It is a topic that rarely has any last word in a debate. If you are in your 40s and 50s and regularly meet your peers, you would know the endless conversations over that cup of coffee or the dinner table on retirement. How much is enough for retirement? That is a question not only for those closer to their retirement but also for the young.
As persistently high inflation hurts everyone, the size of the retirement corpus also grows. From a couple of crore rupees not long ago, conversations are now around R5 to R6 crore. If we have a sustained period of inflation, that could grow even further.
The conversations we talk about in India occur among the wealthy and upper-middle-class communities. Those in the lower income group and the poor are not even considering retirement. Such ideas do not come naturally when young and rarely occur when poor. As average incomes rise, the importance of the topic will only go up.
A new study on India's stock market returns is likely to add to the intensity of the retirement debate. It was assumed for a long that you could withdraw 4% of your retirement corpus every year without affecting returns on your corpus. It was considered the safe withdrawal rate or SWF.
Ravi Saraogi, a Sebi registered investment advisor, has recently published a paper challenging that argument. He says that an average Indian investor's SWR of 3% is suitable, and for a risk-conservative investor, it should be no more than 2.6%. The argument is based on empirical evidence of diminishing long-term equity returns.
That is all set to open a pandora's box. On the one hand, everybody is worried about income prospects. On the other hand, you have to save much more than you thought you needed for possible retirement. That presents a considerable challenge for someone looking to retire early or over the next decade. Assuming 3% as the SWF, for every R1 crore you save, you will be able to draw only R3,00,000 annually.
All of that leaves you with no option but to work harder and earn that bonus or pay. You may want to consider upskilling and learn something new that pays better than things you do presently. There is no excuse for throwing away your inheritance. It has to be put to productive use through appropriate asset allocation.
If you invest R1,000 per month in a diversified equity fund, you can save over R1 crore in 25 years. You must multiply that amount every month to push up your retirement corpus. Being young is an advantage. You know your retirement targets, and you have an opportunity to work towards them.
In addition to systematic investment plans, you may want to make some allocation to direct investing in equity assets.
Stockbrokers offer systematic equity plans now. That means you can accumulate shares of your favourite companies monthly just like you accumulate mutual funds.
The money should be put into companies with solid fundamentals that pay yearly dividends. Try to reinvest the dividend into diversified equity funds or buy more shares of the same company. For example, if you receive a dividend of R100 per share yearly from Reliance Industries or Hindustan Unilever, you can invest that amount into buying the same company's shares. That way, you can benefit from the power of compounding.
Warren Buffett's Berkshire Hathaway owns Apple shares worth $159 bn. They receive over $775 mn in dividends. Berkshire deploys most of that dividend back into buying new Apple stock. At the same time, Apple buys back shares worth $89 bn every year. The value of Berkshire's Apple holding goes up without putting a single extra dollar.
As you accumulate more shares of your favourite companies, you can emulate Berkshire Hathaway on a smaller scale. That would go a long way in boosting the value of your investments needed for long-term financial goals like retirement. Getting rich 'slow' is not such a bad thing at all.
(The author is editor-in-chief at www.moneyminute.in)