Why should you consider owning Stocks as a Retirement Savings Plan?

why to own stocks as retirement saving plans

The word retirement evokes plentiful emotions. It’s the phase of life when you look back at the bygone time with a myriad of thoughts and plan ahead for the upcoming post-retirement phase. One such thought that comes across the mind during this time is the retirement fund.

 The thing about retirement is that during this phase you need funds to lead a life that you envision for. You cannot go on to work for the entire life as there comes a time when you have to bid adieu to the job. It’s during these times that you absolutely need funds. But how will this happen? The answer is a retirement savings plan.

The need for Retirement Saving Plan

With age, the ability for a person to manoeuvre into work the way they do during youth age is minimal. It’s the plain old truth. During this phase, people look to rest along and enjoy life. And this part of the act requires funds. Merely hoarding the cash into a savings account or some other instrument will not provide you with the best retirement option. That’s where the retirement saving plan comes in. The major goal behind a retirement saving plan is to generate regular income without having the need to work for it. A good properly worked out retirement saving plan will help you live your post-retirement phase with well and good. Let’s check out if stocks can be a good retirement saving plan.

Why own Stocks as a Retirement Plan?

Simply put, India still hasn’t warmed up fully to the concept of the stock market investment. They still have reservations around and stay put from investing in the stock market due to fear and myths. It’s a reason why traditional investment means have been so much in usage. Also, another factor to think about is the risk tolerance level and the aggressiveness towards investing.

When we have age on our hands we tend to have a certain job or go through business and have the audacity to maintain an aggressive attitude towards investment. We have a high-risk tolerance level and can certainly take on more risky ventures. But as the age dwindles down, the aggression level tends to curb below. There are a host of reasons for it, the added responsibility on the shoulders, the need to fulfil the family needs and more. These all tend to impact our risk tolerance level and we slowly transition from having an aggressive stance to having moderate or low-risk stance. 

If you look on the basis of returns, then traditional investment routes like fixed deposits tend to offer only 7%-8% in return while other options like PPF and more have a similar level of return like 8%-9%. Count the inflation factor in and the return is a meagre 4%-5% which will not be enough to set up a proper retirement saving fund. Whilst if you were to see, the stock market has historically offered a better return than any other investment option around. They have offered a return of 14%-15% CAGR over the past 15 years.

We’ll discuss further with an example which will clarify it further.

A Mathematical Scenario

When it comes to retirement saving fund, you are generally looking for an investment of 3-4 decades.  A retirement fund is generally pretty large and it cannot be built in a short span of time. It’s imminent that it will take time. For say you intend to start investing at the age of 30 and have set your retirement at the age of 60. That gives you 30 years to build your retirement corpus.  So how do we go about it? Let’s find out the retirement corpus that you’ll need and then seek the best investment options to build that corpus.

  • Start with the estimated monthly expense: First, calculate how much you need to handle your monthly expenses to live a life of your desire after retirement. Consider aspects like medical and travel expenses as they tend to increase after retirement. For say, including all expenses you’ll need around Rs 50,000 per month after retirement. That will round up around Rs 6 lakhs per annum.
  • The onus of expected returns: For saying the expected returns are around 7% to 8% on an average taking into consideration the normal investment scene of India. If you were to take the equity historical returns then the rate of return will be 14%-15%.
  • The size of the retirement saving fund: Based on the above two parameters we can calculate the size of the corpus required for retirement saving funds. Once we find the same, we can base our investment accordingly.

Let’s calculate the same down here.

Size of the corpus = Estimated annual expenses / Rate of return on investment

                                 = 6 lakhs/ 7%

                                 = Rs 86 lakhs

Rs 86 lakhs is the total fund required for you to retire imminently. But if you take inflation into factor, then the required amount will increase further on. Here’s taking inflation of 4% into consideration for 30 years (assuming you started investment at the age of 30 and want to retire at 60).

Required corpus = Rs 86 lakhs * (1+4%) ^ 30

                              = Rs 2.79 crores

So how do you go about building a retirement savings fund in a way that you get the said amount at the end of your retirement? Certainly, there are various investment methods to build such a large fund.  For say, you intend to invest Rs 5000 on a monthly basis for a period of 30 years. The different rates of returns along with the final corpus of the investment are presented down below in the table.

Investment option Rate of Return Monthly Contribution Total term (years)  Final Corpus 
Savings A/c 3.5% 5000 30 years Rs 32 lakhs
Fixed Deposit 7% 5000 30 years Rs 61 lakhs
PPF 8% 5000 30 years Rs 75 lakhs
Gold 8% 5000 30 years Rs 75 lakhs
Mutual Funds 10% 5000 30 years Rs 1.15 crores
Real Estate 9% 5000 30 years Rs 93 lakhs
Equity 14% 5000 30 years Rs 2.8 crores

Sensing the rate of returns from the above table, equity stands as the best investment option to build the said corpus. If you start the investment into the right investment options, you can sensibly build a larger corpus and at a quicker pace than possible.

Final Note

Looking back, there are plenty of investment options around the market ranging from the traditional means to modern-day options like stocks. The rates of return are obviously different as each investment option comes with its own set of returns. But looking at the returns and the ability of compounding, equity is by far the best investment option around and should be the one you should consider as part of your retirement savings plan.

516
1

Leave a Reply

Your email address will not be published. Required fields are marked *