While your retirement might still be 20-30 years away, the right time to start working towards it is when you receive your first salary. If you believe that your late 30s and 40s are when you should start thinking about your retirement, the belief can make it very difficult for you to live the retirement of your dreams and also prevent you from experiencing several valuable benefits.
Here are some of the most significant drawbacks of delaying your retirement planning-
1. Lower Returns from InvestmentsOne thing common among most of the popular investment options such as mutual funds, direct stock investments, and bank FDs is the fact that the longer you remain invested in them, the better are the returns. By investing for your retirement in your 20s and early 30s, you’d be able to give much more time for your investment to deliver higher returns.
While it might not be possible for you to have a considerable amount in the earlier years of your employment for investments, it is essential to understand the purpose of retirement planning and start with whatever you can rather than delaying the decision. The early bird advantage can be significant.
Let us try to understand this with an example.
- How Does the Early Bird Advantage Work ? For instance, let us assume that there are two individuals, Ram and Shyam, aged 25 years who recently got employed. Ram started investing Rs. 1,000 every month in a mutual fund scheme as soon as he got the job and continued the same until he turned 45 years old. He stopped investing after 45 but continued to remain invested and decided only to withdraw the investment after retirement at 60.
Shyam also started investing Rs. 1,000 a month but started when he was already 35 years old and continued till he reached his retirement age of 60 years. While Ram invested Rs. 2.4 lakhs and Shyam invested Rs. 3 lakhs, even if they were able to get 10% annual returns, at retirement, Ram’s portfolio would be worth more than Rs. 31 lakhs while Shyam would have only generated around 13 lakhs.
Even though Shyam invested more money and for a longer duration, compounding and time worked in Ram’s favour who started early. So, rather than waiting for your financial health to improve, it is always better to start investing early and stay consistent with the same.
2. Cheaper InsuranceIf you are beginning to understand the importance of financial planning for retirement, you might also understand how important insurance like health insurance and life insurance are for every individual. With the rising cost of healthcare in the country, health insurance is an excellent way to keep your health and finances protected. Similarly, life insurance would ensure the financial security of your family after your demise.
But rather than purchasing insurance in your 40s and 50s, it is better to invest in them at an early age. As you are young and healthy in your 20s and early 30s, the premiums for these policies are cheaper too. Moreover, you can now also find health and life insurance products like ULHP and ULIP, which combine insurance with investment. If you want your insurance policies also to offer some returns, you can consider these options too.
3. Tax BenefitsMany of the retirement plans and investment plans in India also provide tax benefits. You also get tax-savings on health and life insurance policies under section 80C of the IT Act. So, by starting your retirement planning early, you not only get to generate considerably higher returns until the time you retire but are also able to reduce your tax burden.
If taxes are eating up a considerable portion of your income, it is time that you start knowing the facts about retirement planning and start focusing on them as soon as possible. If done correctly, throughout your professional career, this can help you save lakhs of rupees in taxes while also allowing you to live your retirement years exactly as you had always imagined.
4. More Time to Overcome MistakesThere is no denying the fact that the world of investment is a challenging one. You need a lot of knowledge and experience if you want to generate handsome returns. As a result, throughout your investing career, you are sure to make several financial mistakes, and some of them can also prove very expensive.
But when you understand the importance of retirement planning and savings from an early age, you get more time to overcome such financial mistakes. Apart from investments, even handling your day-to-day finances is an error-prone process. Start early, and you can have more time to work on your mistakes and be financially savvy by the time you reach your 40s and 50s.
5. Aggressive InvestmentThe rewards potential of any investment is tied to the amount of risk it carries. When you are young and have limited financial obligations, you can be a more aggressive investor and select investment options with higher returns potential. For instance, you can consider direct equity investments or small-cap/mid-cap equity mutual funds when you are young.
If you have selected the right stocks and schemes, your investment could generate excellent returns. But once you get older, say around 40-45 years old, it is better to have a defensive strategy for investment. Debt funds or bank FDs are the preferred options. While these are safer investment options, the returns potential is not as high as the aggressive options.
6. Avoid Unnecessary LoansUnfortunately, many people in India do not understand the facts about retirement planning and live above their means. They do not know what they can and cannot afford. To keep up with the high expenses, they often take unnecessary loans that put much stress on their finances. While getting a loan such as a personal loan is now easier than ever, it is best only to take one when there is an actual necessity.
Taking multiple loans or using multiple credit cards would sooner or later get you in a debt trap. If you don't have a solid financial plan, it can be challenging to get out of such traps. More importantly, this will also damage your credit score and make it difficult for you to get a loan in the future when you actually need one. Taking care of your finances from an early age will help you develop a sort of financial discipline and protect you from unnecessary debt.
7. Better Financial StabilityBased on all the points discussed above, you will also have far better financial stability throughout your professional career if you start planning your retirement from an early age. Knowing the purpose of retirement planning and saving and investing for the same will in a way create a financial safety net that could come in very handy if you are looking to change careers, do something of your own before or after retirement, and make other plans for the future.
In other words, by starting early, you get to enjoy peace of mind as your financial health would be more stable. This will also take off the pressure associated with taking quick retirement measures after you have reached the age of 40-50 years. Many times, the last minute rush results in severe financial mistakes as well. Starting early can protect you from these costly mistakes.
8. Retire SoonerWhen you are done with your financial liabilities and have adequate money to live your retirement years comfortably, you could also consider retiring early. By understanding the importance of retirement planning from an early age and executing a reliable saving and investing strategy, it can be easier for you to reach your retirement goal sooner in life. If a financially-independent and hassle-free retirement is what you are aiming for, there is no option better than starting early in life. Plant the seed now so that it provides you with the expected fruits in the future.
Start Small But Start EarlyAs you can see, not starting your retirement planning early in life could lead to several serious problems. While you might surely be caught up with your priorities like purchasing a vehicle, a new home, raising your family, and all the other things that can make your life more rewarding, it is essential to learn the importance of retirement planning and savings as soon in life as possible.
It is only by starting early, that you will have adequate time to plan, make mistakes, make your life financially stable, earn higher returns, and live the retirement of your dreams. If you don't know where to begin, you can also consult a professional financial advisor or a reputed financial service provider.
This will allow you to put your retirement plan into action while keeping you protected from costly mistakes. Only trust reliable advisors and financial institutions for the same so that you are actually able to create and execute a retirement plan that will help you enjoy the golden years of your life in the best way possible.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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