How much should you save for retirement?

Planning for retirement is a critical financial decision that many people tend to overlook till the later stage of the service years. It’s very important to ensure that you have adequate funds to support your lifestyle after retirement. The question of how much to save for retirement varies from person to person, depending on several factors such as income, lifestyle, cost of living in your city of residence and personal goals.

Let’s take a look at how much you should aim to save, why retirement planning is essential and the best strategies to build a sufficient retirement fund.

What is Retirement Planning?

Retirement planning is about preparing for a phase in life when your regular income ceases, but your expenses continue. If you fail to plan adequately, you risk facing financial difficulties in your senior years. Proper retirement planning allows you to anticipate and manage future expenses, such as healthcare, housing, and daily household costs, while ensuring that inflation doesn’t erode your purchasing power over time.

Many people assume that they can figure out their retirement plans later in life, but starting early can make a huge difference.

How much should you save for retirement?

While there’s no one-size-fits-all answer, financial advisors often recommend saving enough to replace 70-80% of your pre-retirement income. This rule, commonly known as the ‘80% rule’, assumes that your living expenses post-retirement could be comparatively lower than during your working years, as you might not have to worry about expenses like daily commuting or work-related costs.

However, with inflation steadily increasing, it is essential to reconsider this percentage. You will need to account for rising healthcare costs, living expenses and the overall increase in the cost of goods and services over the years.

Financial experts also suggest targeting a retirement corpus that is approximately 20 to 30 times your annual expenses at the time of retirement.

Factors influencing your retirement savings

• Age at retirement: The earlier you start saving, the more comfortable your retirement years will be. A person who starts saving in their 20s will likely have a larger retirement corpus than someone who begins savings in their 40s.
• Lifestyle: The amount you spend annually will dictate how much you need to save. Someone who enjoys a lavish lifestyle with frequent travel will need a much larger retirement fund compared to someone who leads a more frugal life.
• Inflation: The cost of living continues to rise every year. It’s essential to factor in inflation when calculating your future financial needs. A retirement plan that doesn’t account for inflation can leave you with inadequate savings.
• Healthcare expenses: Medical costs tend to increase as you age, and health insurance premiums rise with it. Planning for unexpected healthcare costs is crucial.

Strategies for building a retirement fund

• Start early: The sooner you start saving, the better. Thanks to compound interest, the money you invest early on has the potential to generate returns that further increase your savings.
• Create a budget: To understand where your money is going, create a monthly budget. By identifying areas where you can cut back, you can increase your savings and direct more funds towards your retirement corpus. This habit also encourages better money management, ensuring that you're living within your means.
• Take advantage of employer contributions: Employers also contribute to retirement plans, such as the Employees’ Provident Fund (EPF) or the National Pension System (NPS) every month. You can also increase your contributions to both the government-backed retirement plans.
• Diversify your investments: Relying on just one type of retirement savings plan could be risky. Diversify your portfolio by including a mix of equity, bonds, real estate, and government-backed schemes like PPF and NPS. This reduces risk and helps maximise your returns.
• Automate your savings: Setting up automatic transfers to your retirement account ensures that you're consistently saving without the temptation to spend the money elsewhere. Automation makes the process seamless and keeps you on track.

Popular retirement savings options

• Employees' Provident Fund (EPF): The EPF is a mandatory contribution scheme for salaried individuals. Here, both the employer and the employee contribute a fixed percentage of the employee’s monthly basic salary and dearness allowance.
• Public Provident Fund (PPF): The PPF is a government-backed savings scheme that offers attractive interest rates and tax benefits. It has a 15-year lock-in period, making it a long-term investment option for retirement. The PPF can be extended in blocks of five years after maturity.
• National Pension System (NPS): The NPS is a voluntary, long-term investment plan with tax benefits. Contributions to the NPS are invested in a variety of asset classes, including equities and government bonds. Upon retirement, a portion of the corpus can be withdrawn, while the remaining amount is used to purchase an annuity, ensuring a steady income during retirement.
• Mutual funds and pension plans: Mutual funds, particularly Systematic Investment Plans (SIPs), can also be an effective way to build a retirement fund. Investing in equity mutual funds allows you to grow your wealth over time, and systematic withdrawals can be set up once you retire.

In conclusion, planning for retirement is not just about saving money, it’s about securing your financial future and ensuring that you can maintain your current lifestyle once you stop working. Starting early, setting clear goals, and consistently saving are the key pillars of successful retirement planning.