SIP for Retirement Planning: How Much Should You Invest for Retirement?

As we journey through life, there comes a point when you begin to ponder the future, particularly to plan your retirement. Imagine you're at the helm of a ship, navigating the choppy waters of financial planning. Your destination? A future without the worries of income instability, that’s precisely where the retirement fund comes into play.

What is a Retirement Fund?

Retirement fund is an investment option that allows an individual to save a certain portion of their income for their retirement. This comes with a mandatory 5-year lock-in period.

What is the purpose of a retirement fund?

The primary purpose of a retirement fund is to create capital appreciation over a long-term period and provide a steady source of revenue for an investor during the retirement years. The option of systematic withdrawal plan (SWP) provided in the scheme, can be considered as a form of deferred pay, providing capital to pay for the necessities of individuals.

Increasing Medical Expenses

What if you are enjoying your retirement years, finally free from the daily grind, when suddenly, a health emergency strike. As individuals age, healthcare expenses tend to escalate, posing a significant financial burden during retirement. SIPs provide a means to meet these emergency financial demands.

Inflation

Inflation reduces the purchasing power of money over time. The worth or value of money keeps diminishing. It erodes the value of our savings hence; a retirement fund comes as a savior post-retirement.

Falling Interest Rates

Interest rates of various investment options for retirees have dropped significantly in the last few years. This is why you need to save more in order to bank on for your post-retirement expenses.

Why Choose SIP for Retirement Planning?

• SIP in retirement funds are generally yielding returns when seen from a long-term perspective. A small amount invested for a long time fetches reasonable returns over a long period of time. It is a practice of investing a constant amount regularly in a mutual fund over a period of time.
• Based on one’s investment goals and risk appetite, one may invest through SIP in retirement funds.
• A SIP is a disciplined way of investing that also controls your spending habits.
• Systematic Investment Plan can be started with monthly investments as low as Rs 100. So, anyone can invest in a retirement fund with a small amount.
• With the power of compounding, even small investments made regularly can snowball into reasonable wealth over time. There are various types of SIP Investment that you can use to achieve your financial goals.
• SIPs can be stopped and restarted at any time according to your convenience.

How to calculate the amount you need for retirement?

This is a question that crosses everyone’s mind. Let me take you through the answer. Calculate your retirement savings with a retirement planning calculator. It is a utility tool that shows you the amount of money you need after retirement. The retirement planning calculator will serve two primary purposes - shows you the amount of money you need to maintain your current lifestyle after retirement; and helps you to plan your investments to get the desired retirement corpus at the time of retirement.

The retirement planning calculator has a formula box where you select the following points:

• Present age
• Age at which you plan to retire
• Life expectancy
• Monthly income you will need in retirement
• Expected inflation rate
• Expected return on investment

Formula to be used:

FV = PV (1+r)^n
FV = Future Value.
>PV= Present Value
>r= expected inflation
>n= time to retirement

Conclusion

Retirement planning should be a top priority for individuals at every stage of their careers. The early you start, the better! However, one should seek financial advice and consider their risk appetite before making any investment.