Whenever we talk about retirement savings, more we get worried about how we will meet our needs after retirement. Even with falling interest rate, it is deep belief among Indian investors to invest in lower risk products.
Impact of this obsession is terrible.
The reason is, everyone ignores the biggest threat of investment i.e.Inflation. If investor ignores the effect of inflation on retirement savings then he is heading towards old age poverty.
Where investor does not tolerate even a minor fall in the nominal value of investment, what they ignore is inflation is constantly reducing investment’s real value by about 3.5% to 5% every year.
Generally, people talk about risk in terms of volatility. For a long term investment, short term volatility is not concern. A typical fixed income option gives a yield of around 8%. Where an investment of around ₹10,000 per month will give around ₹18 lakh to ₹19 lakh, equity fund would grow till ₹25 lakh for the same period i.e.return of around 14%. So it can be safely said that equity option will generate about 2.5 to 3 times more returns than what fixed income option would generate.
Time horizon for retirement is much longer than we think. You will use this investment earning when you are 65, 75, 85 year old or in some cases beyond that too. From 60 years till the end of your life, It can be around 30 to 35 years i.e. Almost as much as your work life period. By the time of retirement, prices of goodies will go up to 5 to 6 times or even more. In addition to this, unpredictable medical bills would be an additional trouble.
Investors must take care of all this points before they invest and should not trap in conventional thinking.