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Looking to invest for retirement at a later time? Here is how it can impact your retirement goals, and you must plan early retirement investments.
"You must start saving and investing early. "You may have heard this countless times. Though it seems common sense, many people neglect one of the most important things they can do for retirement planning– save and invest.
We sometimes decide to take the investment route. But we seldom stick to the plans. Here is a study to put that into perspective.
According to the report generated in 2021, only 24 percent of Indians have thought of saving for retirement.
Despite the pandemic and a looming recession, a good chunk of the working-class Indians do not think of planning for their retirement.
But is that a real concern? Is it OK to delay investing for retirement?
That's how beneficial investing and planning for retirement early is. So let's get into the actual discussion.
How does a delay in investment impact your Retirement Plans?
Before we get into its details, let's consider a scenario.
Four friends: A, B, C, and D. They work in an MNC in the same position and get the same remuneration. They all agreed to plan and invest for their retirement.
A thought of starting a SIP at 25 with Rs. 5,000/month and making a corpus of Rs. 7.88 Cr. at retirement.
But B delayed investment for five years and did not start until 30. Then he started a SIP with Rs. 8,000/month and made a corpus of Rs. 6.38 Cr. at retirement.
On the other hand, C started a SIP at 35 with Rs. 15,000/month and made a corpus of Rs. 5.90 Cr. at retirement.
D only started planning for retirement when he was 40 with a SIP of R. 25,000/month. He made a corpus of Rs. 4.65 Cr. at retirement.
- They retire at the age of 60
- The SIP is increased by 10% yearly to keep up with the inflation.
- They get an annualized return of 12%.
Insights from the example:
- Even with five times the investment of A, D only makes Rs. 4.65 Cr. At the end of the tenure, that is Rs. 2.32 Cr. less. The winners here are A and B.
- So, even when they all planned for their retirement, the ones who started early clearly enjoyed better returns and corpus at lower initial investments.
- It should tell you why investing early is essential, and delaying investment by five years can lead to a loss of 1.50 Cr, as with B.
There are a few things to remember regarding late retirement planning and investing.
1) You will need to invest more
The money you save today can significantly impact your retirement outcome, probably 30-35 years in the future.
Inflation will undoubtedly influence your money, income, or other savings.
To get some understanding, think about the cost of living just 15-20 years ago.
That's how things will change, and you must prepare. And the best way to prepare is to start as early as possible.
Take the example we discussed early. By delaying investment even by five years, B loses over Rs. 1.5 Cr. even with higher monthly savings.
2) Your corpus will be significantly lower
When you miss planning for your retirement earlier, the immediate impact is the lower corpus you will get.
The corpus will not be larger than expected, even with increased monthly investment.
It will surely make a dent in your corpus, for sure. Let's go back to the example we already know.
The corpus dent of B is Rs. 1.5 Cr. for delaying the investment for just five years.
You must also consider that B invested Rs. 8,000 monthly—that is 60% more than A's monthly investment.
Therefore, delayed retirement planning and investment can significantly lower your corpus and deprive you of real good retirement life.
3) The effect of compounding may not be as huge
One of the biggest advantages of investing early is that it can compound your investments significantly.
But it needs time. When investing early, you afford your investment to compound and compound at a greater rate.
This is what grows your investment to four and five times at the end of the tenure.
Therefore, the wisest investment when planning for retirement is to invest as long as possible.
Investing early is the best way to make this happen. And let the compounding work for you as hard as you do.
4) Work longer than expected to meet your retirement goal
When you start investing for retirement, you expect a certain amount in your hand at the end of your investment tenure.
But when you delay the investment, you may need to increase the monthly investment to get the initial sum you want.
You may need to work longer to meet your long-term investment and corpus requirements goals.
It won't be ideal for anyone who wants to retire as soon as they want.
5) Your retirement life may not be as exciting as you want
With delayed retirement plans, the corpus you get may not be as high as you want it to be.
From our early example, A gets a lump sum of Rs. 7.8 Cr. at Rs. 5,000/month while D only gets Rs. 4.65 Cr, even with Rs. 25,000/month investment.
The parity between the two is too large to ignore. Considering the monthly amount invested, it gets even more disturbing.
Here, A gets to live a comfortable retirement life with the lump sum amount he gets from the investment.
At the same time, D may have to cut some corners to enjoy retirement.
Why invest early in life?
Preparing for retirement and investing early in life can help you save for retirement and build a healthy nest egg.
The following points are good enough reasons why you should invest early in life:
Better and higher returns
Investing at an earlier stage can ensure a larger return on your money. With interest rates low today, savings accounts offer little return on your deposited dollars.
However, if you start investing at an earlier age, you can often enjoy a higher rate of return on your money.
For example, the average rate of return over 30 years for those who started saving at age 25 was 2.4%. The same for those who started saving at age 30 was only 1.9%.
Grow your money when investing earlier
When you start investing early, it allows you to grow your money faster. This is because compounding works overtime to produce more growth in your account balance!
Over time, the total value of your investments will grow if you invest monthly rather than waiting for years to start investing or saving.
Investing early affords you many better options
With early investment, you get more options down the road.
If you wait to invest until later in life, you may have fewer investment options because you may be in a hurry to plan your investment.
Investing early can also fulfill your financial goals without stressing about it.
How to minimize the impact of investing late
The big question that looms in front of everyone planning for a late investment is this—Should I increase or cut the size of my retirement account?
Well, neither; start investing as early as you can.
Many do not understand that late investment planning can significantly impact their retirement goals.
By not adding additional funds to their retirement account earlier in their career, they may not have adequate savings to live their lives comfortably.
Here are a few things that you can do to help mitigate the effects of late investment planning on your retirement goals:
Start saving early
Start investing when you are eligible for your employer's retirement plan. Even if you don't have a specific goal, investing money regularly into a retirement account will help you grow your savings over time.
Review your portfolio regularly
Reviewing your portfolio frequently lets you track how well your investments perform and makes it easier to react quickly if something goes wrong.
This process helps identify opportunities to adjust your investment mix or add new assets.
Diversify your portfolio
Another point that you must remember before planning to invest is to diversify your portfolio.
Investing your hard-earned money in one basket is too much of a risk.
Risk must be justifiable because the investment is for something as serious as retirement.
Hence, diversifying your portfolio is certainly one of the best decisions you can make about your portfolio.
Speak to your financial advisor or investment company to build a strong, return-assured, low-risk portfolio.
Plan your retirement life
It is also important to plan your retirement and how you will spend your retirement income when it arrives.
Create a well-designed plan to help you spend the money the best way possible.
By doing these things, you should be able to avoid facing any drastic financial changes in your later years.
If given a chance, all of us would want to retire ASAP! Unfortunately, many don't realize how important investing early is for their retirement goals.
You can ensure that your investments help you reach your retirement savings goals with enough research and consulting with a financial advisor.
You can also automate and plan your savings without the usual hassle now with Jar's auto-save feature to help you set on the right path with your assets, no matter what happens with the stock market between now and then.