Recently, a survey done by PGIM India revealed that 51% Indians have not even started planning for their retirement. Although the respondents may not be strangers to investing, unfortunately, retirement was not a goal that featured higher on their list.
However, when we put on our rational hats most of us know that this is the one goal for which we should be putting aside money from an early age. Retirement is the one purpose for which banks don’t lend a loan unless you count a reverse mortgage which is yet to really flourish in India. More importantly, today even government employees don’t get the benefit of pension income. As the working years rush by in a blur, before we know it we need a huge sum of money to fund our increasing years of retirement.
Considering the corpus most of us will require, it’s also a goal that will benefit from the magic of compounding. So, if you start at the age of 25, by the time you retire at 60 you could very well end up with a rock-solid amount by investing very manageable amounts per month. Don’t believe us? Read on to see number-based examples for all sorts of investors and risk appetites.
In these examples, it is assumed that you start by invest in either debt mutual funds, or equity mutual funds or a mix of the two. As a rule of thumb, we have considered annualized returns of 7.5% p.a. for debt and 12% p.a. for equity. We look at five such scenarios with the two extremes of debt only or equity only plus three combinations of asset mixes.
For all the scenarios, it is assumed that you start at the age of 25 by investing Rs. 10,000 every month through the SIP mode. Every 5 years, this amount is stepped up by 15% rounding off to the next 100. In portfolios split between debt and equity, the benefit of the doubt is given to debt for the higher rounding up.
Scenario 1: Conservative portfolio
If you are someone who would rather see their investments inch up slowly with little possibility of wild swings, then this portfolio is for you. In this case, for the totality of 35 years, you invest only in the low-risk debt funds. Within the category, you could choose to mix it up. For a long term, short term or medium-term debt funds with clean portfolios might be a good bet.
You start the journey with Rs. 10,000 a month slowly increasing it to end the 35 years at Rs. 23400 per month. What you get in return for your discipline and perseverance is Rs. 2.52 Crores!
Although with such a long runway of 35 years, we would highly recommend dipping your toes in equity.
Scenario 2: Conservative Portfolio
With 70% in equity and 30% in debt, this portfolio is for people who want to give that slight boost of growth to an otherwise staid, stable allocation of debt.
So, you start with investing Rs.7000 per month in debt with a mere Rs. 3000 in equity. Even as you increase the amounts every 5 years, the increase continues in the same ratio, apart from any rounding off to the nearest done in favor of equities.
Although, what you will notice is that while the debt part of your portfolio will inch its way towards Rs. 1.78 Crores, the equity part will overshoot it to reach Rs. 1.97 Crores to give a total corpus of Rs. 3.75 Crores at the end of 35 years.
However, it is extremely important to remember that this does not happen in a linear path. If you can’t stomach the risk or imagine the possibility of this part of your portfolio going in the red, then this version is not for you.
Scenario 3: Balanced Portfolio
This portfolio is more for people who can’t choose just what measure of risk would they want to take over this period. In this case, there is a perfect mix of the stability from debt and the appreciation of equity.
Starting at the age of 25, you start with investing Rs. 5000 each every month into equity and debt mutual funds. For the next 35 years, you hike up your investment by 15% every 5 years ending the period with an inflow of Rs. 11,700 each month to both types of funds. With this strategy, by the time you are ready to retire at the age of 50, you would have a corpus of Rs. 4.60 Crores!
Scenario 4: Equity Oriented Portfolio
If you believe in the India growth story, wanting to put more into equities, then this portfolio is for you. In fact, this portfolio is in line with most conventionally advised portfolios of 70% equity and 30% debt.
The debt allocation will help cushion the inevitable tumbles in between that equity is bound to take on the path to getting the portfolio to appreciate in wealth. Starting with investing Rs. 7000 in equity and Rs. 3000 in debt every month, the inflows grow to Rs. 16,600 to equity and Rs. 6,800 to debt per month. Over 35 years, the total corpus grows to Rs. 5.43 Crores.
Scenario 5: Aggressive Portfolio
As the name suggests, this portfolio depends completely on the risk-return profile of equity funds. The idea is that since it is a long period of 35 years, the volatility that is part of the game will smoothen out to make it a worthwhile venture.
Starting with investing Rs. 10,000 per month in pure equity funds, the investment increases by 15% every 5 years to end at Rs. 23,400 per month. With an average return of 12% per annum, these investments over time will grow to a whopping Rs. 6.65 Crores!
As you can see, when planned early, retirement is not that intimidating a goal that we often think of it as. For a quick summary look at the below table for the five portfolios discussed above:
|Portfolio Type||Debt||Equity||Total Corpus|
|Conservative||100%||0%||Rs. 2.52 Cr|
|Defensive||70%||30||Rs. 3.75 Cr|
|Balanced||50%||50%||Rs. 4.60 Cr|
|Equity Oriented||30%||70%||Rs. 5.43 Cr|
|Aggressive||0%||100%||Rs. 6.65 Cr|
When you start early, investing over the years helps take care of the corrosive effects of inflation also so that you are well set for the golden years.
Have you started planning for retirement yet? Contact a Moneyfront financial advisor today to start your journey.