Imagine living the same lifestyle you are living while working even after retirement. Retirement planning helps in maintaining your lifestyle even when you stop receiving the message ‘SALARY CREDITED’ in your message inbox. A retirement plan is all about knowing how much you need to save to ensure that you can live comfortably for the rest of your life. While your retirement may seem like a long way off, there are many benefits of retirement planning at an early age.
– Why Do You Need Retirement Planning?
It helps you to protect your financial well-beings even as you grow older. Retirement planning allows your savings to grow steadily so you can keep up with the rising cost of living in future due to inflation.
– Significance of Retirement Planning:
Inflation: Retirement planning helps combat the decrease of purchasing power caused by inflation and ensures that your savings grow at a rate that outpaces rising prices.
Increasing Medical Expenses in Old Age: As you get older the medial expenses may increase or change. You may have a medical insurance and also enough corpus to meet all your big or small health issues.
Maintaining your lifestyle: This is also one of the important parts to consider while retirement planning. Retirement planning helps you to maintain a good lifestyle even after your regular income stops.
Fulfil Your Retirement Goals: It happens that people believe in ‘Work now, Enjoy later’ theme. With a proper retirement plan people can fulfil their goals efficiently even after retirement. It may be going on vacations, pursuing a hobby etc.
Peace of Mind: Your peace of mind is priceless. Worrying about managing money to cover both short-term and long-term expenses can be stressful. Stress can lead to serious health issues in old age as well. It’s crucial to prevent yourself from these types of challenges.
– How Retirement Planning can be done?
An individual can have multiple goals allocated to their portfolio like marriage, paying for child’s education or other financial obligations. It is important to identify the percentage of an investor’s assets allocated to retirement while assessing their portfolio. The amount of money that will go towards retirement must be determined from this.
Assumptions about inflation rate, expected returns on debt and equity, asset allocation mix and life expectancy need to be made in order to determine retirement needs. One can back-calculate the amount of annuity the individual could receive from the retirement corpus by taking into account the existing money, predicting returns and length of retirement.
Illustration:
For example, an individual’s current salary at the age of 40 years is Rs.1,00,000 p.m. and his/her monthly expenses are approx. Rs.60,000, we can take into consideration that their future expenses maybe Rs.100,000 p.m. Here, the person would need a corpus of at least Rs.2 crores to sustainably withdraw Rs.1 lac per month, considering a 6% annual withdrawal rate.
The individual can therefore do an SIP of Rs.35,000 starting from now and will have a corpus of approximately Rs.2.25 crore by the time he/she becomes 56. After that the individual can go for SWP (Systematic Withdrawal Plan) from the generated corpus once they retire to live a stress-free life.
Further, starting the retirement plan early has tremendous benefits. This can be easily explained with the help of the following example:
– Illustration of How Retirement Planning Will Work at an Early Age v/s at a Later Age
PARTICULARS | AT AGE 25 YEARS | AT AGE 35 YEARS |
Payment Frequency | Monthly | Monthly |
Investment Amount (Rs.) | 35,000 | 35,000 |
Expected Return Rate | 13% | 13% |
Time Period (Years) | 30 | 20 |
Invested Amount (Rs.) | 1,26,00,000 | 84,00,000 |
Future Value (Rs.) | 15,47,22,641 | 4,00,93,170 |
From the above table, we can see that both the investors want to retire at the age of 55 years, but the person who starts to invest at an early age of 25 years with an SIP of Rs.35,000 for 30 years has substantially higher corpus as compared to the investor who starts investing at the age of 35 years for 20 years with an SIP of Rs.35,000. This clearly indicates that starting early will give you higher corpus as compared to starting later.
It is important to maintain diversification for the portfolio. However, when you are younger, you can go for higher equity and lesser debt allocation.
Conclusion:
From the above, we can conclude that Retirement Planning at a young age is very favorable. However, it’s never too late to start for retirement planning, you maybe 45+ still you can go for retirement planning. ‘IT’S NEVER TOO LATE’. So, start your retirement planning now, if you want to live a stress free in your old age!
To understand more on the topic as well as to start investments please feel free to contact us:
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The article is authored by Ms. Ritika Sharma from Team RichVik.