Building a retirement corpus in your 40’s

Building a retirement corpus in your 40’s

• Set a retirement target
• Save and invest towards this goal
• Revaluate your retirement goal every few years

The midway years to retirement are tricky – your financial commitments are at its peak. You may be servicing a home loan and need money towards children’s education. You are also likely to experience retirement related woes closely, as your parents approach retirement. This is also the phase in life when you should closely focus on your health, considering the possibility of the onset of lifestyle related health issues. This could impede your future earnings, as well as stay as a financial strain on you by way of medication and frequent health attention. As you age, health-related risks go up, do plan for adequate health insurance as part of your retirement planning.

Although you may have achieved some of your financial goals with the support of a loan, such as home loan or a personal loan; remember that there is no loan available to see you through retirement. The 40s could be a good time to take stock of what you have such as an employer-sponsored retirement plan or any other self initiated retirement savings towards your financial freedom. If you haven’t really given a thought to retirement yet, there is still time to start building a reasonable retirement corpus. You could still consider investing in equity and related instruments which have the potential to build long-term wealth.

While it is too early to arrive at how much you will need for retirement, it would be good to work on an income replacement formula. Basically, you should consider building savings that is equivalent to say 30 times your current annual income, assuming you plan to retire at 60. If you have plans to retire early or leave conventional employment to start a venture of your own; you may need to consider retirement more closely than you have done so far. Discuss with your spouse about the type of retirement you both envisage and the city where you wish to retire.

Financially, this phase is demanding and potential to save and invest may be less, so, if you haven’t started saving towards retirement yet; this is a good time to make a start. Look at the retirement saving products including mutual funds which give you the flexibility of liquidity when needed. Like all other financial goals, set a target, consider an expected return on the investments to know how much you need to start with.

For instance, you are 42 and plan to retire at 60 with Rs 2 crore for your retirement and expect your investments to earn 10%; you will need to invest Rs 33,027 from now. And, if you factor 5% inflation, you will need to invest Rs 58,683 (it’s an example) which is almost two and a half times what you need to invest in the absence of inflation. You also have the choice to start investing with a smaller sum through SIP (systematic investment plan) and increase it with each passing year through an SIP top-up. These figures may seem daunting and high. But that should not deter you from saving and investing. Start with a small sum and keep increasing this regular investment over time. Given the near two decade timeline; your investments need to be in equities given their potential for higher returns in the long run.

Make use of any additional income you earn by way of bonus, gifts, dividends or any other form of unexpected gains to divert these to your retirement investments. There are online tools available to arrive at the retirement corpus you need and you could also consult a financial advisor who can take you through the various available retirement savings options that meet your requirements. Among the products that you could use to save for retirement, look for tax efficiency – products that do not attract tax on the gains or ways in which you could optimise income tax in retirement.

Although you may not know the exact retirement sum that you need, it should not be a reason to leave it all to chance. List your existing essential monthly household expenses to start with; this would give you an idea on how much you need now. You could set a target based on these expenses and refine your target a few years later once you are in a position to set a clear target. The importance at this stage in your life is to make a start towards retirement investing by acknowledging the need for it.

Retirement Checklist

• Have adequate life insurance
• Work towards debt reduction
• Set a retirement target
• Have adequate health insurance
• Explore places to retire
• Increase your retirement savings

Next steps

1. Use to estimate your need
2. Start small with investments towards retirement
3. Check the progress made by your investments once every few years