Very often, people postpone planning for retirement till they are very close to it. But that can leave them severely under-prepared. Consider the following findings from the Old Age Social and Income Security (Oasis) Report.

• Life expectancy is going up. With advances in medicine and technology, the average life expectancy of an Indian is expected to rise to 75 years. And with time, this will only rise further.
• Savings alone may not be enough. A longer life means you will have to support yourself for that much longer to ensure a healthy and worry-free retirement. To keep ahead of inflation over such long periods, you may need to invest your savings for growth.
• Societal and cultural changes. As the joint family system is slowly but surely disintegrating, it is likely that you will have to fend for yourself after you retire.

The implication: you are likely to live at least 20-25 years in retirement with nothing but your investments to see you through.

If you want your retirement years to be carefree, you need to act now. The earlier you start, the better your chances of reaching your retirement goal. And you’re less likely to need major sacrifices to catch up later in life.

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The cost of delaying

” I am too young to bother about retirement.”

The sooner you begin setting aside money for your retirement investments, the better off you’ll be. The longer you wait, the more sacrifices you’ll have to make to catch up. That’s because of the power of compounding—your investments earn income, and that income earns income, and that income earns income. See the Relevant Links box for a link to more information about this phenomenon.

Consider Preeti and Rohit who plan to retire at the age of 60. Let’s assume their accounts each earn 15% annually.

• Preeti started investing at the age of 25. She invested Rs.10,000 each year for 10 years and then she stopped contributing.
• Rohit started investing at the age 35 and then invested Rs.10,000 each year for 25 years.

What happened when Preeti and Rohit reached 60 years?

• Preeti’s investment of Rs.1 lac has grown to Rs.76.9 lacs.
• Rohit’s investment of Rs.2.5 lacs has grown to only Rs.24.6 lacs.

 

Why Start Investing When You’re Young Based on an average annual return of 15%. Preeti, Age 25 Rohit, Age 35 Invests Rs.10,000 annually for 10 years for a total investment of Rs.1 lac Stops contributing at age 35 and let’s the money grow until age 60. At age 60, Preeti’s account total is: Rs. 76.9 lacs Invests Rs. 10,000 annually for 25 years for a total investment of Rs. 2.5 lacs. Started 10 years after Preeti, but invests every year until age 60. At age 60, Rohit’s account total is: Rs. 24.6 lacs

As you can see, although Preeti contributed for 15 less years than Rohit and invested Rs.1.5 lacs less, she accumulated Rs.52.3 lacs more than Rohit because she started investing 10 years earlier and had more time for compounding to work for her.

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“I don’t have enough money to invest for my retirement.”

Most people don’t start investing for retirement right away because they don’t think they have enough money to start. A large initial commitment isn’t necessary.

Making regular monthly contributions, however small, often works just as well in the long run. That’s called rupee-cost averaging, a great strategy for building a nest egg gradually.

You put the same amount of money away each month regardless of stock market conditions. While this doesn’t assure a profit always, it helps you ride out the downturns and should ultimately increase the value of your investment.