Life expectancy has increased in current times, which means people are living longer than before. So unlike before the life span after retirement is not restricted to 10-15 years but may go on for a longer time. This fact coupled with other factors like breakdown of traditional family set up, rising medical cost; ever increasing inflation means robust retirement planning is a must for one to survive with dignity once they stop earning.
When to Start Retirement Planning?
Often one may assume that they have a lot of time for their retirement planning so it can wait and the initial years are meant or splurging. However this is not the case, ideally one should start when they are in their 30s and here is why.
Starting Early Means You Can Take Risks:
We are all aware of the maxim which says higher the risk, higher the return. There is another principle one must follow while make their investment choices; one should focus more on high risk, high return instruments while they are young. Proportion of high risk instruments in the portfolio should be reduced as one grows older. Thus if you start your retirement planning in your 30s you will have sufficient time to invest in instruments that offer you high returns before you shift to lesser risky and lesser lucrative investment options.
Power of Compounding:
Corpus at 60 (Rs. 50k invested @ 8%/annum)
Started at 30
Started at 35
Started at 40
When you start investing in your 30s the power of compounding works in your favor as even a small amount invested will yield much better results due to the compounding factor. The table alongside illustrates this. If an amount of Rs. 50000 is invested at the age of 30, the corpus at retirement is Rs. 5.4 lakh. This is 50% more than the corpus if the person makes the investment 5 years later and 125% more than the corpus if the investment is delayed by 10 years.
Better Debt Planning:
Starting in your 30s means you can plan your debt in a more of organized and relaxed manner. It’s prudent to pay off all your loans before you approach your retirement age. In your earlier years you may have debt like education loan to pay off, so before you apply for any further debt like personal loans or auto loans make sure you are over leveraging yourself. Getting a home loan at an early stage can help you in more efficient tax and debt planning but you should always factor in the growth that you expect in your income vis-à-vis the growth in your expenses and liabilities before you acquire any fresh debt especially the one as big as a home loan.
Sufficient Time for Course Correction:
Starting in your 30s also gives you sufficient time to evaluate your progress and make changes in a timely fashion if required. Often you may start retirement planning without putting much thought into it, starting early means that one can assess their plan and see if they are investing enough or are they investing it in the right way. If you feel that something is amiss then you can make the necessary changes and still have some time to see their positive impact. The later you start the lesser chances you have of making an impactful change. Staying credit healthy should be a part of your financial planning at all stages, for this you can access your free CIBIL Report from time to time and assess your credit health. Looking at the report also lets you assess your overall debt situation.
Get set and go, start your retirement planning right away.
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