Did you know that 86% of Indians above the age of 50 years regretted not starting early to save for their retirement, according to the India Retirement Index Study (IRIS) conducted by Kantar for Max Life Insurance Company?
If you don’t want to regret it, then it is essential to start saving and investing for your retirement at the earliest.
However, we understand that it is easier said than done. Moreover, when you are young, retirement is the last thing on your mind.
In this article, we will look at some reasons why we should invest for our retirement as soon as possible.
Benefit from the compounding effect
When you start investing for your retirement, you can get the full benefits of the power of compounding. Compound interest is nothing but the interest you get on the interest you earned on your initial amount from previous periods.
Time is the most crucial element to gain the complete benefit of compounding. This is because the longer you stay invested, the higher the impact of compound interest on your initial investment will be. So even if you invested a higher amount at a later stage, you might still accumulate a lower amount than a person who started investing earlier than you, even if it was a smaller amount.
For instance, let us consider the example of two friends, Priya and Riya. Both of them started working on the same day. However, Priya started to invest from the first month with ₹5000 per month, but Riya started investing after 10 years with ₹ 10,000 per month.
So, after 20 years from their first paycheck, Priya and Riya had invested ₹ 12 lakhs each.
However, if we consider an annual average return rate of 12%, then Priya would have accumulated ₹ 50 lakhs while Riya’s investment value would be ₹23.23 lakhs. That is almost less than half of Priya’s accumulated amount.
That’s the power of compound interest.
When you are younger, you have fewer obligations. During this time, you might not have a dependent spouse, children, or elderly parents who are financially dependent on you. If you are not yet a parent, you might not have to think about the children’s education and other related expenses. As a result, you can save a higher amount towards your retirement.
In your 40s, although your earnings power is higher than in your 20s, you will have many responsibilities, such as paying home loan EMI, children’s educational expenses and saving money for future education. So, the percentage of your income you can earmark your retirement will decrease.
Take higher risk and reap higher rewards
When you are young, you can take higher risks. This is because investing in risky asset classes such as equities requires a longer time frame. Equity investments have the potential to give higher returns than other asset classes over the long term. When you start investing early for retirement, you have the bandwidth to take higher risks and invest in equities, which can help you reap higher returns over the long term. As we have already seen the power of compounding, you can accumulate a larger retirement corpus by investing in equities for the long term.
Inflation is a silent killer that diminishes our purchasing power. The amount of items and services that we can buy with a certain amount today will not remain the same after 10 or 20 years. You will need more money to buy the same amount of items and services after a few years.
For instance, the value of Rs. 1 lakh will go down to ₹29,000 in 20 years, even considering an average inflation rate of 6%.
So, assuming that your current monthly expense is ₹ 25,000, then you will need ₹33,700 in five years and ₹.2.57 lakhs in 4 years to buy the same amount of goods and services.
The only way to ensure that your savings don’t outrun your expenses during your retirement life is to start investing early and ensure that your investments are growing at a higher rate than inflation. Again, equity as an asset class has historically given higher returns than the inflation rate.
Increase in life expectancy
According to UN Estimates, India’s expectancy will hit 81.96 in 2100. To put this into context, India’s life expectancy in 2022 was 70.19, and it was 35.21 in 1950.
This means the average number of years a person will live after retirement will increase. As a result, you will need more money to live out your post-retired life.
For instance, if you consider your life expectancy to be 80. In this scenario, you will need Rs.2.25 crores for 20 years post-retirement. We are considering a present earnings of ₹ 40,000, a basic monthly expense of ₹ 25,000, and the present age as 35.
However, when the life expectancy goes up to 90 years, you need ₹3.17 crores to fund your expenses after retirement. It is important to note that we are considering that your money after your retirement will grow at 7.5% every year. We are assuming an inflation rate of 6%.
So, we have seen that you will need to accumulate more money with increased life expectancy.
Increase in healthcare costs
Did you know that the medical inflation in India is the highest in Asia? India’s medical inflation was recorded at 14% in 2021. Medical inflation includes the cost of hospitalisation, medicines, consultation charges, and lab tests. This means you have to pay more to get healthcare-related products and services.
We are all aware that medical expenses are most likely to form a bulk of monthly expenses after retirement. Hence, even if your other expenses go down, expenses regarding medicines and treatments might go up. As a result, you need to start investing early to take care of your post-retirement expenses.
In this current scenario, retirement is a non-negotiable financial goal. With the rising costs and the changing scenarios, it has become imperative to start investing early for retirement.