A Step-by-Step Guide to Retirement Investing

Authored By: Yogesh is a Co-Founder at Appreciate, a fintech platform helping Indians achieve their financial goals through globally diversified one-click investing.

Planning for retirement doesn't have to be challenging. Follow our detailed guide to investing for retirement, including tips on asset allocation, risk management, and more.

Are you thinking about how you'll enjoy your golden years? Retirement planning is a must for a secure future. Understanding the basics of retirement investing is the first step toward achieving a worry-free retirement.

Imagine living your retirement years exactly as you've dreamed, without financial worries. Sounds good, right? Yet, according to a recent survey, 80% of working-age individuals in India are not saving for their retirement.

Keep reading to find out how to set your retirement goals.

Setting Retirement Goals

Consider your current lifestyle, inflation, and future medical expenses. For example, if you wish to retire at 60 with a monthly expense of ₹50,000 (adjusted for 6% annual inflation), you would need approximately ₹2.16 crores to support a 20-year retirement period.

The below table should be adapted based on individual circumstances, including changes in income, investment opportunities, and personal goals.

Choosing Investments for Your Retirement Account

Stocks, Mutual Funds and Bonds

• When you buy stocks, you own a piece of that company. Over time, your stocks can grow in value along with the company. For example, well-known companies like Infosys and Reliance Industries are popular choices among Indian investors for their proven track records. As of early 2024, Reliance Industries has shown significant growth, with its stock price appreciating by 36.73% over the past year.

• Bonds are like loans you give to the government or companies; in return, they pay you back with interest. They are generally safer than stocks because they offer fixed, regular returns. Government bonds like the Indian Government Securities (G-Secs) are a go-to for those looking for stability in their investments. The average returns on Indian government bonds, as of early 2024, vary by maturity but generally offer yields of around 7%. For instance, the yield on the 10-year Indian Government Bond is approximately 7.114%.

• Mutual Funds are pools of money collected from many investors to invest in stocks, bonds, or other assets. They are managed by professionals who choose the investments on behalf of investors.

For retirement savings, mutual funds that focus on a mix of stocks and bonds are often recommended to balance the risk and returns. Examples include the HDFC Balanced Advantage Fund and the ICICI Prudential Equity & Debt Fund, which have consistently performed over the years.

The Importance of Low-Cost Index Funds

Index funds track the underlying index to replicate the returns, like the Nifty 50 or the BSE Sensex. They are known for low costs because they don’t require active management. They simply mirror the index they follow.

One of the key benefits of low-cost index funds is that they offer a way to invest in the stock market without picking individual stocks. This reduces the risk and complexity of investing.

For instance, the UTI Nifty Index Fund and the SBI Nifty Index Fund are popular choices among Indian investors for their low expense ratios and solid track record of mirroring the Nifty 50’s performance.

For December 2023, the SBI Nifty Index Fund Direct-Growth showed a return of 7.91%, outperforming the Nifty 50, which had a return of 7.22% for the same period.

Common Retirement Investing Mistakes to Avoid

• Investing based on emotions rather than a well-thought-out plan can lead to rash decisions, like selling stocks during a market dip or buying during a peak. The average investor's returns are significantly lower than market indices, primarily due to emotional decision-making.
• For instance, the S&P 500 had an average return of about 10% over the last 30 years, while the average equity fund investor saw returns of just around 4% due to poorly timed buy and sell decisions.
• High fees can eat into your retirement savings, reducing the money available for investment. The average expense ratio for an actively managed equity fund was about 0.68% in 2022, while passive funds were much lower. Compounded over time, even a 1% difference in fees can significantly reduce portfolio value.

Final Thoughts

Choosing the right investments for your retirement account requires a balanced approach. Stocks, bonds, and mutual funds each offer different benefits and risks. Low-cost index funds, particularly, provide a cost-effective way to gain market exposure. Understanding these options and how they fit into your overall investment strategy allows you to set yourself up for a more secure financial future.

Platforms like Appreciate Wealth, the best trading app, offer an accessible way to build a retirement portfolio that aligns with your financial goals. They simplify the process, helping you avoid common mistakes and ensuring your retirement planning is right.