Friday, May 2 2025
Source/Contribution by : NJ Publications

We've all been guilty of it-pushing retirement planning to the back burner. "Retirement? That's decades away!" we tell ourselves, all while fantasizing about leisurely mornings and exotic vacations. While retirement is one of life's certainties, it remains one of the most overlooked aspects of investment.

We plan for all important events of life - be it buying a home, planning for kids marriage, but fail to plan for this most challenging part of our life-stage. As the saying goes, "Failing to plan is planning to fail." It's easy to get lost in the daily grind. Mortgages, kids' tuition, that urgent car repair - they all demand immediate attention. Retirement? Well, that's a problem for "future me." We operate under the illusion that time is an infinite resource, an endless buffet we can sample at our leisure.

According to the India Retirement Index Study (IRIS), conducted by Max Life Insurance in partnership with KANTAR, 44% of Indians believe the ideal age to start retirement planning is before 35. However, alarmingly, nearly two in five have yet to begin.

Procrastination is a retirement killer. The earlier you start, the less you have to save each month. The power of compounding makes time your biggest ally. As Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."

Why Retirement Planning is Essential?

Below factors converge to make it indispensable:

• Declining Interest Rates: Fixed-income products once offered attractive returns of 12-13%. These rates have significantly dropped and are expected to decline further.

• Increased Longevity: Medical advancements have extended life expectancy, meaning your retirement funds must last longer.

• Rising Aspirations: Retirement is no longer just about survival. People want to pursue dreams, travel, and enjoy hobbies they couldn't during their working years.

• Changing Family Structures: With urbanization and the rise of nuclear families, financial independence is more critical than ever, as children often live separately from their parents.

• Escalating Healthcare Costs: Medical expenses continue to rise, making it imperative to have adequate savings.

• Impact of Inflation: Inflation erodes purchasing power. In India, with an average assumed inflation rate of 7%, a monthly expense of ₹25,000 could balloon to around ₹1 lakh in 20 years and nearly ₹2 lakhs in 30 years.

Calculating Your Retirement Nest Egg

We all would like to have a happy retired life, but without quantifying the same in financial terms the definition of 'HAPPY Retired Life' remains very vague. The key question is: How much should your retirement corpus be? While there's no one-size-fits-all answer, you can estimate your retirement fund by considering:

• The age at which you plan to retire

• Your current lifestyle and monthly expenses

• Expected rate of return on investments during your working and retired life

• Inflation rate over time

• Existing retirement savings (e.g., provident funds, pension plans, insurance policies)

• Any specific hobby you want to pursue during retirement

(Note: This list is illustrative. Consult a mutual fund distributor for personalized guidance.)

After quantifying these factors, you can calculate your target retirement corpus and the necessary investment strategy. According to the IRIS 4.0 study, 57% of Indians fear their retirement savings will run out within 10 years, with 30% worried about depleting their funds in just 5 years. A well-structured retirement plan ensures that your corpus sustains you throughout your post-retirement years, growing with inflation.

Regular Reviews and Adjustments
Retirement planning is not a static exercise. It requires ongoing adjustments to reflect life's evolving circumstances:

• Job promotions or salary hikes (increase contributions accordingly)

• Major life changes (marriage, childbirth, etc.)

• Tax law modifications

• Receiving an inheritance or windfall gain

Retirement Planning Strategies

Various options exist to build your retirement portfolio:

• Insurance products designed for retirement.

• Systematic Investment Plans (SIPs) in equity mutual funds.

• Pension plans.

• Employer-sponsored retirement benefits.

• Creating income producing assets like rental properties or farmland.

Given the long-term nature of retirement planning, equity investments, particularly through SIPs, offer the potential for substantial growth, leveraging the power of compounding. However, diversification is crucial to manage risk.

Conclusion: The Best Time to Start is Now

Retirement planning is a continuous, long-term commitment. Don't wait for the 'perfect' moment, as it rarely arrives. Procrastination is the enemy of a comfortable retirement. Begin building your financial future today, and truly enjoy the fruits of your labour.

The majority of Indian investors do not have a structured approach to savings and investment. The amount of money saved is determined by their spending patterns rather than a savings target. In a similar vein, most people invest haphazardly. When they have enough money, they invest it all without any specific goal—in bonds, stocks, post office small savings plans, bank FDs, etc.

Every individual has financial goals that are unique to  their needs. Some of these goals could be short-term like a foreign holiday which is 12-15 months away or mid-term like owning a car after 4 years, while others could be long-term oriented like funding your 3 year old child's higher education or having a financially protected retirement.

Whatever your needs might be, there are mutual fund schemes to help meet them. Mutual funds are a one-stop solution to all of your financial goals. There is a mutual fund basket for every type of investor; whether you are a conservative or aggressive investor, have a short-term or long-term goal, have a small or large amount to invest. You can use a variety of mutual fund schemes with various investment objectives to accomplish your financial goals.

SEBI allows Indian fund houses to offer different types of schemes for investing in different kinds of assets. Mutual funds come in all shapes and sizes, but choosing the right mutual fund scheme for your financial needs is the real question. Your objectives for mutual fund investments can vary, such as generating a regular income, wealth accumulation or capital preservation. Let us look at some of the common goals and the most suited mutual fund options to invest in for these goals.

1. Retirement Need

If your age is 35 years and you retire when you are 60, you have 25 years, making this a long term goal. The most suited mutual fund scheme category for this goal is Equity Diversified Mutual Fund which aims to achieve long-term capital appreciation through diversified investments. These funds invest across various sectors, thus reducing risk. Other than this, there are retirement oriented schemes offered by various mutual funds with specific features to cater your retirement needs.

2. Child's Higher Education or Wedding

Child's higher education is also considered as a long term goal, however, here the time frame is usually shorter than retirement. The mutual fund categories that can be looked at for this type of need are Equity Diversified Mutual Funds, Balanced Advantage Funds and Aggressive Equity Oriented Hybrid Funds. Other than this, there are solution oriented Children's fund which aim at funding future life events such as a child's higher education or wedding. If you would have done an SIP of Rs. 5000 every month, 15 years back for child's higher education, assuming a return of 12%, you would have accumulated Rs 23.79 lakh.

Moreover, other than the above mentioned mutual fund categories, you can invest in Gold Funds to achieve your need related to purchase of gold for your Child's marriage.

3. Tax Saving

Mutual Funds also offer investment options for saving tax. Equity Linked saving Schemes (ELSS) are specifically designed to do the same. ELSS investments are eligible for tax deductions up to Rs. 1,50,000 in a financial year under Section 80C of Income Tax Act. Investing in ELSS funds can offer significantly higher returns in the long run than most other tax-saving investment options like PPF, NSC, NPS and 5 year Bank Fixed Deposits. ELSS funds serve a dual purpose of tax saving along with wealth creation.

4. Regular Income

SWP's can be very beneficial for investors who need regular cash flows from their investments for a long period of time. SWP stands for systematic withdrawal plan. If you invest a lump sum in a mutual fund through SWP, you may choose how much you want to withdraw on a regular basis and how often. SWP allows investors to generate both monthly revenue as well as an accumulated sum at the end of the maturity period. Hybrid funds such as Balanced Advantage Funds are good options for SWP as they have low risk as compared to equity funds and at the same time have potential to generate higher inflation adjusted returns in the long term.

5. Parking of Funds

If you are an investor looking for an option to park your surplus funds for a few weeks or even a few days, there are mutual funds available for you. Overnight funds and Liquid funds allow investors to make better use of extra cash they have in their hands. Compared to bank deposits, these funds are capable of providing better returns at minimum risk and also enable investors to access their funds efficiently and quickly.

6. Other Goals

If you have any goal other than the ones mentioned above, then classify it on the basis of tenure and risk profile. There are different types of mutual funds available based on your risk profile. If you are a risk taker, you would lean more towards equity mutual funds. If you are more risk averse, you would lean towards hybrid or debt mutual funds.

Moreover, there are funds for all needs— short, medium or long-term. For long-term goals, equity or diversified equity funds which invest nearly 65%-80% in equity can be considered. For medium-term goals, choose balanced or hybrid funds that invest in equity and debt in a 60:40 ratio. For short- term goals of 1-3 years, consider short-duration debt funds since they offer lower volatility and better interest than bank accounts.

7. Conclusion:

Mutual funds come in many different forms, and there is a mutual fund for everyone. Your financial goals together with your risk taking capacity determine which mutual fund(s) are best for you. You can consult a financial advisor or a mutual fund distributor who can handhold you throughout your investment journey and help you make the right decisions.

In today's fast-paced world, managing personal finances can be a challenging task. Whether you are seeking professional guidance or prefer a do-it-yourself approach, understanding your financial situation is crucial. One effective way to gain insights into your financial strengths and weaknesses is by utilizing financial ratios. These ratios provide a quantitative analysis of your financial health and can guide you in making informed decisions regarding the different aspects of your personal finances. In this article, we will explore six common financial ratios that can help you evaluate your current financial standing and create a solid foundation for financial well-being.

1. Emergency Fund Ratio:

Having an emergency fund is a vital component of financial stability. It acts as a safety net, providing you with readily available funds in case of unexpected events such as job loss or other emergencies. The emergency fund ratio measures the number of months your cash savings can cover your monthly non-discretionary (unavoidable) expenses. The idea is simply how many months can you continue to live comfortably in absence of any income.

To calculate this ratio, divide your cash/liquid savings or investments by your monthly non-discretionary expenses, which include utility bills, rent, educational fees, EMIs and other household expenses. Financial experts generally recommend maintaining an emergency fund equivalent to at least three to six months of these expenses. The higher the emergency fund ratio, the better prepared you are to handle unforeseen circumstances.

2. Savings Ratio:

Saving and investing the money for the future financial goals is a very crucial aspect of personal finance. Your savings ratio represents the portion of your income that you save and invest aside for your financial or life goals like retirement, education for child, purchase of home /car and so on. It is generally recommended to save at least 10% and 15% of your income each month to build a healthy savings cushion. However, the ideal savings rate may vary depending on your specific goals and age and the amount of savings you can manage. When one is young, the income can be less and expenses /liabilities more since you are in the consumption phase and thus the savings can be less. However, when you are accumulating phase of your life, with higher income you should aim for as much as you can possible manage. Evaluating your savings rate regularly can help you stay on track and make adjustments as needed. By prioritizing savings and managing expenses effectively, you can build a strong financial foundation for the future.

3. Debt to Total Assets Ratio:

The debt to total assets ratio provides insight into the portion of your assets that your lenders own. These debts would include your home loan, car loans, personal loans, credit card outstandings and so on. As you repay these debts your ratio decreases. This ratio is typically high in younger individuals and gradually declines with age as one builds assets and pays off debt. A lower debt-to-total assets ratio indicates a healthier financial situation, especially as you approach retirement. This can be also a good indicator of personal financial well-being and the debt burden on the lines of the Debt to Equity ratio for companies that research analysts track. The ratio is calculated as your total debt divided by your total assets. The aim should be to have a lower ratio here and is indicative that the debt burden is less.

4. Net Worth to Total Assets Ratio:

Your net worth is the difference between your assets and liabilities. It represents the value of what you own after deducting what you owe. The net worth to total assets ratio, also known as the solvency ratio, measures the percentage of your total assets that you own. Tracking this ratio over time allows you to monitor your wealth accumulation and provides motivation during debt repayment. This is similar to the earlier ratio but the perspective is different as we are evaluating your actual networth here and not the debt against total assets.

Younger individuals commonly have a net worth to total assets ratio of around 20%, while individuals in retirement should aim for a ratio closer to 90% to 100%. Achieving a higher ratio indicates significant progress in eliminating debts and building wealth.

5. Liquidity of Portfolio

The liquidity of your portfolio refers to the proportion of your total net worth held in liquid and disposable assets. This ratio depends on your financial goals and should be evaluated accordingly. If you have short-term goals or goals nearing maturity, a higher proportion of liquid assets is recommended. Quite often we have seen that the wealth or net-worth is locked in assets such as land, property, gold and so on which cannot be disposed off in times of emergency. Further, for properties used for consumption, like residence, there is some debate as to whether it should be considered at all when calculating this ratio.

To assess the liquidity of your portfolio, divide your liquid assets by your total net worth. It is essential to strike a balance between financial and non-financial assets or liquid and illiquid assets, considering your specific financial objectives. There have been many cases where people have suffered and had to borrow money even though they had sizable money locked up in illiquid assets.

6. Debt Servicing Ratio:

The Debt Servicing Ratio is a measure of your ability to repay your debt obligations. It is calculated by dividing the monthly debt payments by the monthly income. A good Debt Servicing Ratio is generally considered to be one-third or less. This means that your monthly debt payments, like your EMIs, should not ideally exceed a third of your monthly income. A higher ratio indicates that there exists the risk of financial problems, as one may have difficulty in making debt payments. A higher ratio also means that not enough is left for savings and for meeting discretionary and non-discretionary household expenses. However, the ideal ratio is subjective and will change with time and usually would be higher when one is young and falls when one has higher income levels.

Conclusion:

In brief, understanding and utilizing personal finance ratios can provide valuable insights into your financial situation and guide you in making informed decisions. By regularly monitoring these ratios and making necessary adjustments, you can create a solid financial plan to achieve your goals. Whether you decide to seek professional advice or take a DIY (Do-It-Yourself) approach, these ratios will help you gain a better understanding of your financial health and focus on areas that require attention. Start evaluating your personal finance ratios today and pave the way for a brighter financial future.