Starting retirement investing at 40 with no corpus? Why chasing high returns could backfire, and what to do instead

Starting retirement investing at 40 with little or no existing corpus can make the goal look daunting, particularly when retirement may be only 15 years away. But a shorter investment horizon does not necessarily mean investors should chase aggressive returns.

Instead, the focus should be on calculating the retirement corpus required, investing a larger amount consistently and gradually reducing risk as retirement approaches, according to Krishanu Choudhary, Director & Unit Head, Anand Rathi Wealth.

Start with the retirement corpus, not returns

The first step for someone starting at 40 should be to determine how much money will actually be needed at retirement. This should factor in expected retirement expenses, inflation, existing assets and liabilities, as well as the number of years left until retirement.

For instance, if a 40-year-old expects to retire at 55 and needs ₹50,000 a month for living expenses in today’s terms, that expense could rise to around ₹1.4 lakh a month in 15 years, assuming 7% annual inflation.

“Once the goal is defined, the investor should identify the monthly investment required to reach it rather than focusing only on generating higher returns,” Choudhary said.

Starting at 40 still gives an investor a meaningful investment horizon, but the shorter period of compounding makes disciplined and consistent investing more important.

Don’t take excessive equity risk to make up for lost time

A common mistake among late starters is to assume that they need to take significantly higher risks to compensate for the years they did not invest.

Choudhary cautioned against this approach. Taking aggressive or speculative bets can increase portfolio volatility and expose the investor to the possibility of a large loss, particularly when retirement is getting closer.

Instead, investors should align asset allocation with their risk profile and retirement horizon. Increasing the amount invested, using annual step-ups and controlling expenses can help build the corpus without relying on unusually high returns.

For someone starting at 40, the ability to save more as their income rises can be a more sustainable way of addressing the shorter compounding period.

Use different investment buckets for different goals

Rather than using one asset allocation for all financial goals, investors can divide their money into separate buckets based on when the money will be required.

For short-term goals, Choudhary suggests keeping the allocation entirely in debt. For medium-term goals, an allocation of around 60% equity and 40% debt can be considered.

Retirement, being a long-term goal, can have a higher equity allocation. Choudhary suggests that an investor could start with an allocation of around 80% equity and 20% debt for the retirement bucket, depending on their risk profile.

However, this allocation should not remain unchanged as retirement approaches. Investors should progressively move money into safer assets so that a market correction immediately before retirement does not significantly affect the corpus.

One approach is to shift an amount equivalent to one year’s retirement expenses from equity to debt each year before retirement. Withdrawals can then be made from the debt portion, allowing the equity allocation more time to recover from market volatility.

Higher savings can matter more than higher returns

For a 40-year-old starting from scratch, increasing the investment amount can be a more practical way to compensate for the shorter compounding period than taking additional investment risk.

Investors at this stage may also have greater earning capacity than they did earlier in their careers. This creates an opportunity to allocate a larger portion of their income towards retirement savings.

Annual step-ups in investments can therefore play an important role. Instead of attempting to generate exceptionally high returns, investors can increase their contributions as their income rises while keeping the portfolio aligned with their risk tolerance.

Choudhary also recommends maintaining an emergency corpus equivalent to around one year’s expenses. This should include recurring commitments such as insurance premiums, children’s tuition fees and house rent.

For a late starter, the key challenge is not simply to find investments that can deliver higher returns. It is to determine the required corpus, save enough to reach it and ensure that the portfolio does not take excessive risk as the retirement date gets closer.