Retirement planning is the most important financial aspect in one’s life, but it has the least priority among most working youngsters.
Life is full of complexities, all are busy with their lives. Individuals don’t have time to plan and they take it too easy. Adulthood is indeed an important stage of one’s life and it is imperative to plan for the future. This is the stage where one can work hard and save money and invest for long term goals like retirement. Unfortunately, one seldom pays much emphasis on. In fact, it has been observed that today’s young generation doesn’t pay much attention to it.
Retirement planning should be the most vital goal of any individual. It is one of the most important parts of the overall financial planning graph.
While retirement as a term sounds very long distance in one’s life; however, the judicial move will be to start planning for it from the day you get your first salary. It should be a part of your intentional living.
Below are the broad reasons why one should start planning for retirement from an early age:
To maintain a decent lifestyle so that once you are retired you don’t compromise on the quality of life and you continue to live the same way as you do now. In order to have this, one has to have a substantial corpus ready at the time of retirement.
The other important factor is life expectancy. It is seen that life expectancy in India is increasing day by day with the advent of new medical technology. So, it is imperative to have a solid financial cushion which would help them to live without any stress post-retirement. The corpus built over these years will also help if a retired individual has to undergo any medical treatment.
Saving and investing early will be your Trump card which can be used later on in life. Investing early is smart work. For instance, let’s understand this with two extreme cases - Arihaan and Aakash.
Both start work at 20 and want to retire at 60. The market returns 12% a year, compounded monthly.
Arihaan at 20 years of age starts investing Rs 10,000 per month for the next 30 years but leaves the money in the market for the next 10 years till retirement.
Aakash waits 10 years and starts investing Rs 10,000 at 30 years of age for the next 30 years till retirement.
Who ends up with more money:
Arihaan invested Rs 36 lakh and made Rs 11.2 crore. Aakash also invested Rs 36 lakh and made Rs 3.43 crore.
The huge difference between Arihaan and Aakash is the delay cost. Even though they invested the same amount but Arihaan started investing early and invested till he was 50 years old and kept his money invested till 60 and the money kept on compounding, whereas Aakash started investing when he was 30 years old and he lost 10 years of initial compounding.
We can clearly see that investing early produce great fruits. Power of saving and investing early is massive.
Now that we have established an understanding of the importance and the requirement of a sound investment and retirement plan, let’s look at the avenues to do so. With regard to retirement planning, there are few financial instruments where one can invest for long term. They include- stocks, mutual funds and insurance. Since it is a long-term investment goal you can consider buying good large-cap stocks with strong and quality management and fundamentals as they give high dividends and their value also grows with time.
The stocks of these companies should have good corporate governance, you should also look at the consistency of returns before selecting a stock.
Mutual funds are another vehicle where you can invest lump sum as well as in a monthly mode. The similar rule applies in this case also. You should look at a mix of funds like large-cap, midcap, diversified and small cap. For this, you can take the help of your financial advisor who will guide, monitor and rebalance the retirement portfolio.
One has to be pragmatic when it comes to saving and investing for your own retirement. The key mantra is to start saving and investing the instance you start earning. It sounds bizarre initially when you think of retirement when you are just starting out in the career.
Happy investing!
(The writer is managing partner at Aaneev Wealth)