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Retirement is the phase of life that people want to enjoy after working hard throughout their lives. They wish to devote time to their family consisting of children and grandchildren. But to do that they should have enough money so as not to be financially insecure or keep looking for jobs till very old age. This can be easily achieved if a person starts to save for retirement right in their 20s. A long time horizon with proper planning leads to achieving the goal of financial independence.
During the lifetime there are many loans that a person may have to clear like student loans, credit card debt, housing loans, etc. but saving even a small amount for retirement from the 20s can make a huge difference for the future. When you are young and have fewer responsibilities it is easier to save money. The principle of compounding will come to effect as the initial savings get reinvested leading to a much bigger corpus by the time of retirement. The following things can be considered for early saving for retirement:-
Budget-
The first step is to prepare a monthly budget. This way you will be aware of the necessary expenses and places where you are spending unnecessarily. Do the right things by spending less on discretionary items, which will enable you to save enough money for investments.
What are your goals?
Set up realistic goals and expectations in life. If possible meet a financial advisor who will work out a plan for you. There are certain things that you should have in mind like when you plan to retire and the present income and expenses. It can be worked out how much to set aside every month for retirement based on the place where you wish to settle down. If you wish to settle in a metro city, then you will require a bigger amount after retirement than when you settle in a town or village. Plan the amount taking into view the insurance and medical needs.
There are benefits of early investments-
When people start earning in their career they may feel they have very less income and it is too soon to start planning for retirement as there is a whole life ahead of them. But starting to save early for retirement has its own advantages. There is the power of compounding that comes to play in your investments.
Compounding means you receive interest not only on the basic principal amount but also on the interest which keeps getting added up. It means reinvesting the earnings from the initially invested amount instead of spending it somewhere. In a year it may look like a small amount but over the years it can make a huge difference to the investments.
Let us take an example of Dinesh who invested a lump sum amount of Rs. 1,00,000 and will get an interest of 12% on his investment every year. We will see how much the amount he receives after 10 years. If he takes his interest amount of Rs 12,000 and keeps it aside he will have an amount of:-
1,00,000+ 120000= 220000 after 10 years.
But if Dinesh does not take out Rs 12,000 every year and let the power of compounding work for him his amount after 10 years would be=
1,00,000+ 2,10,585= Rs 3,10,585
Playing catch up-
Everything is not lost say if you start investing in your 30s. You have to start saving at some point in time for your retirement. Some people start saving for retirement in their 40s. But then it will be like playing a catch-up where you will have to contribute more amounts. By saving for retirement in your 20s you will have to invest significantly smaller amounts than when in the 40s, where you will have to increase your contributions. Compounding would have already done the heavy lifting financial work for you.
Where to invest?
There are different asset classes and each offers different returns according to the risk taken. If you have time on your side, like in your 20s, then you can create a portfolio with the highest returns. For short-term goals, the amount is usually kept in cash or cash equivalents so as to have a high level of liquidity. For long-term goals like retirement, the amount can be invested in assets that provide high growth.
The highest returns are provided by investments like stocks that carry a certain amount of risk. The lowest return is provided by investments that have the least amount of market risk. A person can design their portfolio according to risk tolerance so as not to cause any undue stress. It is therefore necessary for a person to be aware of the historical returns of the assets which will set a reasonable amount of expectations. It is much better to invest in stocks for good returns in your 20s as there is sufficient time for the stocks to recover in case there is a fall in the market.
Join your company’s retirement plan-
There are many companies that help their employees by having retirement schemes. When a person is in employment a part of their salary is deducted and deposited every month in the government scheme called the employees’ pension scheme (EPS). The employer also contributes to the employees’ pension scheme by a matching amount according to the government rules. A large corpus can be accumulated this way over the years and after retirement, the person will get a pension through the EPS account.
Don’t accumulate high debt-
Making delayed payments with credit cards can be quite costly and it is always wise to clear off the high credit interest and student debt as soon as you start earning. This way you can focus on saving more for your retirement. It is also prudent to have an emergency fund equivalent to six months of your expenses to help in case of an emergency.
Increase the contributions every year-
You may get an increment every year and an annual bonus. These can be utilized towards your retirement savings and over a period of time will help you fight inflation and accumulate a good corpus by the time of retirement.
In your 20s, retirement may look too far away to even contemplate saving as you may have many immediate responsibilities, but it is wise to start saving for retirement at the earliest. You can take the help of a financial advisor to manage long-term financial goals and plan out for retirement. By the time of retirement, you would have a good corpus and lead a stress-free life.