Retirement planning is the most important aspect of financial planning. It should begin the day you start earning.
For most people, retirement means switching the daily grind with an easy-paced life. Going out of the work force may mean there is no regular income. You, as a retiree, will be dependent on your savings, investment, and pension. Therefore, you must plan ahead: Think of your income needs and expenses during your retirement years. It is important you get your calculations right. Your future self depends on you. There are several myths about retirement planning. Let’s look at a few well-known ones to understand why you must lose no time in kicking off your retirement fund.
MYTH: YOU CAN ALWAYS START LATER
In investment, the time you remain invested is as important as the rate of return you earn. This is the power of compounding. Let’s say you — a 30-year-old — has decided that your retirement corpus needs to be Rs 5 crore by the time you reach 60. If you invest Rs 15,000 per month with a returns expectation of 12 per cent a year, you can create a corpus of Rs 5.29 crore in 30 years. But if you start the same investment plan only five years late at 35, you will end up with just Rs 2.84 crore in 25 years. This is the power of compounding. The sooner you start, the better. The ideal age to start a retirement fund is as soon as you start earning.
MYTH: YOU NEED MORE INCOME
Many think they can delay investing for retirement till a time they have higher disposable income. Thinking this way is a folly. You must save and invest a portion of your income regardless of its size. A portion of your income needs to be allocated towards long-term investments. Let’s say you are 25 years old intending to retire at 60. Start by investing Rs 3,000 a month with a returns expectation of 12 per cent a year, and step up your investment by 10 per cent each year (thereby investing Rs 3,300 from the second year, Rs 3,630 from the third, and so on). When you retire 35 years later, you will still achieve a corpus of Rs 5.33 crore.
MYTH: I CAN DEPEND ON MY CHILDREN
You always could depend on the largesse of your children. But wouldn’t you want to retain your financial independence in retirement? In 2017, an RBI study on household income reported that more than 80 per cent Indians over 60 needed economic support from their children. In 2018, a study by HSBC revealed that 68 per cent expect support from children in retirement. These statistics are especially worrying when coupled with the trend of families going nuclear. A higher number of dependents may cause financial stress to a nuclear family that may be living in cramped urban dwellings dealing with high urban inflation. Therefore, it’s important that you plan you plan your own finances and live on your own terms.
MYTH: MY SHORT TERM GOALS ARE MORE IMPORTANT
It’s easy to treat retirement in the abstract — something that happens to other people that you needn’t worry about. Nothing could be further from the truth. Almost all of us will go out of the work force one day. While our short-term needs are legitimate and must be fulfilled, long-term planning cannot be ignored.
MYTH: SOMEONE ELSE WILL COVER ME
It’s not unusual to see our grandparents and parents receive a pension income from the government-owned businesses they may have worked for. In this day and age, few private sector jobs lead to pension incomes. So it falls on us to create that pension fund ourselves. We may also think that inheritance from our parents may solve most of our money problems. This may or may not happen. We also make the mistake of thinking that health insurance provided by our employer is enough and we fail to get our independent coverage. Every-one must own personal health policies to protect them even in retirement when their employer-provided coverage ceases.
Even if you are in your 20s or 30s, you need take charge of your retirement planning now. The sooner you start, the easier it will be for you later.
— The writer is the CEO of BankBazaar.com