It's never too late! Here's how you can plan your retirement even in 40s (2024)

Living in the present is great. However, the stress of not having a secure future will give you nightmares. Many people start investing in their 20s or even 30s but one thing they forget to prioritize is planning for retirement. Retirement planning is as important as planning for your marriage, education, and more. If you have hit your 40s and feel like you have missed the train, don't worry! ETMarkets spoke to Chirag Muni, Executive Director at Anand Rathi Wealth Ltd to understand the best way to start your retirement journey in your 40s. Excerpts:

How important is it to plan for retirement?
Chirag Muni: Retirement planning is very crucial in every individual’s life. A lot of decisions need to be taken early for a secured retirement and a steady flow of income even post-retirement. The best way to increase retirement savings is to start early with a few disciplined steps.

Is planning in the 40s too late?
Chirag Muni: Ideally, one should start planning for retirement by their early 20s or as soon as they start earning. However, it is still possible to start retirement planning in the 40s considering 60 years to be the age of retirement. This will allow you to have 15 to 20 years to plan your portfolio.

What is the first step to retirement planning in 40s?
Chirag Muni:Deciding a tenure for retirement is pivotal to planning retirement as the strategy will differ accordingly. You should choose an age to retire and ascertain the number of years from today this will help you decide on your asset mix. As you reach closer to your retirement, you should re-shuffle the asset allocation mix to reduce risk in the portfolio.

What about the corpus target? How to decide that?
Chirag Muni: Set your corpus target considering inflation. Inflation eats away the portfolio returns and the investors are left with post-inflation returns (i.e. real returns). Therefore, building an inflation-proof portfolio is essential to earn a real return. You need to set a target corpus which will help you generate income and you will also withdraw a portion from the same. The relevant inflation can be considered to be at the rate of 7%, you should set your goal at least 1-2% above inflation.

Example:

How to decide the asset mix for the portfolio?
Chirag Muni: The expected target return will vary in the following manner based on the historical track record of the asset classes and your tenure to retire:

What about withdrawal and risk appetite? Is it risky to invest for such a long term?
Chirag Muni: You should fix the risk appetite based on your tenure. You shouldn't get into too many ventures if you are closer to your retirement tenure. Coming to withdrawal, you should calculate the withdrawal rate from the corpus that you will need every month. It should ideally be around 5-6% of the total corpus or 80% of your current expenditure per month.

What other expenses does one need to calculate while planning for retirement?
Chirag Muni: 1. Lifestyle expenses such as daily lifestyle expenses
2. Healthcare expenses: Even though you might have health insurance from your company, opt for an additional cover as well. You must have personal health insurance in case you leave the job too.
3. Life goal expenses such as travel plans, children's education and marriage, etc should also be kept in mind while planning.
4. Emergency Corpus: Ideally, at 40, one should park 6-10 months of expenses in a liquid fund for difficult times.

Is insurance a part of retirement planning?
Chirag Muni: Insurance acts as a cover for your rainy day and therefore, is an important part of your retirement planning process. This will ensure that you do not have to dip into your retirement corpus when an unforeseen circ*mstance occurs.

1. Get health insurance: Coverage should be 5x of annual income as Mediclaim cover

2. Get critical health coverage as well: This will allow you to get monetary coverage in case of critical illnesses
3. Term Insurance: Coverage should be 20x of annual income as life cover

How often should one review a portfolio?
Chirag Muni: Ideally, one should review their major goals and strategies on a two to three-year basis. A portfolio review should be done on an annual basis. The investments that are close to goal completion should be shifted to liquid funds. New goals, if any, should be adjusted for and investments should be parked in short-term, medium term or long-term buckets.

Which type of retirement tools are there in the markets?
Chirag Muni: We have the government-backed NPS. Apart from that EPF, PPF, and FDs can be added to the debt portion. Additionally, investing wisely in just equities instead of a particular retirement product can also create a good corpus for you. Mutual funds give you liquidity and access that many other tools lack. Ideally, opting for pure-play equity and debt products can help you plan for your retirement.

For the equity portion, you can invest in the diversified categories of equity and for that you can either pick arbitrage funds or target maturity funds.

Debt: For the money that you would need in the next 2 years, you can invest in below Arbitrage Funds and do a SWP.
Kotak Equity Arbitrage Funds (G), SBI Arbitrage Opportunities Fund (G) etc

Equity: The money that you need post 3 years can be invested in a basket of Equity Funds (via SWP). Funds like ICICI Pru Large & Mid Cap Fund(G), Kotak Multicap Fund-Reg(G), DSP Equity Opportunities Fund-Reg(G), Quant Value Fund-Reg(G), HDFC Small Cap Fund-Reg(G) and ICICI Pru Focused Equity Fund(G) can be considered.

Watch the full interview here: