The rise of nuclear families, increasing life expectancy, rising healthcare cost, and absence of public-funded old age healthcare has increased the financial insecurity among retirees. Another growing concern for retirees or those approaching their retirement is the debt burden arising from education loans availed for their children’s higher education, at least in the initial years of their children’s professional lives. These factors have increased the importance of creating adequate financial corpuses for one’s post-retirement life and a child’s higher education.
Here are some tips to help you build a corpus-
Estimate your target corpus
While it is tough for parents to predict the career choices of their children, one can still assume 2 or 3 career options and estimate a ballpark figure for pursuing those education courses. As higher education in India has witnessed steep inflation over the past 2 decades and is expected to do so in the near future, factor in an inflation rate of at least 10% for those courses for the number of years left for your child’s higher education. This would keep you on the safer side while estimating your ward’s higher education corpus. Once you are aware of the required corpus, use online SIP calculators to find out the monthly contribution required for creating your child’s higher education corpus.
For estimating your retirement corpus, take the help of various retirement calculators available online. Prefer retirement calculators that factor in the inflation rate, expected life span, retirement age, rate of returns for pre- and post-retirement phases, existing investments for post-retirement corpus, etc. Such calculators would help you derive a more realistic figure for the monthly contributions required for creating your retirement corpus.
Start investing early
Starting early for your retirement corpus or your children’s higher corpus would help you benefit from the power of compounding and also instill financial discipline. The power of compounding allows the gains generated from your investment to generate returns on their own. This helps in creating a bigger corpus over the long term with much lower investment contributions. For example, assuming an annualized return of 12% p.a., a 30-year-old would require a monthly SIP contribution of about Rs 5,800 to build a retirement corpus of Rs 2 crore by the time he reaches 60 years of age. However, if he starts his investing 10 years later in the equity funds assuming the same rate of return, then he would need a monthly SIP contribution of Rs 20,300 to build the same corpus by the age of 60.
Invest in equity funds
While equity as an asset class can be very volatile in the short term, it has mostly outperformed fixed-income asset class and inflation by a wide margin over the long term, especially for investment horizons exceeding 5 years. This makes equities the best asset class to achieve long-term financial goals like creating a retirement corpus or a child’s education corpus. For retail investors, the best equity-related instrument is equity mutual funds. Equity funds offer their investors the key benefits of adequate diversification, investment convenience, and professional fund management at a very low cost. Those with taxable income can also invest in ELSS funds, popularly known as tax-saving mutual funds, to claim income tax deductions under Section 80C.
While investing in equity funds, opt for direct plans as they have lower expense ratios than regular plans. While the difference in the returns generated by direct plans and regular plans may appear to be meager in the initial years, the difference becomes significant in the long term due to the power of compounding.
Avoid compromising your emergency fund
Do not ignore the importance of maintaining an adequate emergency fund while prioritising your retirement corpus or child’s higher education corpus. An adequate emergency fund, capable of meeting your mandatory monthly expenses for at least 6 months, would save you from redeeming your retirement corpus or children’s education corpus during unforeseen financial emergencies or loss of income due to job loss, disability, or other health issues.
Review your investments at periodical intervals
Reviewing the performance of your mutual funds is as crucial as regular investing. After all, even star funds with excellent track records can become laggards. Thus, compare the returns generated by your existing mutual funds over the past 1-year period with their peer funds and benchmark indices, at least once in a year. Redeem those that constantly underperform their peer funds and benchmark indices.
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