In Your 40s? Here’s How You Should Plan Your Retirement

No matter how much you earn or love your work, one day age will catch up with you and you will stop working. In an ideal scenario, you must start planning for your retirement from the time you start working. Unfortunately, real life would not always follow the perfect path towards the attainment of our goals. Therefore, many of us leave the matter of retirement planning for a later stage of our lives—sometimes, too late.

Following the retirement planning thumb rule can make a difference 

Retirement planning is an essential, must-have life plan. Starting off early on this quest is one of the best things you could do for your own financial security. Even if you start off with a small monthly sum of money, a lengthy investing period allows for greater compounded growth and lessens the need to take on high risks, making it easy for you to achieve a steep-looking target in the long term. But starting off later to meet the same target would need you to take bigger risks.

As a rule of thumb, it’s a wise idea to set aside 20% of one’s income towards a retirement fund in your 20s. You could gradually scale up the contributions to 30% in your 30s, and 40% in your 40s—or to the highest extent that your income and savings allow you.

Now, the trouble with this thumb rule is that if you haven’t started off with retirement planning in your 20s and 30s, you will have to play catch-up in your 40s and 50s.

Illustration for starting out early 

The earlier you start investing, the lower you will have to invest for building a higher retirement corpus. Let us assume a 25-year-old investor starts investing a sum of Rs. 5,000 per month towards his retirement corpus. Assuming he will retire at the age of 60, he would have invested a sum of Rs. 21 lakh. Assuming an average return of 10%, at retirement the investor would have a financial corpus of Rs. 1.9 crore. 

Now if the same investor would have waited for another five years to start his retirement planning and started at 30 years of age, even a higher investment per month would not have generated such a high corpus. If he had invested Rs. 7,000 per month for the next 30 years till his retirement, his total corpus would reach only Rs. 1.5 crore.

Not only did he make a total investment of Rs. 25.2 lakh, which was higher than Rs. 21 lakh if he had started at 25, his final retirement corpus is short by Rs. 32 lakh. 

Retirement planning in your 40s 

Age is just a number but a change from late 30s to early 40s can bring with it a world of difference and responsibilities. Whether you’re salaried or self-employed, on average people peak in their careers and income-generating abilities in their 40s. Higher earnings also allows people to shift higher amounts towards investment and retirement planning. 

Let us assume the case of two individual Mr. A and Mr. B, both 40 years old. Also let’s assume both will retire at 60 and have a life expectancy of 75 years and monthly expenses of Rs. 50,000. For the 15 years of retirement, they will both need Rs. 2.84 crore to maintain their current lifestyle, assuming an average inflation rate of 7%.

Now let us assume Mr. A has been investing Rs. 5,000 per month from the time he was 30 years old. At a 10% annual rate of return, Mr. A already has a retirement corpus of Rs. 10.32 lakh by the time he touches 40. Meanwhile, Mr. B’s retirement fund is zero at the moment.  

With an expected inflation rate per annum of 7% and an expected average rate of return for investments at 10% per annum, Mr. B will need to make a monthly investment of Rs. 39,076 while Mr. A will need to invest a relatively lower Rs. 29,458 to accumulate a corpus of Rs. 2.84 crores at the time of retirement so that both can maintain the same standard of living post retirement as they are currently.

Tips for retirement planning in 40s 

• Starting closing your loans: Close personal loans or credit card debt to ensure you can maximize your investment towards retirement goals. Consider home loan prepayment keeping the EMI steady to ensure you bring down the tenure of your home loan and repay your home loan in your pre-retirement years.  
• Reevaluate your equity investments: As you get closer to retirement, you can consider reducing your investments in equity and focus on debt instruments. This is to secure your investments from market volatility. While you can look to take full advantage of equity through your forties, you can gradually start switching from equity to debt instruments at some point in your fifties. How much you delay making the switch comes down to your risk appetite. You can start by redeeming parts of your equity investments that you need for your short-term needs while remaining in other equity investments that can continue growing. Smart, planned switching would ensure safety of money while providing you capital growth through retirement.
• Ideally suited retirement tools: Among long-term debt instruments, you can take full advantage of PPF, KVP, and NSC. They assure conservative returns (currently in the range of 7.8 to 8.1% annually) and safety of your capital. Mutual funds are a great tool for long-term fund building, and you should use direct plans for corpus building at lower costs compared to regular plans. If you are a conservative investor, you could consider a pension plan as well though the returns there may be lower compared to other avenues.
• Check your insurance: Make sure you have adequate health insurance going into your retirement, which is a time your health will gradually start failing you and your medical costs will increase. The sooner you buy a health cover, the cheaper it will be for you. Opt for the best possible cover your money can buy. Among life insurance, make sure you are adequately covered your dependents are well-covered not just in your pre-retirement years but also after retirement.

Want to know how well your retirement savings are stacking up? Use our calculator to find out!

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(A version of this article had appeared in the Financial Express.)