In an online survey conducted by economictimes.com, more than 24% of the 2,578 respondents said they were saving less than 5% of their income for retirement. Another 25% are putting away 5-10% of their income for their sunset years. It is unlikely this will be enough to sustain their current lifestyles when they stop working.
A delay in planning your retirement may well be the costliest decision of your life for the following reasons:
- Time is against you i.e. even if you decide to start saving for retirement 10 years before the event, you would have lost the returns of compounding a concept in which when money is left to earn interest long-term, can grow exponentially because interest earns interest.
- At a later stage,your equity exposure will be low and is also advisable so, even if you decide to invest more the overall returns will just about beat inflation i.e. you will have more money in absolute terms but the real returns would in low single digits. If you park your money in bank deposits chances are your real returns will be negative since you most likely will be in the 30% tax bracket by then.
- Your choices are limited i.e. you can either extend your retirement age or you can cut down on your standard of living, the latter is very difficult to do.
If the picture is indeed as grim as it is painted out to be the question is, why do we fail to plan for retirement in our younger years? There could be a range of answers including the innate human need for instant gratification however, I feel it is the lack of awareness and lack of focus on goals that require long term commitment.
So, what does one do? The least you can do is to be clear on the following:
- Your planned retirement age.
- The amount of money you need when you retire.
The answer to the 1st question you will know, for the 2nd question you will need an expert as there are a lot of variables involved and unfortunately, a simple retirement calculator will not help. The answers will help you get clear on the target but to achieve the target you need to start investing early.
To drive the point home, let’s consider a typical scenario. Suppose you are 25 years old and start a SIP of Rs 10,000 per month and keep investing for next 30 years until you retire at 55, at 14% expected annual returns, you would have accumulated Rs 5.6 crores. What if you delay and start investing the same amount after 10 years i.e. when you are 35. The amount accumulated falls to Rs 1.3 crores at the same rate of return i.e 14% which is very much possible with Mutual funds. I hope I have made the case for starting early and even more so, for people who are already late.
So, go ahead and take the first step and start a SIP, time does not wait for anyone so better late than never!
By Arjun Sarkar
CEO Everguard Life Ventures Pvt. Ltd. (Parent of SIPtm)