Amrit Nivesh | ARN 113567 | AMFI-registered Mutual Fund Distributor
Your salary stops one day. Your bills don’t.
If your work does not come with a pension, the money for the years after it has to come from what you build before you stop. In that sense, you are your own pension fund. Nobody knows how long their retirement will last, so it is safer to plan for a long one than a short one.
That sounds like a lot to think about. It comes down to three steps.
Step 1: Know your number
Start with what you spend, not with what you earn. Your retirement has to pay for your life, and your life is what you spend on it each month.
Our retirement calculator asks for a few things:
- your age now, and the age you want to stop working;
- your monthly expenses today;
- the age you want the money to last until;
- the inflation you expect, and anything you have already saved for retirement;
- the return you expect before you retire, and after.
It grows today’s expenses with inflation up to your retirement age. Then it works out the sum that could keep paying them, still rising with prices, until the age you chose. Last, it takes off what your existing savings could grow to, and shows the monthly SIP that could build the rest.
A few things make the answer more useful. Use your real monthly spending, not a round guess. Choose an age to plan until that is older than you expect to need, because running short at eighty-five is worse than having something left. The inflation box comes filled in; change it if you expect something different. And the returns are yours to choose. Nobody knows the real figure in advance, so try a few and see how much the answer moves.
Step 2: Give time the heavy lifting
SEBI’s investor education site describes compounding as “the process of earning interest on your interest income”, and says that “the longer your money is invested, the greater the potential for compounding to work.”
In a SIP that runs for many years, each instalment has its own time to grow, and growth can earn growth of its own. Over a long stretch, a large part of what you end up with can come from that growth rather than from your own instalments. Over a short stretch, most of it is simply the money you put in.
Compounding works in both directions, though. In a bad year the value falls, and it can be less than what you invested. Time helps because it gives the good years a chance to outweigh the bad ones, not because the bad years stop coming.
Step 3: Don’t wait for a perfect moment
AMFI’s investor site calls this the cost of delay: “By delaying your investment, you may effectively delay your ability to generate income from your money.”
For the same goal, starting later leaves fewer years for growth, so more of the money has to come out of your own pocket each month. You can see it with your own figures. Put them into the retirement calculator and note the monthly SIP it shows. Then imagine starting ten years from now: raise “Your age now” by ten years, raise “Monthly expenses today” to what you expect to spend by then, and compare the two.
Waiting for the market to look “right” is also a delay. Nobody can call that moment reliably, and a SIP is built so that you do not have to.
Then keep going
Over a long stretch, time can do much of the work. Your job is to give it as many years as you can, and not to interrupt it.
- As your income rises, put more towards retirement.
- Look at your number once in a while, and again when life changes: a marriage, a child, a home loan, a new job.
- Try not to stop when the market falls. A SIP that keeps running through a bad patch keeps buying while prices are lower.
What this cannot do
- It cannot promise a return. What your units are worth depends on how the scheme’s holdings perform, and they can be worth less than you put in.
- The calculator’s answer is only as good as the figures you give it. Change the return or the inflation, and the answer changes.
- Retirement savings do not replace an emergency fund, health cover or life cover. Each of those does a different job.
- It cannot choose a scheme for you. Each scheme has its own risk, costs and exit rules, and the scheme documents are where they are written.
If you are new to SIPs, start with What is a SIP, and how does it work?
Next step
Work out your number on the retirement calculator. If you would like to go through it together, or need help getting started, send me a message and I will call you back.