One-Stop Guide For Millennials To Start Retirement Planning Right Now

Day by day, rising number of Indian youngsters seem to be jumping into 'FIRE'. Relax, we aren't talking about the hot, bright flames that end up burning us. There¡¯s a new global community which more and more millennials are inching towards, i.e. Financial Independence, Retire Early (FIRE). And imagine, with a country that not just has its largest youth population currently, but also holds the tag of having one of the youngest populations in the world, what does the emergence and popularity of this community hint at? It points to the trend of more and more youngsters being eager to retire early, instead of blindly following the age-old norm of working until your ¡®golden¡¯ years of 60s arrive. However, while there is no harm in deciding to retire whenever one wishes to, what holds the key is to plan for it, more so if you plan for an early one. Eager to know how to go about it? Read on as we help you chalk out the right path to start retirement planning right now.

1. First know when to retire

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Gone are the days when everyone used to follow the crowd and retire at the ¡®common¡¯ age of 60. Today¡¯s young generation of millennials is no more interested in following this tradition blindly, and in fact, many millennials have even begun retiring at early stages of life, as soon as they reach the age of 35-45! Yes you read that right. It all depends on your priorities, your mindset and the way you wish to live your life. There are contrasting personalities as well, who prefer to continue working till as late as possible, even in their 60s or 70s. So, it becomes imperative to first ask yourself this question before you can kick-start your retirement planning- when do you plan to retire? Because if you don't have an answer to this, then you don't have a definite investment horizon to base your retirement planning decisions on. Whereas on the other hand, once you have an answer to this, you know how much time you have in hand to accumulate a sufficient corpus to take care of your retirement years.

2. Start estimating the expected post-retirement expenses

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Certainly, your post retirement expenses are less likely to be the same as your current or pre-retirement expenses, right? While there is no right answer as to which one, the pre or post retirement expenses would turn out to be higher for you, it's nonetheless crucial to estimate the expected post retirement expenses, basis which you would begin investing towards that target corpus. While the future is uncertain and we cannot exactly know what our post retirement expenses would turn out to be, its generally advisable to assume them as the same as your expenses as per current lifestyle, including your household expenses, utility bills and other expenses you expect to be continued post retirement, and exclude the loan EMI repayments, investment contributions etc in case you expect to finish them off before retiring.

Also Read: From Real Estate To PPF: Top Investment Options To Help Millennials Retire Early

3. Never ignore the money eater - inflation

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Your task of estimating retirement corpus does not end with estimation of expenses. The most crucial parameter to factor in during this estimation, is one thing that can eat away your money! That is, inflation. Inflation in fact has direct implication on your purchasing power. Let¡¯s look at what would be the future cost of your expenses after factoring in inflation (assumed inflation rate is 7% p.a.)

Monthly expenses at present - ? 25,000-?50,000

Future cost after factoring in inflation - ? 68,976-?1,37,952 if you retire in 15 years, ?96,743 -?1,93,485 if you retire in 20 years, and ?1,90,307- ? 3,80,613 if you retire in 30 years.

As you can see from these calculations, for current monthly expenses of just ? 25,000-?50,000, you would be required to instead create the corpus with an estimated expenses widely ranging between ? 68,976-? 3,80,613 per month! Upon creating your corpus based on these inflation adjusted expenses, you would be able to ensure your post retirement corpus does not turn out to be insufficient, which would otherwise have been the case if the inflation cost was not factored in.

So, all you need to do is take the help of retirement calculators to get an estimate of the monthly investments required to create your retirement corpus after adjusting inflation, and then, begin investing accordingly.

4. Make equity mutual funds your best friend

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The above calculations are evident of how inflation can eat away your money by reducing your purchasing power. So, when it comes to wealth creation for retirement corpus, can you rely on investment instruments that are not able to beat inflation? No, right? That's exactly why you need to make equity mutual funds your best friend to build a sufficient retirement corpus by maximising wealth creation. Equity as an asset class holds a history of outperforming both inflation and fixed income instruments like PPF, bank FD, etc by a wide margin over the long run. This in itself makes equity the most suitable asset class for achieving long term financial goals usually spanning over 5 years and more. As far as volatility is concerned, remember that equities do tend to involve high degree of volatility but mostly in the short term, and not the long term, hence making them a suitable instrument to achieve long term wealth creation.

5. Start investing as early as possible

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The mere thought that your regular inflow of income would cease post-retirement, should be enough to nudge you to take quick actions and start investing for retirement, no matter how far away it is. After all, early bird catches the worm, right?

Whenever you think of procrastinating, remember that, the more you delay, the higher you would need to contribute from your pocket for timely accumulating the target retirement corpus. While on the other hand, the earlier you begin investing, smaller the amount you need to put in to create the corpus. Let's understand this through an example.

For example, let's assume you wish to create a retirement corpus of Rs 75 lakhs (after factoring in inflation cost), aim to retire at 50 years of age, and a conservative 12% p.a. Return is assumed on equity investments. So, if you begin investing at the age of 25 years, a monthly SIP of just Rs ?3,992 would fetch you this corpus by the age of 50. Whereas if you begin investing at the age of 30 years, 35 years and 40 years respectively, you would need to contribute a monthly SIP of close to ? 7,581, ?15,013 and ?32,603 respectively to accumulate the target corpus by the age of 50. Hence, the later you start, the deeper you need to dig your pocket every month to sufficiently accumulate the target corpus on time.

Also Read: Things To Know Before Investing In Equities Now That Markets Are Soaring

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