Have you heard of terms like “Present Value” and “Future Value“ ? “Time Value of Money” is a fundamental financial concept which says the money that is available at the present time is worth more than the same amount in future, due to its potential earning capacity. The core principal is any money, provided it can earn a rate of return, is worth more the sooner it is received. In very simple terms, a Rupee was worth more yesterday than today and a Rupee today is worth more than a rupee tomorrow. Time Value of money is also related to “inflation”, which constantly erodes the value of your investments and therefore negatively affects the “purchasing power” of money.
This is very vividly experienced and understood by people who have either retired or are close to retirement when they realise that the same commodity was far cheaper 10 years back than it is today. That’s inflation! And therefore, many at this stage realise that whatever they had planned as their retirement corpus is turning out to be not enough to sustain their desired lifestyle.
I have often seen investors have investment goals like buying a home or growing children’s higher education when they are in their 30s, and rightly so. But in the same breath, I wonder, what stops them from putting aside a little bit of their savings month on month in their retirement kitty? “Lack of cash flow” – as commonly cited by this demography after saving up for the requirements which seem much closer to now vis-à-vis retirement, which seems to be in a distant future. Or is it the “lack of foresight”?
Planning for ones retirement when they are in their 30s:
So here is the math: Future Value = Present Value ( 1+ Rate of Return )N
N = Number of compounding years.
While this is the financial formula, there are many calculators available on the internet or excel which can help you arrive at the value and do this calculation for yourself.
Let us say your current monthly expenses are worth Rs 50,000 and you are 30 years of age and plan to retire by 60. This Rs 50,000 will be worth Rs 2,87,175 of monthly expense after 30 years if we assume a rate of inflation at 6%. Let us also assume that one lives till the age of 80 years. And let us says the corpus at retirement will fetch you a return of 9%. Hence to sustain your current lifestyle for around 20 years post retirement, you need a corpus of Rs 3.2 Crores. This figure increases further if we take inflation adjusted return.
Hence, my advice to all youngsters is to start planning for your retirement corpus as early as possible with whatever little monthly outlay you can manage for the retirement goal. The outlays towards this corpus will only increase as your income increases, but please do not procrastinate this “start to retirement planning ”“because you think that your retirement is many years away.
Mutual Funds through the systematic investment plan (SIP) mode of investment into the equity markets can help you build this corpus as it not only helps you to invest regularly, but also gives you the long term wealth creation advantage which comes from the equity markets over a period of 25-30 years.
Traditional financial investments like bank deposits and PPF alone may not be able to get you to that corpus. SIPs in equity mutual funds will not just averages out the effect of the ups and downs of the equity markets (what we term as rupee cost averaging), but also has potential to give a healthier return compared to other asset classes over a period of 15-20 years. There is now a substantial amount of historical data for the past 20 years available for the Indian Mutual Fund Industry .I would urge you to read and see the quantum of wealth that has been created for investors who had started SIPs of Rs 5000 per month 20 years ago in some of the equity funds that existed then, which is around 12 lakhs of investment whose value is close to a Crore now. The markets have also withered multiple cycles to give you a fair picture of the fruits of staying invested in the equity markets through the MF route over this kind of horizon. Hence it is important that you start taking advantage of the time that is on your side and invest into the equities with an aim to earn better returns on your investments and therefore plan for your retirement early on in life. Think about it.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.