Planning for Your Retirement Like it or not, we all will grow old one day and so will you. The question now, is only how you will spend the golden years of your life. Do you want to retain your current standard of living? Want to live even more lavishly? Or do you want to grovel in front of your near and dear ones for food, accommodation...and let's face it, your dignity? Many of our readers are just starting off in their careers in Investment Banking, and the last thing on their mind right now is retiring. Fair enough, but if you start saving early (and frequently) and follow some discretion in spending, you reap the benefits manifold later on in life.
Here are some common mistakes that can significantly affect the quality of your retirement years. Starting late The early bird does indeed catch the worm. If you start saving early, your money gets more time to grow. Each gain generates further returns. As time passes, you miss out on this benefit, called compounding, which can grow money exponentially over time. For example, if you start saving Rs 5,000 per month when you're 20 and it earns 12% returns every year, you will have Rs 5.94 crore when you retire at 60. But if you start a decade later at 30, you will accumulate just Rs 1.76 crore. The 10 additional years that you give your money to grow can do wonders for your finances. This is the power of compounding. Even five rupees set aside today for the next twenty years will add up, with compounded interest, to a sizable fortune. Not accounting for inflation Many of us think that whatever you save during your working life will be adequate for your sunset years. But have you accounted for the demon that goes by the name of inflation? Nibbling
and gnawing away the value of your money 24X7? We're guessing not. This means you will not save enough to be able to continue your present lifestyle in old age. Assuming 7% inflation, Rs 1,00,000 today will be worth Rs 13,000 after 30 years. Ignoring inflation gives a false sense of security that what you currently save is good enough when in fact you will save much less than what you will need years down the line. Cashing out EPF money Another common mistake: withdrawing money from your provident fund account, say to study abroad, take a vacation or plan a wedding. This is ill-advised as instruments such as the Employee Provident Fund, or EPF, have been specifically engineered to provide financial security after retirement. These are highly useful for retirement planning, especially due to their tax-free status. Our advice: keep your money locked in, borrow from other sources if you have to. Ignoring the equity market It's one thing to save your hard-earned money, but where should you channel your savings so as to maximize your returns? Keeping your money in a bank account is just not going to cut it. The composition of the portfolio should depend upon your risk appetite. While the PPF is a good product, diversification is highly advised. Asset classes chosen should yield returns over and above the inflation rate. Another mistake is being too conservative and shunning stocks altogether. Keep in mind that to beat inflation one does not have an option but to invest in a growth asset like equity. If you do invest in equity, be in it for the long haul -- that is where equities outperforms other asset classes by a big margin. One thumb rule to determine your equity allocation is "100 minus your age". Risk appetite, liquidity, inflation, liabilities and your long term goals should also factor into your equity allocation. With increased life expectancy, with people living 20-25 years, even more, after retirement, it is critical that we ensure our finances are in a good shape when we retire. Educate yourself with how finances and the financial system works. Learn more about stocks, fixed income and other investment options available at your disposal in our Certification in Investment Banking program.