Absence of a good retirement benefit system in India means you have to plan your investments carefully for your twilight years especially in the face of inflation and rising life expectancy Investing for retirement is a problem quite different from any other kind. For one, it is usually done decades before it is needed. Ideally, we should all start investing for retirement as soon as we start earning. To some extent, this happens automatically with benefit systems like the Employees’ Provident Fund (EPF) which is a compulsory deduction from salary. However, this alone may not be enough in the face of inflation and rising life expectancy. Hence discretionary savings (for example in mutual funds) should also be started as early as possible to have a larger retirement corpus.

Retired life (after 60 years) is long but we often do not understand the maths when we are young. According to the United Nations Population Division, average global life expectancy has increased from 48 years in the 50s to 70 years now and expected to rise to 75 years by 2050. However, this figure is an average and may be slightly higher in urban and semi-urban areas with reasonably good access to medical care.

Thus one must plan for a post-retirement life of at least two decades if not more. It means that if your earning life is about 40 years, your non-earning life may be about 20-30 years. Since a huge chunk of your life is actually spent in retirement (without any regular income), it is important to save as much as possible in the 40 years of your earning life to spend during your retired life.

How much should one save? Given the inflation rate, your expenses during retirement may be far higher than your corresponding expenses during your earning life. It is therefore important to roughly calculate your estimated retirement expenses post inflation to avoid any surprises later and plan your investments accordingly. The rule of 72 indicates that at 7% inflation rate, expenses would double every 10 years. Remember, a key cost would be medical expenses which needs to be planned in advance through health insurance, etc as it may be difficult to avail meaningful coverage at the later stage in life especially if you have existing illnesses.

All this means that the burden of retirement savings weighs very heavily on us in our working years. However, it is not impossible to plan for retirement, provided we start saving early and invest the savings wisely. Mutual funds, through their inherent advantages, provide various options to create this corpus.

Summing Up

We should start investing for retirement as soon as we start earning. To some extent, this happens automatically with the EPF which is a compulsorily deduction from salary. However, discretionary savings should also be started as early as possible to have a larger retirement corpus. This is important since life expectancy may increase due to advancement in medical technology. Suppose you live till 90 years, you have to save enough in the 40 years of earning life to pay for the 30 years of retirement life. Remember that retired life is long and it takes a lot of savings to live in dignity especially in the face of inflation.

Information contained in this article is not a complete representation of every material fact and is for informational purposes only. Regulatory/ taxation details, if any are provided on a best effort basis and are as per the existing laws and subject to change from time to time. The recipient is advised to consult an advisor/ tax consultant prior to arriving at any investment decision.