‘Start investing early for your retirement’

For building the retirement nest egg, the focus today is more on equity mutual fund SIPs and lifetime income or pension plans along with a house and EPF/PPF account, says Rajiv Bajaj, chairman & MD, Bajaj Capital, in an interview to Saikat Neogi. Excerpts:

What is the level of awareness of retirement planning in India and what are the investing trends to build the nest egg?
The concept of retirement planning is pretty new in India, but it is gaining traction nonetheless. We used to have a joint family structure and children were supposed to take care of parents, thereby reducing the need for retirement planning. However, this is changing fast, driven by the nuclearisation of families. People in their 40s today are more conscious of planning for their retirement, as opposed to those in their 40s a couple of decades back. The awareness is only going to increase as the population ages and we go past the demographic peak.

How should one estimate one’s needs at retirement and then how should one save money to accumulate the corpus?
There is a very simple way to do that. Estimate your monthly expenses that you would need to incur, if you were to retire today. Deduct the spending on children’s education and home loan EMIs as they would no longer be there when you retire. Estimate the rate of inflation that can prevail between today and the time you retire and grow your monthly expenses (net) at this rate for the period between today and your retirement. You arrive at the estimated income that you would need at the time of retirement. Assuming that the interest rates at the time of your retirement would be lower than what they are today, calculate the amount needed as principal to generate that income. Divide this by (1 – inflation). For instance, if inflation in future is estimated at 4%, you divide the principal by (1 – 0.4) i.e. 0.6. The amount that you get is the corpus needed at the time of retirement.

Depending upon how far away you are from retirement, invest your monthly savings in equity oriented mutual funds through the SIP route. More importantly, keep growing the SIP amount every year in line with your income growth.

For most people in the early years of work life, saving for retirement is not a priority. How can small amounts invested regularly from an early age give a head start?
Starting early helps you build a large retirement corpus even with a small amount. Let us assume two people, Ashok and Ravi, both 30 years old. Ashok starts saving and investing immediately, while Ravi starts at age 40. Both have a target retirement corpus of Rs 3 crore. If both are to retire at age 60 years, Ashok has 30 years to save and invest while Ravi has 20 years. Ashok can achieve the target corpus by investing Rs 10,000 per month through SIP in equity mutual funds at an assumed CAGR of 12%. Ravi, on the other hand, would need to invest Rs 33,000 per month to achieve the same corpus at age 60. Thus Ravi has to invest an amount that is 3.3 times more than that of Ashok, to get at the same corpus at the same age as Ashok. Moreover, Ravi had to invest Rs 79.2 lakh in 20 years to reach the target, while Ashok invested just Rs 36 lakh (less than half) to reach the same target. Ashok, by starting early, allowed more time (30 years) to his investment to compound, while Ravi gave less time (just 20 years) by starting late. It is hence important to start early.

How would Bajaj Capital’s retirement solutions help individuals to accumulate the retirement corpus?
Our retirement planning tool helps you formulate a strategy to get there in time and a high probability. And then our retirement planning experts help you execute the plan seamlessly.

Post retirement, we help you plan the asset allocation of your retirement corpus in such a manner that it has a high probability of fulfilling all the following goals:

Never short of money in meeting your living expenses and other goals—a life time cash flow plan is prepared till age 100 years;

Capital protection as well as growth; beat inflation;

Tax efficient— optimal post tax returns;

Protection from reinvestment risk or risk of falling interest rates;

Liquidity—almost 2/3rd of the portfolio is sought to be in liquid investments that can be redeemed at two days’ notice without any penal interest or exit loads.

To add to it, we help you execute the plan by enabling investments seamlessly and then track, review and rebalance the investments to ensure that they are in line with the plan.