I am too Young to Plan my Retirement is a Myth

Have you thought about your retirement? Are you thinking that you are too young to think about  retirement? Let us take an example -

Let us take your monthly expenses are Rs. 25000 per month and assume that you will retire about 30 years from now.  Assuming an annual inflation rate of 6% (you must have said ONLY 6%) and a similar lifestyle, you will need about Rs. 1,43,000 per month (Howz that!! 6 times) post retirement in the year you retire. It will only increase from there due to inflation. If you think, you will not have a similar lifestyle when you are retired, let us assume that you will incur 80% of the expenses today. Even then you will need about Rs. 1,14,000 per month in the year of retirement. You will not be earning so much then and therefore need to plan your investments such that they allow you to afford the expenses.

It is important to plan for retirement when you are young and have time on your side. Many of us just contribute to PPF and EPF and think that is enough to save for the future because we are not aware of how much money we will need when we retire. Life Expectancy in India is growing and retirement phase of a person is generally long and it should be provided for.  If you start 5 years later, you will need to save even more as you have lost the opportunity of power of compounding. Hope this example removes the illusion that you are too young to think about retirement. Check this Economic Times recent cutting…

There are some myths around retirement. Let us see if they hold true.

I am too young to plan for retirement –

It is important to start planning for retirement as early as possible. It means you need to save less to build the same corpus as you would need 5 years later. Let us extend the example mentioned above -

Age when retirement planning started	25 Years	30 Years
Retirement Age	55	55
Monthly expenses	Rs. 25000	Rs. 25000
Inflation Rate p.a.	6.00%	6.00%
Annuity Rate p.a. and Rate of Returns on Investment p.a.	6% and 6%	6% and 6%
Total amount required	Rs. 5,16,91,421	Rs. 3,86,26,837
Amount to be invested yearly	Rs. 2,85,677	Rs. 3,57,055

The corpus required will be lesser 5 years down the line but to reach that amount, you will need to invest much more than if you had started earlier. (you can also start with a smaller amount & keep increasing amount with increase in your income)

I will not spend as much as I am spending now –

It is true that some lifestyle expenses may be reduced but you cannot assume that the monthly outflow will be less. You might take up new activities and hobbies post retirement. You will have more medical expenses as you are growing older. There will be expenses related to children’s education, children’s marriage etc. The expenses will be equal, more or only slightly lesser which means you have to start thinking of income and wealth for retirement years seriously from the beginning.

I will fund the entire education of my children –

It is a very responsible and loving idea that you fund your children’s education. But good education is very expensive and you cannot blindly put all your savings in that goal. There are different aspects of life that needs to be taken care of with finances. You should have a target amount that you will spend on for each goal and work towards it. If you spend all your money on the children, tomorrow you will be dependent on them for finances which is not a great place to be in.

I will inherit wealth which will take care of my retirement needs-

You assume you will inherit some money and wealth and calculate the amount and sit happily. You spend all your earning and do not plan for retirement. But this is foolhardy. If the inheritance does not come to you as planned or loses value, you will not have anything to fall back on. The inheritance can also be used for generating more wealth instead of using it for retirement expenses.

I will invest only in a particular asset class –

Many people think investing in real estate is enough to fund for retirement. Some people are extremely defensive and will invest only in PPF or Fixed deposits. Some people think since equities generate the best returns, they can put all the money in equities. You cannot put all your eggs in one basket. If the timing of buying the property or buying and selling shares is wrong, you could be in a loss and lose your hard earned money. Your retirement plans will also go awry. Therefore you should invest in different asset classes which leads to higher returns and a diversified portfolio which reduces investment risks.

I have a lot of money in my bank account –

You might be prudent with your cash and not a spendthrift. This is a great habit to have but not enough to fund your retirement. If your money is lying idle in the savings bank account, it loses value every year due to inflation. It is important to invest in a diversified portfolio of assets that includes shares, Mutual Funds, PPF, Real Estate and Gold instead of keeping all the money in the bank.

Many people follow these myths and lose out on time and strategy to have a proper retirement plan in place. It is important to remove these myths from our minds and work towards a proper retirement plan so that the sunset years will be stress-free and enjoyable.