Planning for retirement is not something you should put off until later in life. With life expectancy on the rise, experts now predict that in India, people could live from the current average of 72 years to as much as 82 years or more by the end of this century, you might find yourself living for 15 to 20 years after you retire. If you plan to stop working around the age of 60, those extra years need to be supported by a healthy nest egg. The sooner you begin planning, the easier it is to secure a comfortable future.
Many people delay thinking about retirement because other financial goals, such as funding a vacation, paying for children’s education, or buying a home, seem more urgent. It is common to see individuals focusing on these immediate needs and postponing retirement savings until they reach their 40s or even 50s. At that stage, daily expenses and responsibilities often leave very little extra money for saving. The problem with waiting, however, is that time is a crucial ingredient in building wealth.
In this blogpost, let’s delve deeper to understand how this retirement planning works.
Table of Contents
The Magic of Compounding and Its Impact
When you start early, you benefit from something called compound interest, a powerful financial tool that can make even small, regular contributions grow significantly over time. Compound interest works like this: the money you invest earns returns, and then those returns begin to earn returns as well. In other words, your earnings start to generate their own earnings, creating an exponential growth effect. This means that by starting to save at a young age, you give your money many years to grow, which can make a huge difference in the amount you accumulate by the time you retire.
Let’s break down the idea of compound interest with a simple example. Imagine you begin investing at the age of 25. Even if you only set aside a small amount each month, your investment has over 35 years to grow. By contrast, if you start saving at 35, you have only 25 years for your money to compound. Starting at 45 or 55 leaves you with even less time, meaning you will need to save much more each month to reach the same retirement goal.
For example, assume the following:
- Your planned retirement age is 60.
- You expect to live until 85.
- Inflation averages about 5% per year.
- Your investments yield about 12% per year before retirement.
- After retirement, your investments are in safer assets that yield around 6% per year.
Under these conditions, the amount of money you need to save every month increases significantly if you start later. A person who starts saving at 25 might only need to invest a relatively modest sum each month. However, someone who begins at 35 will almost have to double that monthly contribution. If you wait until 45 or 55, the required monthly savings jump to even higher levels. Although the total retirement fund might be larger for someone who starts early (because of the longer period for inflation to work on your expenses), the monthly burden on your budget is much lighter.
A Practical Comparison
To help illustrate this point, consider three individuals who want to retire at the age of 60 and maintain a lifestyle where they currently spend around Rs. 50,000 per month. They all expect the cost of living to rise by about 6% each year due to inflation. Here’s a simplified comparison:
- Starting at 25:
- You have 35 years until retirement.
- The future monthly expense at retirement is estimated to be very high due to inflation, and you might need a total corpus of around Rs. 7.68 crores.
- However, the monthly investment required to achieve this goal might be as low as approximately Rs. 14,080.
- Starting at 35:
- You have 25 years until retirement.
- Your future monthly expenses would be lower in absolute terms than those of the 25-year starter, but inflation still has a significant effect.
- The total corpus required might be around Rs. 4.29 crores, and the monthly investment needed could be about Rs. 25,453—almost double the amount required for the 25-year-old.
- Starting at 45:
- With only 15 years until retirement, you have much less time for your investments to grow.
- The corpus needed might be around Rs. 2.39 crores, but the monthly contribution required could jump to about Rs. 50,833.
| Age (at present) | 25 | 35 | 45 |
| Time to retirement (retirement age is 60 years) | 35 | 25 | 15 |
| Current Monthly expenditure | 50,000 | 50,000 | 50,000 |
| Expected Inflation | 6% | 6% | 6% |
| Monthly expenditure at retirement | 3,84,304 | 2,14,594 | 1,19,828 |
| Corpus to be accumulated | Rs. 7.68 crore | Rs. 4.29 crore | Rs. 2.39 crore |
| Monthly investment required (Rs.) | 14,080 | 25,453 | 50,833 |
Even though the younger saver has a larger total target due to the longer period of inflation, they benefit from a much lower monthly commitment. This example clearly shows that the earlier you start, the easier it is to meet your retirement goals without putting a huge strain on your current finances.
Taking Advantage of Investment Opportunities
Starting your retirement savings early also allows you to choose a more aggressive investment strategy. When you have many years ahead, you can afford to invest in assets that might be riskier in the short term but offer the potential for higher returns over the long term. This might include investing in equity mutual funds or other market instruments. With a long-time horizon, you can ride out the ups and downs of the market and benefit from the long-term upward trend of these investments.
In addition, early savers have the flexibility to make tactical adjustments to their investment portfolios. Over a long career, you will encounter various market cycles, and having a long-term perspective allows you to adjust your strategy to take advantage of these cycles. You can also benefit from various government-sponsored schemes that offer tax breaks, such as the Public Provident Fund (PPF) and the National Pension System (NPS). These instruments are designed to reward long-term saving with tax benefits and stable returns, making them excellent tools for retirement planning.
Managing Financial Setbacks Without Derailing Your Future
Life is full of surprises, and sometimes unexpected events such as medical emergencies or sudden job losses occur. When you start planning for retirement early, you are more likely to build up a financial cushion that can help you during these tough times. If you have a sufficient emergency fund, you won’t be forced to dip into your retirement savings, which are meant for your future. Ideally, it is recommended to maintain an emergency corpus that covers at least six months of expenses.
Consider a situation where you lose your job for a few months. Without an emergency fund, you might have to withdraw money from your retirement account to meet your monthly obligations, such as paying rent or EMI instalments. If you have been saving for retirement for many years, you can set aside a separate fund for emergencies. This way, you can deal with unforeseen circumstances without affecting your long-term savings goal.
However, if you do end up needing to use a part of your retirement savings during a crisis, it is important to have a plan to replenish that money as soon as you are back on your feet. For instance, if you normally contribute Rs. 15,000 per month to your retirement fund and you withdraw an amount equivalent to four months of expenses during a job loss, you will need to temporarily increase your monthly contributions to catch up on the lost savings. This extra effort might be manageable if you have built the habit of saving early in your career.
Planning Step by Step for a Secure Future
Before you even start contributing to your retirement savings, you need to map out a clear plan. Here are some steps to help you begin your journey:
- Determine Your Retirement Goals: Start by asking yourself what kind of life you want after retirement. Do you want to travel the world, live in a peaceful countryside, or continue pursuing hobbies and learning new skills? Understanding your desired lifestyle will help you estimate how much money you will need.
- Estimate Your Future Expenses: Think about your current monthly expenses and factor in inflation. It is crucial to project what your expenses might look like in the future, as the cost of living tends to rise over time.
- Set a Target Corpus: Based on your future expense estimates, determine the total amount you will need to have saved by the time you retire. This target corpus should be large enough to support your lifestyle throughout your retirement years.
- Decide on Your Investment Strategy: With a long investment horizon, you can afford to take on more risk for potentially higher returns. However, it is important to diversify your investments. This means spreading your money across different types of assets, stocks, bonds, mutual funds, and fixed deposits, to reduce risk and ensure stable growth over time.
- Plan for the Unexpected: Create a separate emergency fund that can cover at least six months of your expenses. This fund will provide a safety net in case of job loss, medical emergencies, or other unexpected events, so you won’t have to withdraw from your retirement savings.
- Review and Adjust Regularly: Life changes, and so do financial markets. It is important to review your retirement plan regularly and adjust your savings or investment strategy as needed. This will help you stay on track with your goals, even if your circumstances change.
The FIRE (Financial Independence, Retire Early) Approach
For some, the idea of early retirement is not just about planning for the traditional retirement age but about achieving financial independence as soon as possible. This concept, often called FIRE (Financial Independence, Retire Early), involves saving aggressively during your working years so that you can retire much earlier than usual. While FIRE may not be for everyone, it highlights the benefits of starting early and maximizing the power of compound interest.
Even if you are not aiming to retire very early, adopting a FIRE mindset can still be beneficial. By saving more aggressively and investing wisely from a young age, you create a robust financial foundation that can make your retirement years much more comfortable. The extra discipline in managing your money during your working years ensures that you have ample resources to enjoy your later life without financial stress.
In Conclusion: Secure Your Golden Years
Retirement planning is not a one-time task, it is a continuous process that spans many years or even decades. The habits you form early in your career will have a lasting impact on your financial health later in life. By making retirement planning a priority from a young age, you are setting yourself up for a future where you can enjoy the fruits of your labour without worrying about money.
The bottom line is that there is no time like the present to start planning for your retirement. With increasing life expectancies and the inevitability of inflation, the cost of living in your retirement years will be higher than it is today. By starting early, you not only allow your money to grow through compound interest, but you also gain peace of mind knowing that you are prepared for the challenges and opportunities that lie ahead.
Take that first step now, and watch as your savings grow over the years, providing you with the freedom and security to live the life you’ve always dreamed of in your later years.
You can also check out my other blogpost on the three important factors that we need to consider during retirement planning.
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