This observation should serve as an alarm bell, for everyone, especially the younger ones. Consider this: The oldest millennial is just 43 years old now.

Time flies; worry-free years of spending and fun can pass in the blink of an eye. If you think this is the time to enjoy with your money, and you are too young to think about retirement, then think again.

Action Point: The right time to start your retirement planning is now.

Like any other coin, the golden years also have two sides. On one side, most of us visualise 24X7 holiday mood, vacations, peace, watching the sun set while sitting in a sea-facing villa and a worry-free life. However, the other side includes health issues, ever-increasing healthcare costs, finite monetary resources, and the need for support. Taking care of your health as well as your wealth matters a lot seeking to ensure that the golden years remain golden. Saving for retirement is inevitable, except for those unfortunate souls who leave us too early.

Before delving deeper into how to save for retirement and whether mutual funds help us to build a retirement corpus, let’s first understand how much we need to save.

Start by estimating your projected monthly household expenses after retirement. This can be a challenging task. Expenses related to employment, for example, commuting to and from the office, will decrease. However, expenses related to healthcare are likely to increase. If we assume current expenses will continue, we can estimate projected expenses. Let’s look at this with the help of an example. Meet Mr.ABC who is 30 years old and wants to retire at 60 years. His current monthly expenditure is Rs 50,000. Assuming a 6% inflation rate, he will need to spend Rs 2.87 lakh per month at the time of retirement to enjoy the same lifestyle (statement is for illustration purpose only).

The next step is to compute the SIP amount considering an expected rate of return on investment and the duration of lifespan after retirement. In the case above, let’s assume Mr. ABC needs to raise the retirement fund for 20 years post-retirement – until he reaches 80 years of age. The assumed rate of return on investment is 12%. Hence, he needs to invest Rs 19,720 per month (statement is for illustration purpose only).

Let’s take one more example of 40 years old Mr.XYZ. He also plans to retire at the age of 60 years and wants a corpus that will take care of him till the age of 80 years. His monthly expenditure is Rs 50,000 per month now. He will need approximately Rs 1.60 lakh per month when he retires, adjusted for inflation. He has to invest Rs 38,903 per month. The number has almost doubled though the current expenses are similar. However, we suggest you consider an investment advisor before investing depending on your risk appetite.

Do not get overwhelmed by these numbers since they are only illustrations. You can do the math for yourself here: https://www.barodabnpparibasmf.in/ or refer a financial advisor before investing.

The key takeaway from this exercise is to start your retirement planning as early as possible. Initially, the numbers may appear impossible. Many individuals start investing late and have existing commitments such as home loan repayments and other household expenses which do not leave much in savings, limiting their ability to invest. However, it is better to start investing now and gradually increase investments as income and savings rise.

The examples above have highlighted that inflation is an under-estimated risk for most households. Inflation raises the monthly expenditure even if you choose to keep the lifestyle constant. In reality, lifestyle inflation is inevitable since we keep ‘upgrading’ and our monthly costs continue to go up. You have to select investments that can aim to beat inflation by a decent margin. By starting early, you get a long period to prepare for retirement. You can invest in equities that have the potential to generate high returns without worrying too much about volatility, however one should be aware that the risk associated with equities is very high. Traditional fixed income instruments alone may not be adequate for funding your retirement, given the limits set on contributions in some avenues, inability to beat inflation in the long term and adverse taxation.

Investing in mutual funds can help a lot in creation of retirement corpus using equities in the long-term. Systematic Investment Plans (SIP) in equity mutual fund schemes, especially multi-cap and flexi-cap can help achieve your financial goals for you but as suggested earlier also the risks associated with these investments are very high. These schemes allow the fund manager to invest in equities and equity related instruments of companies across various market capitalisation. Investors can also use aggressive hybrid schemes for this purpose, since they invest 65-75% of the money in stocks and rest in bonds.

Retirement schemes launched by mutual funds can also be used to invest for retirement. These schemes come with a lock-in and the tag of ‘retirement’ that seeks to ensure that the investments are more likely to be used for funding your golden years.

While equity investments seek to factor inflation, investments in equity and equity oriented mutual funds can also help you reduce tax liabilities. Traditional fixed income instruments, unless exempt, attract tax on the accrual basis at the slab rate of the investor. But gains in mutual fund investments are taxed only when you sell mutual fund units. As of now long-term capital gains booked up to Rs 1.25 lakh in a financial year are tax-exempt. And gains booked above this threshold are taxed at 12.5%.

Using mutual funds for retirement planning can be one of the ways for investments as the process brings discipline, cost-efficiency and healthy post-tax returns. As your move closer to retirement, you can shift your investments in equity mutual funds gradually to less risky avenues like debt funds. Although SIPs can be effective, consider investing additional lumpsums during volatile or lean phases in the stock market. You can also use Systematic Transfer Plan (STP) for the same purpose.

Importantly, retirement planning is an ongoing process. It is vital to review your progress regularly. As your lifestyle improves along with your career growth, your retirement plan should be revisited every once in a while. Keep investing for your second innings –retirement!