How should you invest your retirement funds?

How should you invest your retirement funds?

Being financially stable and independent post retirement is one of the most crucial financial goals that you may have. For this, it is always advised to begin with your retirement planning and investments at the earliest. It is important for you to think of the investment options you can opt for to form your retirement corpus and protect yourself against inflation along the way. 

Discussed here is an effective retirement investment approach for investors belonging to different life stages to form an adequate post-retirement corpus. 

Investors aged between 20-30 years

In this stage, retirement may seem like a farfetched financial goal. You may give higher priority to your short-term financial goals like purchasing a vehicle, saving for a trip abroad, etc., than investing for your retirement life. However, it’s important to realize that right now because you are young, you may have limited financial obligations and the highest potential to periodically invest a big surplus amount to build your retirement corpus than investors at any other life stage. 

For example, if you are a 25-year-old individual investing every month a sum of Rs 4,000 at an assumed rate of return of 15%, then you would be able to form a retirement corpus equaling Rs 5.94 crore by 60 years of age. However, if you start at 45 years of age, then you would require monthly investing an amount equaling Rs 87,800 to create the same corpus equaling Rs 5.87 crore if the same rate of return is assumed. Thus, delaying your investment for retirement to a later life stage would require you to make higher contributions, which may stress you and force you to reduce your lifestyle expenditures and other crucial goals. 

To create an adequate corpus for retirement, you should consider putting your surplus funds every month in equity mutual funds. This is because equity mutual funds have the potential to beat inflation and fixed-income returns over the long term by a wide margin. Additionally, ensure to go for the Systematic Investment Plan (SIP) route when investing in mutual funds. An SIP is recommended owing to its feature of periodic and automatic fund deduction from your bank account. This feature ensures financial discipline. It also saves you from the confusion of market timing as continuing an SIP in a mutual fund provides you with the benefit of rupee-cost averaging. 

Investors aged between 30-55 years

In case you are a mid-aged investor falling between 30 and 55 years of age, you might be considered a sandwich generation. This is because, in this phase, you tend to have multiple obligations like creating higher studies corpus/wedding corpus for your kids, meeting the medical expenses of your parents, taking care of your monthly fixed expenses, etc. Additionally, you might also require placing a substantial amount of your monthly income towards your loan Equated Monthly Instalments (EMIs) and paying for your insurance premiums. Along with the increase in financial obligations at this stage, your income is also likely to substantially increase. Thus, try and increase your contribution for retirement with enhancement in your monthly income to form a higher corpus and remain on the safer side. 

Do not compromise your retirement contributions to form an education corpus for your ward. While your child has the option to opt for a student loan for higher studies, no bank would agree to lend you to meet your post-retirement expenses. Make sure to create an adequate contingency fund as doing this can prevent you from liquidating your corpus set for retirement in the case of any urgent need for money. 

Investors aged 55 years and above

When you near your retirement age, you are advised to liquidate your equity investments in your post-retirement corpus to invest in short-term debt mutual funds or other fixed-income instruments. The rationale is to save your post-retirement corpus from market volatility. However, in place of completely shifting from equity investments to a debt instrument, you must take up a steadier approach by initially computing your expected annual expenditures in your retirement years. Once done, start transferring the estimated figure periodically once you are 3-4 years away from retirement. 

Taking this approach will allow you to maintain substantial equity exposure during your post-retirement years. This would ensure a higher inflation-adjusted return and reduce the risk of facing corpus depletion during your retirement years. 

The bottom line

No matter at what life stage you are currently, retirement planning should form an important part of your overall financial planning. It’s just as important as other financial goals and ensures that your golden years are truly golden.