Nilesh Shah, MD, Kotak Mutual Fund, talks with Vivek Law about the need for retirement planning
You need to generate returns somewhere between 12-14% p.a, which takes care of inflation as well as up-gradation that you want
When we talk about retirement planning, we believed our kids would take care of it. but the pattern is changing. Planning for retirement is an essential and depending on children is no longer an option?
In our society today we see many elderly people being neglected by their kids. I sincerely pray that their kids will take care of their retirement, but why should we take a chance? Why not live on our own money, with dignity. It is absolutely imperative for everyone to plan for their own future. they need to invest wisely so their retirement is dependent upon their own corpus rather than looking outside for help.
While it's impossible to predict which way inflation will go in the coming years, one of the key things to keep in mind when you plan for your retirement is to factor in inflation? How does one factor in that?
If we see the historical range of inflation, it's been 7-8 percent a year. However, all of us want to live a better life. My father travelled in a non-AC car, I travel in and A.C car and my daughter would probably better than what I have right now. So, we need to provide for about 10-12% of inflation, which takes care of one, nominal inflation and second a little bit of upgrade, which we all as individuals, desire. You need to generate returns somewhere between 12-14% p.a, which takes care of inflation as well as up-gradation that I want.
How does one go about building a retirement plan? Because it takes 25-30 years to build a corpus. Is an SIP something people should work with even for a retirement plan?
Essentially there are 3-4 basic commandments, if we can say. The first is early start. Whenever you have money, you should start investing, you should start early so the power of compounding works for you. Second, normally people earn income; spend money, then whatever is left is invested. It should be the other way around. Whatever is your income, target how much you want to invest, residual should go on expenditure. The discipline of investment and starting early should be extremely important lesson for everyone. The third thing is to invest regularly.
There's no point in wafting to time the market; it is time in the market that makes money for you. So keep investing small amounts every month, but systematic, regular investment will build your retirement corpus. The next most important thing is long term investment. Investments are like bamboo trees - you keep feeding water, fertilizer for four years and only in the fifth year you see the tree grow and then it grows to great heights. So you have to start early you have to target savings out of whatever income you have, make regular investments, you have to be a long term investor, invest in diversified assets. Create a balance. With these commandments, a good healthy retirement corpus can be built.
You gave us the average of inflation which has been 7-8% and you said if you really want to be able to build wealth for your retirement, you should be looking at a 12% return. A savings bank account or an FD with a bank or some of these endowment plans or even Ulip plans- none of these are going to give you a 12% return, isn't it?
Definitely. These products are not meant for investment solutions. Insurance is protection, savings bank account is convenience, you do need them but at the same time you need to provide for your investment solution. That comes from the stock market, real estate and mutual funds.
This is why it is extremely important to divide your allocation between debt, equity, real estate and commodities. In order to maintain your financial health, you need to have debt, equity, real estate, commodities, all put together.