An often-heard excuse for putting off retirement planning is 'I have enough time to go before I retire, so why rush?' Sadly, most fail to realise that procrastination is their biggest adversary when it comes to making retirement plans.
In fact, starting early and ensuring that you have sufficient time on your side is the key to successful retirement planning. In this article we will discuss how making an early start can be advantageous in more ways than one and also the pitfalls of not making an early start.
Greater flexibility
Having adequate time grants a degree of flexibility to your retirement plans. It gives you the opportunity to explore various investment options and avenues. For example, among asset classes, equities are known to outperform others like gold, property and bonds over longer time frames. The key is 'longer time frames.'
However, over shorter time periods equities can be the most volatile asset class. Hence if you wish to gainfully utilise the power of equities, making an early start is imperative.
Power of compounding
The single biggest advantage that can be derived from making an early start is the opportunity to benefit from the power of compounding. Put simply, this is the ability of an asset to generate returns, which are reinvested for generating more returns.
Longer time horizons enhance the compounding benefits. An illustration will help us better understand the same.
Raj and Jai (both 30 years of age), wish to make investments to build a corpus for their retirement. Raj starts immediately with annual investments of Rs 10,000 earning a return of 8% pa.
On the other hand, Jai procrastinates and starts investing after 10 years. However, to make up for the lost time, he invests twice the amount, i.e. Rs 20,000 at 8% pa. Both the individuals would like to retire at the age of 60 years, giving Raj an investment horizon of 30 years, while the same is 20 years for Jai.
|
|
Raj |
Jai |
|
Amount invested (Rs per annum) |
10,000 |
20,000 |
|
Tenure of investment (years) |
30 |
20 |
|
Returns (% per annum) |
8 |
8 |
|
Maturity amount (Rs) |
1,132,832 |
915,239 |
At 60 years of age, Raj has a corpus of Rs 1,132,832 as compared to Rs 915,239 accumulated by Jai. Despite doubling the investment amount, Jai fails to match the sum amassed by Raj.
The longer investment tenure (30 years vis-à-vis 20 years) makes all the difference. The message is clear -- give your investments sufficient time to grow and you can gain from the power of compounding.
For those who come in late
Those who delay their retirement-related investments are likely to have a tough time in meeting their defined objectives.
Suppose you decide (after taking into account your present income and expenses, the likely increase in both) that on retirement you will need a corpus of Rs 2,500,000. We will assume that investments made will yield a return of 12% per annum. Now let us consider 3 scenarios, wherein you are 30 years, 20 years and 10 years away from retirement.
|
|
Case 1 |
Case 2 |
Case 3 |
|
Target amount (Rs) |
2,500,000 |
2,500,000 |
2,500,000 |
|
Tenure (years) |
30 |
20 |
10 |
|
Returns (%) |
12 |
12 |
12 |
|
Annual investment (Rs) |
10,359 |
34,697 |
142,460 |
|
Monthly investment (Rs) |
819 |
2,744 |
11,265 |
In case 1, the monthly investment amounts to approximately Rs 819; however with passage of time, it grows exponentially.
As a result if you start investing for retirement, 20 years before the due date, Rs 2,744 will be the monthly investment amount.
Finally in case 3, when there are 10 years left for retirement, the monthly investment required will be Rs 11,265.
With lesser time at your disposal, a higher amount has to be set aside for meeting your retirement needs. Not only can the same be tough on the wallet, for some it may not be a feasible option. As a result, the pre-determined investment objective might have to be toned down.
Moral of the story: Not only does it pay to start early, delaying the same can cost you dear!
We have discussed how it helps to start early and how not starting early could prove to be an expensive proposition. But there is also a need to understand why many fail to get started.
At times individuals are not able to set aside the requisite amount of money needed for their retirement. They can contribute only a part of it, not all. As a result, they end up postponing their plans. In our view, this is a wrong approach.
Instead, the right course of action is to start off with what you have and make up for the deficit at a later stage. On the other hand, if you decide to simply wait for an 'opportune' time, it might be too late by the time you start.
Another reason is that a significant amount of money is often spent on providing for one's present lifestyle i.e. shopping and entertainment binges, leaving very little for retirement. While the importance of satisfying present needs cannot be denied, it does make imminent sense to take care of your future as well. You should strive to strike a balance between the two.
Finally, perhaps, making a retirement plan and putting money aside for the same acts as a reminder of the eventuality -- retirement. Maybe the thought of growing old and leading a rather sedentary lifestyle brings with it a certain degree of discomfort and discourages some from working towards their retirement plan.
However such a mindset needs to change. Looking the other way will only worsen the situation. The solution lies in accepting retirement as an eventuality and being adequately prepared for it. And making an early start is your best bet at being prepared!
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