Creating a financial safety net for retirement is a key concern for most salaried individuals. That’s why retirement planning is at the core of many saving and investment decisions. Setting up a retirement corpus, however, can be challenging. You not only need adequate funds but also an investment avenue that can help you potentially match or beat inflation over the long term.
Wenesday Rate
Wed 25 Dec. 2024
This is where a Systematic Investment Plan (SIP) in equity mutual funds comes in. SIPs allow you to routinely invest an amount that is convenient in a mutual fund scheme. Over time, even affordable but disciplined investments have the power to potentially build wealth.
When planning how to build a retirement corpus, an SIP calculator can be an invaluable tool. It saves you the trouble of doing complex calculations and helps you determine the SIP amount that can potentially get you to your goals. As you near retirement age or as your income rise, this tool can also help you strategise how to adjust your SIP investments. This article tells you more about how to make optimum use of an SIP calculator for retirement planning.
Why use an SIP calculator for these estimates?
An SIP calculator is convenient because it gives fast results based on several variables. The calculator considers how much you invest, the returns you expect, and how long you will stay invested. It also includes the effect of compounding.
Compounding takes place if your investment returns, when reinvested, go on to earn further returns. As your investment base keeps growing each time you reinvest returns, the effect of compounding can potentially lead to accelerated and exponential growth in the long run (depending on market conditions). However, manually calculating compounding is challenging. An SIP calculator saves time and reduces errors.
Determining a suitable SIP amount
The first step in your retirement planning journey is to determine how much you need to invest regularly. If you already have SIP investments, you can use the calculator to determine whether those are adequate to get you to your retirement goal. Using a free online SIP calculator, you can enter your monthly investment amount, expected rate of return and investment horizon (the number of years left till retirement). The calculator will then tell you what the potential size of your final corpus may be.
For example, let’s assume you are investing Rs 10,000 per month in an equity-oriented mutual fund scheme where you expect to earn 12% returns per month. You seek to retire in 20 years. When you enter this information in an SIP calculator, the tool will tell you that your corpus can potentially amount to Rs. 99.9 lakh (approx.). If this amount seems inadequate, you can enter different monthly investment values to arrive at the combination that is suitable. Do note, however, that the calculator assumes a fixed rate of return for its estimates. However, mutual fund returns can vary based on market movements and are not fixed or guaranteed.
It is also important to factor in inflation when determining your desired corpus. You can look at projected inflation rates to determine what your inflation-adjusted corpus size will need to be at the time of retirement. This can help you set realistic and well-defined goals.
Adapting SIP amount to salary increments
When you start your investment journey, especially if you’re early on in your career, you may be able to invest only a small amount. This may make a large retirement corpus seem like a daunting prospect. However, as you progress in your career and your income increases, you can adjust your SIP amount. An SIP calculator can help you routinely re-evaluate the required monthly investment that can potentially help you reach your goals.
For example, if you receive a 10% salary increment, you can consider increasing your SIP contributions by a similar percentage. This adjustment ensures that your investments keep pace with your earning capacity, helping you potentially build a larger retirement corpus. Regularly updating your SIP investment in line with salary increments can potentially significantly boost your retirement savings over time.
Adapting SIP strategy to age
Different life stages require different financial strategies. Here’s how you can use an SIP calculator to tailor your retirement planning based on your age:
- In your 20s and 30s: At this stage, your investment horizon is very long, meaning you can take higher risks. You can adopt an aggressive investment strategy that focuses on equity mutual funds to optimise long-term growth potential. An SIP calculator can help you determine a suitable investment amount based on the rate of return that equity investments can potentially offer (for example, 12%).
- In your 40s: As you approach mid-career, you may need to adjust your investments. You may be able to increase your SIP amount at this stage, but your investment horizon is now shorter, so you may need to move towards a more balanced investment avenue. You may choose equity avenues that are relatively less volatile, such as large cap funds. You can also consider hybrid fund categories that combine equities with the relatively stable debt securities. This way, you can add a cushion against market volatility while still aiming for potential growth. Once again, an SIP calculator can help you determine a suitable investment amount based on a more conservative return rate and a lower duration.
- In your 50s and 60s: As retirement nears, your focus may shift away from growth potential and towards reducing the impact of volatility on your investments. You may therefore start moving your investments from equity towards more conservative avenues such as debt mutual funds and hybrid funds. An SIP calculator can help you readjust your strategy.
An SIP calculator can thus aid retirement planning by helping you do complex calculations based on changing parameters. It can help you determine an SIP amount that is suitable for your goals and adjust contributions with salary increments. It can also help you tailor your investments to your life stage. By using the SIP calculator strategically and shifting relatively stable avenues such as hybrid and debt funds as you near retirement, you can potentially build an adequate retirement corpus. Starting early and adjusting your plan as needed can help you potentially work towards a comfortable post-retirement life.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
