I am still young; retirement planning can wait until I have reached middle age.
For most young professionals in India, career progression takes precedence over retirement planning. Indeed, most don’t begin to think of retirement planning until they reach middle age (40-45). But is that good enough? Not really. By starting early, you can considerably reduce the amount you need to save every month to reach your target retirement pool.
Here’s an illustration: Sumit and Vineet, both professionals, wish to have a retirement kitty of Rs 1 crore when they retire at the age of 60. Sumit is 45 years old and is 15 years away from retirement. On the other hand, Vineet is 25 years old and has just begun his career. Assuming that both can deploy their monthly savings in an investment scheme that provides 12% growth per year, the chart shows how the required monthly savings increases the more you delay saving. Vineet needs to save only Rs 1,555 per month compared with Sumit’s Rs 20,017.
Retirement savings account for a greater percentage of your earnings the more you delay. If we assume that Vineet earns Rs 500,000 a year at the age of 25, the required annual savings of Rs 18,660 is only 3.73% of his income. On the other hand, assuming Sumit earns Rs 15,00,000 a year, the annual savings of Rs 2,40,204 is 16% of his income. Sumit’s situation is further complicated by other costs such as children’s education among others. Another challenge is exigencies such as medical expenditures and inflation-caused reduction in purchasing power. To ensure that the corpus is big enough to solve these problems, investors are advised to begin saving early in life so that they can enjoy the power of compounding.
Opt for asset classes that are suitable for your risk profile. Monitor your portfolio regularly and rebalance if necessary. Mutual funds are a good retirement planning tool as they offer different products that cater to investors with varying risk-taking abilities and are professionally managed. Their systematic investment feature is a good choice for investors who do not wish to shell out a large sum of money upfront.