Retirement Planning is a process of setting up financial objectives for the post-retirement life & creating wealth to achieve them during the retirement period. This includes identifying future sources of income, estimating future expenses, & making a well-informed decision to ensure there are enough funds to maintain the desired lifestyle during the post-retirement period. An effective Retirement Plan includes both financial aspects & non-financial aspects, such as investing, savings, lifestyle, financial security, etc.
A Systematic Investment Plan (SIP) is an effective retirement tool which involves investing a fixed amount monthly in mutual funds, helping you build a retirement corpus. These plans are flexible, which helps build wealth over a period of time by reducing risks & dealing with market fluctuations. This plan helps you take advantage of the power of compounding & rupee cost averaging, further reducing the risks of market volatility. This plan ensures a consistent & small beginning with a gradual growth of wealth without any financial burden, letting one achieve financial independence post-retirement.
Features of SIP
Provided are the features of a Systematic Investment Plan (SIP):
- Rupee Cost Averaging
The Rupee cost averaging followed in SIP helps investors to mitigate the risk of market fluctuations. This means that during downtime, investors buy more units & vice versa to enjoy the benefits of market fluctuations.
- Disciplined Investment
Regular contributions of money towards SIP build a disciplined approach, which further leads to regular savings, consistent investments, & wealth creation.
- Flexibility
This plan allows investors the flexibility to choose the amount to be invested, which makes this plan suitable for every income class with different financial standards.
- Professional Fund Management
Under this plan, the professional fund managers help in decision-making depending on the investor’s financial objectives & market fluctuations.
- Long-Term Wealth Creation
SIP allows investors to plan investments to achieve long-term wealth creation with consistency, discipline & compounding power.
- Suspending Investment Options
At times of financial uncertainties, SIPs allow investors to pause their investments, i.e. suspend them for the time being, which will resume automatically after the pause tenure is completed.
- Unrestricted Investment Ceilings
It allows you to invest any amount starting from as low as INR 100 with no upper limit.
How Does SIP Work for Retirement?
Let us understand how a SIP works for retirement:
- Set Your Retirement Goal:
Make an estimate of the amount of funds that would be required post-retirement, taking into consideration the future expenditures, desired lifestyle, & inflation factor.
- Pick the Right Fund:
If you are looking for long-term wealth creation, opt for equity funds, & if you are looking for a balanced risk, opt for hybrid funds.
- Start Investing Early:
It is advised to start investing as early as possible on a monthly basis to get the benefits of the power of compounding.
- Benefit from Compounding:
The returns earned from SIPs are reinvested, which allows for getting the benefit of additional earnings in the subsequent years.
- Stay Consistent:
An investor should invest on a consistent basis, even during market ups & downs, to achieve long-term financial objectives.
- Review Periodically:
Review the investments made periodically & make adjustments if required, or switch between the funds if considered necessary for higher returns.
Key Points to be considered before investing in a SIP for Retirement
Provided are the points should be considered before investing in a SIP for retirement purposes:
- Define Your Retirement Goal:
Consider the amount of funds that would be required post-retirement, depending on your desired lifestyle, inflation, future expenses, etc.
- Start Early:
It is advised to start investing as early as possible to get the benefits of compounding & further build a huge retirement corpus.
- Understand Your Risk Appetite:
If you are a risk-averse investor, opt for debt funds that provide stable returns. But if you are a risk-lover, opt for equity funds, i.e. market-linked funds, & if you are risk-neutral, opt for balanced funds.
- Check Expected Returns:
An investor should look for future expected returns by looking into the past performances of similar funds.
- Diversify Your Investments:
An investor should invest the funds in different asset classes such as equity, debt, or balanced funds to maintain a balance between risk & returns.
- Account for Inflation:
Take into consideration the inflation factor & invest in those funds that provide a better rate of return than the inflation rate.
- Review Regularly:
An investor should review the investments on a regular basis & make appropriate adjustments in case the funds are not performing up to the mark.
- Look for Tax Benefits:
Investors should invest in those funds that are entitled to deduction of taxes u/s 80C of the Income Tax Act, 1961.
- Compare Expense Ratios:
An investor should compare the expense ratios & choose a fund with a low expense ratio to reap higher returns at a lower cost.
Benefits of SIP Calculators in Retirement Planning
A SIP calculator is a financial tool which helps individuals with their Retirement Planning through SIPs. This can be done by estimating the returns & making well-informed decisions along with long-term financial security. Provided are some of the benefits of a SIP calculator:
- This calculator provides you with a clear & realistic picture of the growth of investments made over a certain period.
- This means no rough estimates, only accurate forecasts, depending on the amount of policy, policy tenure, expected return rate, etc.
- This calculator helps you project achievable financial objectives for retirement planning.
- Certain tools help in calculating returns quickly & easily without any manual calculations getting involved, which further saves time & provides accurate results.
Conclusion
SIP for retirement includes investing a certain fixed amount of funds on a regular basis to accumulate the corpus funds with the power of compounding. These plans offer flexibility, allowing individuals to start with small investment amounts & increase the amount gradually. This is a long-term financial plan that helps achieve long-term financial objectives. An investor should look for early investing, remain invested for better returns.
