Retirement Planning: Benefit of starting early

Retirement is an important life events and appropriate financial planning is essential for an stress-free retirement. Majority of people would start paying attention to retirement planning on the verge of retirement. This could be a very costly mistake as insufficient wealth at retirement will lower the quality of retirement life.

Key benefits of early investing for retirement

1.       Power of Compounding

“compound Interest is the Eight wonder of the World. He who understands it, Earns it & He who doesn’t, pays it”

                                                                                                                                                                                                -Albert Einstein

Lets assume Mr X targets an Rs 1 cr retirement portfolio at age 60 (assuming 12% return)

Mr X age	30	35	40	45	50	55
Monthly	2,861	5,322	10,109	20,017	43,471	122,444
One time Investment	333,779	588,233	1,036,668	1,826,963	3,219,732	5,674,269

Mr X at age 30 , has to commit a monthly investment of Rs 2,861 (for 30 years) to achieve the target ; but if he postpones his investment decision and start planning at age 50, then he has to invest Rs 43,471 (for ten years) to be on the same footing; every 5 years delay will approximately double the investment requirement.

Mr X could get max benefit of compounding if he starts investing early; If Mr X Keeps procrastinating & delaying his investments then he is losing the benefit of compounding

2.       Longer Investment Horizon – More allocation to Equities

Equities as an asset class is more suitable for long term investor and has potential to generate a return of 12-15% return in the long run. On the other hand fixed income (Bank FD, Bond funds) instruments have potential to generate 7-8% return in long run.

Conventional thumb rule for Equity allocation based purely on age should be:  subtract your age from 100 [100-age];For Example, if you are 45 years of age then you should have (100-45) =65% of your portfolio invested in Equities. As investor grows older the allocation to equity should fall.

Starting early helps to ride the volatility of equity markets and could potentially gain from higher return.

Very common mistakes majority of the investor do is to build up on the fixed income instruments (bank FD, Bonds) at the younger age, which can yield 7-8% return (much lower than equity) and loose out on the compounding benefit. Majority of the investors planning through fixed income securities are more likely to fail achieving their retirement target.

Conclusion

Starting early for your retirement requires lower investment contribution, due to long investment horizon yielding compounding benefit and potential higher return (provided higher equity allocation) .

Majority of the investors don’t plan for retirement until they near it, due to lower investment horizon they lose out on compounding benefit and also the risk-taking potential significantly diminishes with lower investment horizon forcing investors to settle for low return portfolio (meaning your contribution should increase).

Its never too early or never too late to plan for retirement. Feel free to get in touch with me for financially comfortable retirement on 0965-65708812