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Evaluate the process of retirement

Experts say even people of modest means can accumulate wealth over time if they adhere to certain simple strategies, reports Sanjeev Sinha.
Hindustan Times | By Sanjeev Sinha
UPDATED ON MAR 17, 2008 11:51 PM IST

Before starting on the fanciful journey of retiring young, it helps to figure out your post-retirement expenses in a bid to put together a lucrative nest egg, and then plan accordingly. Your foremost aim should be to gain financial independence, which is a pre-requisite to retiring early.

“You can retire when you can sustain your lifestyle without depending on your salary. If you want to achieve that economic independence at the age of 40, you need to have your retirement corpus ready by that age,” says Rattan Chugh, CEO, Cornerstone Wealth Management.

For example, if you are 30 years of age and expect that in today’s cost your post-retirement expenses will be Rs 50,000, then at an average inflation of 5 percent, the same expense by the time you retire will be Rs 81,445. Assuming post-retirement returns at 8 percent, you would need a corpus of Rs 1.2 crore. That’s what you need to save in the next 10 years. Assuming most of us start working around age 22, we have a good 18 years to reach at least Rs 50 lakh in retirement money by 40. And you don’t really have to be that rich to achieve this target.

Experts say even people of modest means can accumulate wealth over time if they adhere to certain simple strategies. Thus, remembering one simple compounding rule can take years of worry about retirement off one’s mind and set one on a strong course for later years. One basic thumb rule is that money can double every 6-7 years if it compounds at the stock market’s average return of nearly 11-12 percent annualised over it’s lifetime. Therefore, even if you invest Rs 10,000 per month for 20 years in any scheme that earns 12 percent return, that can easily give your first crore.

“We suggest that one should earmark a part of one’s monthly income (to start with 20-25 percent) to committed monthly savings and invest it prudently,” says Rajiv Deep Bajaj, MD, Bajaj Capital, adding, “it is also important to diversify or spread one’s investments across various asset classes towards optimising overall return on portfolio without bearing undue risk.”

Luckily there is a plethora of good investment avenues available in the market today, which can provide handsome returns, such as mutual funds, unit-linked insurance plans and real estate. “In the early stage, one should be having aggressive asset allocation and invest regularly in equity or equity-based mutual funds. Debt-based assets get automatically accumulated to some extend through employee provident fund. As one moves closer to the retirement year, one can reduce the allocation towards equity and thus reduce risk,” advises Chugh.

Once you retire, the majority of investments should be in debt so that you do not have a downside risk on your investments. The surplus at the time of retirement should be able to generate returns equivalent to your monthly expenditure.

You are more likely to face some hurdles or uncertainties in realising your dream. But with proper financial planning, you can expect to be on the right track and achieve the desired goals with much ease and convenience.

And those who have started late should remember one old saying — “The best time to plan your finances was 10 years ago and the second best time is today.” Therefore, do not ponder over the past, but try and make the most of what you have today so that 10 years hence, you don’t end up thinking that you have actually missed the bus!

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