Here's a Robust Roadmap to Retirement Planning for Millennials

Jan 06, 2023 / Reading Time: Approx. 10 mins

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The millennial generation has experienced significant technological and economic development during their lifespan. This generation is caught between traditional financial values and a modern way of life that is vastly different from that of the older generation. Millennials need to understand the importance of financial planning, as this gives them an upper hand to control their finances prudently. The first step of financial planning is to set S.M.A.R.T financial goals which includes buying a house/car and long term goals like retirement.

In order to achieve these envisioned goals millennials should put meticulous efforts such as invest in worthy investment avenues like mutual funds. I recommend subscribing to PersonalFN's SMART Fund Explorer, to identify the best suitable mutual fund schemes to invest in, based on the return you need to generate to reach your financial goals. It is a unique tool that will assist millennials in structuring their investment in the right mutual funds that are in line with their goals at a calculated risk for the expected returns.

You see, in today's fast-paced world the higher cost of living (particularly in metro cities), the upwardly trending personal and professional aspirations and the growing competition makes it harder to find a job that pays enough to support one's needs and lifestyle, these are some challenges that millennials face that generations before them did not.

If you tell an average 25 year-old that the best time to start saving for retirement is now, they may unconvincingly glance and say "Are you kidding? I'm not due to retire for another 35 years!"

Millennials may claim that they are busy starting a family or paying down student loans and they simply don't have the money to worry about retirement. However, keep in mind that since you didn't make a retirement plan throughout your working years, this will cause you to struggle financially in your sunset years.

Given that, millennials may consider a comprehensive roadmap to retirement in this new year, 2023, which can help you figure out where you stand in your retirement planning journey.

Here are a few important steps that millennials need to follow while drawing a roadmap to retirement:

1. Define your retirement lifestyle

You need to know what you want and how you want to live in retirement. You should plan your retirement goals. Just as we know what we want to achieve during our careers, we should also have similar goals for the time spent during retirement. Most individuals plan more on travel and entertainment than they did before. Earlier, you might occasionally go to movies, restaurants, and on vacations. But post-retirement, every day is a vacation!

Here are a few questions that may help you decide on your retirement lifestyle:

  • Where will you be living?

  • Do you wish to shift to a new country?

  • What activities interest you most?

  • Where do you wish to travel post-retirement? Etc.

This step may appear simple, but it also lays the foundation for the remaining steps, which means it's something you should give serious consideration to before you start your retirement planning. After all, unless you have a goal in mind, how will you aim to save and invest the required amount to achieve that goal.

Here's a Robust Roadmap to Retirement Planning for Millennials  
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2. Estimate the cost of your retirement life

Retirement planning is difficult, and that's why one needs to have an estimate of the amount one will spend when retired. Although not all of your current spending will follow you into retirement, in the long run, inflation and health difficulties may cause your expenses to rise. Using baseline estimates and then adding discretionary lifestyle expenses is a valuable framework.

You need to determine the minimum monthly income an average retiree would need to maintain a basic standard of living. Further, look up the average inflation rate and use that to compute how much the above number would have grown. For instance, if the inflation rate is 5.9% this year and you are 30 years old, by the time you are 65, the cost of everything will have doubled. Also, keep in mind that healthcare costs will probably rise faster than inflation.

Moreover, add on a buffer for discretionary lifestyle expenses and unexpected events. This can vary widely depending on circumstances and goals, so it may be best to be more conservative and estimate a higher amount requirement for your golden years.

3. Construct a plan to reach the estimated retirement corpus

The next step is to look at what you need to do to reach the estimated amount in the previous step. One needs to create a corpus equivalent to the desired lifestyle post retirement. Your post-retirement life will be directly impacted by the type of savings, investments, and financial decisions you make today.

In contrast to the older generation with government jobs, the millennial generation, who work in the modern start-up kind of work culture, lacks the security of an assured pension after retirement. In order to maintain your standard of living and keep your independence in your later years, it is crucial that you build sufficient corpus for retirement.

Building a retirement corpus seems like a daunting task; many individuals consider that basic savings will suffice their retirement expenses. However, it's not enough, you need to save as much as you possibly can and invest in instruments that are specifically designed to help you during your retirement, like the National Pension Scheme (NPS), Public Provident Fund (PPF) or the Post Office Monthly Income Scheme, etc., as well as other slightly more lucrative avenues like mutual funds to build your retirement corpus.

4. Make invest in worthy mutual fund schemes

Inflation eats into your income, and Your income is reduced by inflation. Therefore, factoring it into your retirement plans is essential. If you don't beat inflation, your purchasing power as a consumer keeps decreasing. Traditional retirement investment strategies can help you accumulate the necessary corpus, but they are not enough to generate inflation-beating returns.

Mutual fund investments are an excellent way to start your retirement planning since they assist you in selecting the ideal asset allocation and offer a diversified portfolio that enables you to produce long-term returns that outperform inflation. The more you delay investing, the more it lessens your possibility of reaching your retirement target.

All you have to do is make small contributions in the mutual fund via SIP at regular intervals, and the power of compounding will stick by your side, provided you start early. Another aspect of investing to keep in mind is to follow the rule of thumb wherein 100 minus your age will determine your investment in equities, and the remainder can be distributed in debt and alternative investments.

For example, if you are 30 years old millennial, your portfolio would likely have an allocation of 70% of the amount in equities and 25% distributed in debt and other assets. As you age, this number changes to lesser investment in equities and more in other asset classes. Consequently, when your responsibilities grow, the risk exposure decreases.

5. Get a hand on your insurance policy

The one thing that will pay off in retirement is the amount you spend on health insurance in the early stages of life. Apart from savings and investments, you also need to take into consideration the healthcare costs that may appear in your retired life. Considering the escalating medical costs over the last few years; it will be prudent to purchase adequate health insurance cover that will assist you during highly expensive medical treatments in your sunset years. On the other hand, a life insurance cover safeguards your family's financial requirements in your absence (untimely demise).

Remember, you have to ensure the terms and conditions of the insurance policy before purchasing for easy access to claims. The secret sauce is that insurance is cheaper while you're still young, as it has lower premium charges.

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To conclude...

The earlier you start and the more conscious you are of your income and expenses, the more advantageous it is towards your retirement planning. Discipline and patience are key variables in the roadmap to a worry-free, strong financial retirement. The above-stated elements can help you develop some foresight into what steps are essential for retirement planning.

Therefore, the key takeaway is that you must maintain a sufficient post-retirement corpus to counteract the rapidly rising costs of living, increasing life expectancy, rising healthcare expenses, and the absence of any social security for the elderly. With the beginning of the new year 2023, take a step towards retirement planning, or later it will become nearly impossible to maintain a good lifestyle post-retirement.

Warm Regards,
Mitali Dhoke
Research Analyst

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