What really matters when investing for
retirement
Your cost of living will double every 12
years, assuming a 5% annual rate of inflation.
One of the most
important reasons to save regularly, and invest wisely, is to ensure one has a
comfortable retired life. This is especially important in the context of
increasing lifespan and catching up on the good things, which you bucketed
under ‘things to do after you retire’. It is not uncommon to see several 75-80
year old folks traveling to exotic locations and catching up with their old
friends.
While planning for
retired life, one needs to be sensitive to the concept of inflation. In
simple terms, your cost of living will double every 12 years (assuming a 5%
annual rate of inflation). This, to a large extent, decides where you
should invest. Thus, the investing journey starts well before you actually
start to retire.
The following table
shows the various asset classes, with expected returns and the number of years
it would take to double your money in each of these asset classes:
Essentially, wise
investing is all about creating a portfolio of investments which grow your
money faster than inflation increases your expenses, so that you have enough
money in your retired life. Having a greater margin of safety helps you lead a
peaceful retired life, especially when you encounter extraordinary situations
like health emergencies.
Things you should
know:
- Inflation is currently at about 5% annually. It is
expected to be at about these levels for some more years. For some
individual situations, it could be higher.
- Fixed Deposits are currently yielding about 7% annual
interest. If you are in the full tax bracket, your returns will be down to
about 4.8% annually, which takes nearly 15 years to double. Essentially,
you can’t fund your entire retired life by investing mainly through Fixed
Deposits.
- By using debt mutual funds or tax-efficient debt
instruments (converting income to capital gains), one can do better than
FDs with similar level of safety.
- Property has historically delivered a return about
2%-3% more than inflation. Based on current inflation, property
investments should double every 9 years, including the rental income (or
rent saved).
- Investments in equity mutual funds (or stocks)
should double every 6 years, assuming a 12% annual rate of return – which
is in line with nominal GDP growth.
“Wise investing is
that which stays ahead of inflation.”
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