can have an exponentially positive impact on your earnings.
Change With Times: As you grow older, your liabilities increase, and you get closer to your retirement, it is likely that your ability to take risks might decrease. Thus, you need to slowly reduce your equity exposure and shift the gains made from your equity investments into safe instruments. This approach will ensure that you are able to grow your retirement corpus through exposure to equities and eventually protect it by moving to fixed-income generating instruments.
Building a robust retirement corpus means that even as you grow old in age, you can stay young at heart. The bottom line is that retirement planning is important and that equities can help you create an enviable retirement corpus.