How to Plan For Retirement in Your 30s, 40s, and 50s

How Do I Plan for Retirement?

Retirement planning is the process of investing and accumulating a corpus during your working years. You then deploy the corpus and make regular withdrawals from it to meet your regular expenses during the retirement years.

During the accumulation phase, the expected rate of return should be higher than the inflation rate and also consider the increase in the standard of living. Similarly, during the retirement years, when the corpus is deployed, the aim should be to earn a net positive return (growth rate – inflation rate).

You can work with an investment expert who can guide you on how to save for retirement. The retirement planning process involves the following steps.

• Based on your current annual expenses, calculate the expenses in your first year of retirement. Take the impact of inflation into account.
• Based on the expenses in the first year of retirement and life expectancy, calculate the retirement corpus you will need at the start of retirement. Take the impact of inflation and return on corpus during retirement years into account.
• Now that you know the retirement corpus amount, based on the number of years to plan and the expected rate of return, calculate the amount you need to invest annually to build the corpus. The annual investment amount can be broken down into monthly amounts to invest through an SIP.
• The investment amount can be calculated as a fixed monthly amount for regular SIP or a 5 to 10% annual increase for step-up SIP. A step-up SIP is recommended.
• Start investing in the mutual fund schemes recommended by the investment expert. Do a regular review once every six months to one year. The investment expert can recommend any changes as and when required.

How to Invest Money for Retirement?

Ideally, one should start investing for retirement from the moment they start earning. However, if you have still not started, it is never too late to start investing towards creating a retirement fund. One important factor to keep in mind is ‘Inflation’ and it is important to beat this silent devil at any stage of your investing life. And hence, no matter what your age is, a significant portion of your investments must be invested in equity.  Let us look at how one should invest towards retirement as per their age.

1)      Planning for retirement in your 30s

When you start investing towards retirement in your 30s, you have a long runway in front of you. It is safe to assume an investment horizon of close to 30 years when investing in your 30s. One needs to be very aggressive at this stage of investing for the Retirement Goal because there is ample time for compounding to take place on your investments. As you are starting early, you can invest a major portion of your retirement savings in aggressive equity mutual funds. In the long run, equities benefit from the power of compounding. Equities have the potential to give inflation-beating high returns and create exponential wealth for you.

Imagine if you start investing through a Systematic Investment Plan (SIP) of Rs. 10,000/- per month in a Mid-Cap fund when you turn 30 and keep investing till the age of 60 years, you would have amassed a corpus of Rs. 5.5 crores* from an invested amount of 36 lakhs. Sounds unbelievable right! But that is the power of compounding working its wonders on your investment. If you add the additional flavour of a ‘step-up’ of let us say 5% on your monthly investments, the outcome would be an unbelievable almost 8 crores*.

*Assumed return of 14%

2)      Planning for retirement in your 40s

Investing in your 40s would pretty much be similar to how it is in your 30s. Stay aggressive, have control on your investing emotions and stay focused on your Retirement Goal.

If you have already started investing for your retirement in your 30s, you may continue doing so in your 40s. If you have not yet started, you must start investing as delaying your investments can cost you in the long run.  As your income grows every year, you should increase the amount invested towards your retirement fund and other financial goals. Increasing the monthly investment amount helps you reach your financial goals faster than scheduled.  While the majority of investment may go into equity mutual funds, you should allocate a small portion of your corpus to Debt Funds and gold.

In the 30s to 40s age group, many people get married, become parents, take a home loan, etc. During every such important life event, you must evaluate your emergency fund, term life insurance cover, family health insurance cover. If required, you should increase the emergency fund amount and/or life/health insurance coverage amount.

3)      Planning for your retirement in your 50s

If you have started investing towards your retirement from your 20s, by now you would have made decent progress in building your retirement corpus. You should work with an investment expert and review the progress of your retirement fund and other financial goals once every six months to one year.

You should rebalance the portfolio regularly to revert to the base asset allocation. For example, if the stock market has seen a significant rally, the equity proportion would have increased. In such a case, during the rebalancing exercise, you should either sell some equity portion and reinvest the proceeds in debt or allocate incremental money to debt. Either of the measures will decrease the equity component, increase the debt component and revert to the base asset allocation.

If you have achieved any of your financial goals, like repayment of home loan or building a fund for your child’s higher education, you can redirect the free cashflows towards your retirement fund. The additional investments will help you reach your retirement corpus faster than scheduled.

Risk reduction of the portfolio is critical at this stage as you do not want to stay exposed to high risk investments. At the same time, there must be enough liquidity to account for lifestyle expenses for at least the first three to five years of post-retirement years. Life expectancy is also increasing and It is important to that one would need to account for at least 20 years of post-retirement life.

Becoming conservative at this stage could risk early depletion of your retirement corpus. Inflation is another factor to account for and your portfolio needs to beat inflation by a margin so that there is no adverse impact on your future cash flows. What costs Rs. 1000 today could cost Rs. 5000 in the next 20 years. If your investments do not outpace the effect of inflation, your corpus could decrease faster than expected.

Best Retirement Savings Options

In the earlier section, we discussed how do you plan for retirement. Let us now look at how to invest for retirement. There are various financial products that you can consider for investing towards your retirement.

1)      Equity

Within the equity segment, there are various mutual fund schemes that you can consider. Some of these include the following.

• The majority of your investments should be in diversified equity mutual fund schemes like large, mid, small, flexi-cap funds, etc.
• You may allocate a small portion to sectoral, thematic, factor-based mutual fund schemes.

2)      Fixed income

Within the fixed-income segment, there are various financial products within mutual funds and others. Some of these include:

• Debt mutual funds like liquid funds (for emergency fund), duration funds, corporate bond funds, etc.
• Government small savings schemes like PPF, NSC, post office fixed deposits, etc.
• Bank fixed deposits, corporate bonds, Government securities, etc.
• Employee Provident Fund (EPF) provided by the employer

3)      Gold Funds or ETFs

Within the gold segment, it is recommended that you invest in gold mutual funds through SIP. The other financial products for investing in gold include gold ETFs, Sovereign Gold Bonds (SGBs), gold coins, digital gold, etc.

Retirement Fund: Plan Well and Be Financially Independent During Your Golden Years

Retirement planning can be done across various age groups, whether in your 20s, 30s, 40s, or 50s. The earlier you start retirement planning, the better. Whichever age group you start, you should progressively keep building on it till your retirement.

You must work with an investment expert who can guide you on the corpus to be built based on your current expenses, financial products to invest in to build the corpus, and finally, deploy the corpus during your retirement years. When you plan your retirement fund well, you can be financially independent during your golden years and live a life of dignity.

FAQs

What Are the Other Important Things That You Should Plan Alongside Your Retirement?

Along with investing for your retirement, you should build and maintain an emergency fund with 3-6 months of expenses, buy adequate term life insurance as a backup for your family in your absence, and buy a family floater health insurance plan for your entire family.

Should You Do Your Estate Planning During Your Retirement?

As and when one acquires financial assets, they should do estate planning to ensure the smooth passing of assets to intended beneficiaries after their demise. You need not wait till your retirement to do estate planning by making a will. You can make a will much before your retirement. During your regular review of overall financial planning with your investment expert, you must review your will also. If your financial assets have changed substantially after the last will, you must make a new one to include the assets acquired after the previous will.