FIRE (financial independence, retire early) has engulfed social media platforms. Individuals as young as 30 now want to retire by 40.
Retiring at 40 implies that one’s standard of living will not increase post-retirement and that their investments will suffice for all emergencies and expenses for the next 40 to 50 years. Moreover, it means forgoing the two highest-earning decades of one’s life (40-60 years), which is a financially risky decision. The primary reason for this risk is increasing life expectancy.
As life expectancy continues to rise, retirement planning implications become increasingly significant. The average Indian retires at 60. In 1990, the average life expectancy for Indians was 59 years. By 2022, it had increased to 68 years. According to the World Economic Forum, the global average life expectancy is projected to reach 81 years by 2100. This means planning for a retirement that could span 30 years or more.
To ensure a comfortable retirement, it is imperative to invest wisely. By making informed investment decisions, one can secure their financial future and enjoy a comfortable retirement, regardless of when they choose to retire.
Here’s how to create and sustain retirement funds.
Diversify investment portfolio
A well-diversified investment portfolio is crucial for mitigating risks and consistent growth. For instance, allocating 60% to equities, 30% to fixed-income products, and 10% to alternative asset classes can provide a balanced approach.
- Equities: Historically, equities have delivered better returns than most
asset classes. The Nifty 100 Total Return Index has delivered an annualized return of 12.61% in the last 10 years as of 28 November 2024, according to data from the Association of Mutual Funds in India. - Bonds and corporate fixed deposits: Government and corporate bonds, along with corporate fixed deposits, typically offer lower returns than equities, around 7-10% pre-inflation, but with reduced risk.
- Real Estate: Retail investors can access this asset class through real estate investment trusts with minimal capital outlay.
- Gold: Gold is viewed as a hedge against equities and a counterweight to market volatility. Retail investors can invest in gold via gold mutual funds, exchange-traded funds (ETFs), etc.
Review portfolio regularly
Regular financial reviews are essential to adapt to market changes and personal circumstances.
- Annual reviews: Ensure your portfolio is rebalanced annually to maintain the desired asset allocation.
- Adjustments: Make necessary adjustments based on significant life events, such as marriage, the birth of a child, or substantial market shifts.
Get comprehensive insurance coverage
Adequate insurance coverage is vital for protecting your financial well-being and that of your loved ones.
- Investment in annuity products: Annuity products can offer a reliable income stream for life, mitigating the risk of outliving your savings. The National Pension Scheme (NPS) is a preferred option. Sixty per cent of the NPS corpus is tax-free when you turn 60.
- Inflation-proof your retirement savings: The average inflation rate in India over the past decade has been around 5-6%. Apart from equities and other investments, you can also consider the Government of India’s Inflation-Indexed Bonds (IIBs) that are directly linked to the Consumer Price Index (CPI).
Strategies to sustain retirement funds
- The 3.5% rule: This rule suggests how much you can withdraw from your corpus to sustain you until the end of the retirement period. There is a well-known 4% rule, which says you can withdraw 4% of your retirement savings annually, adjusted for inflation. To be sure, the 4% rule was derived from the US context, and a research report found that around 3.5% might be more suitable for the Indian context.
- The 75% rule: A common rule of thumb is that if you can secure 75% of your last take-home pay as income for the rest of your life, you will be financially comfortable.
- Annuities: Annuities are financial products that offer guaranteed income for life, which can be particularly beneficial in managing longevity risk.
- Dynamic withdrawal strategies: Dynamic withdrawal strategies involve adjusting your withdrawals based on market performance and personal needs. For instance, reducing withdrawals during market downturns can help preserve capital.
Legacy planning and wealth transfer
Effective legacy planning can help minimize taxes and ensure your assets are distributed according to your wishes. Review and update your will regularly to reflect changes in your financial situation and family dynamics.
That said, treat these rules as only the rules to do a back-of-the-envelope calculation to derive how much money you need for retirement. Such planning is complicated, and you should consult a registered investment advisor.
You can ensure a secure and fulfilling retirement by extending your retirement planning horizon, accounting for healthcare and long-term care costs, inflation-proofing your savings, adopting flexible withdrawal strategies, and planning for legacy and wealth transfer. As you navigate these complexities, consider consulting with financial advisors to tailor these strategies to your needs and goals.
Views are personal.
Rohit Murarka is the business head-Kotak Cherry at Kotak Alternate Asset Managers Ltd.
