I met a friend recently at a coffee shop who told me he plans to retire at the age of 40. I was quite shocked to hear this for two reasons: first does he have enough funds to support him till his last breath and second where is he investing that money for steady returns.
But what surprised me the most was his lack of preparation to implement his plan. He was investing in bank fixed deposits and real estate but considering his present expenses and trending inflation, he is expected to fall short of at least Rs 5-6 crore (roughly).
According to the World Bank data, life expectancy has increased from 52 years in 1960 to 72 years in 2015. However, despite these statistics on improving life expectancy, there is not enough effort around creating adequate wealth and cash flows to allow us to enjoy this longer life span.
To solve the wealth challenge, it is important for us to change the way we save. Firstly, we need to shift from traditional saving options as these investments may not help create wealth in the required proportion on account of falling interest rates. Secondly, we need to be more goal-oriented in our approach.
It is therefore imperative for savers to have a judicious mix of market-linked products like mutual funds in their portfolio. One can start a mutual fund investment with as little as Rs500 per month through a 'recurring deposit' like approach called a systematic investment plan or SIP.
For example, let's start with an SIP of Rs10,000 per month in equity mutual funds. Assuming a compounding return of 12 percent per annum, this monthly investment would result in a corpus of Rs1 crore after 20 years.
What about the "fixed income"? India loves fixed income and there are so many options. A good one is the public provident fund (PPF) which offers eight percent plus every year, tax-free.
As you get closer to the age of 60, you want your money to be more "secure".
Taking all your money out of equity is not a good idea. You might keep 20 percent or more of your money in stocks, but move the rest to fixed income.
You need 18 to 35 times your annual expense at age 60 to retire. But remember that this is a crude approximation of what you will actually need. For instance, if you plan to work beyond 60, then the corpus needed will shrink.
(With inputs from Value Research)