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.

Retirement Planning when you are young

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…

too young to plan retirement

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)

ReadIs Rs 1 Crore enough to retire?

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.

Read11 ways to curtail impulsive spending

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.

ReadRetirement Planning Vs Child Future Planning

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.

Read10 big lies that skew retirement planning

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.

ReadAsset Allocation – formula for investment success

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.

Watch – My Retirement Planning Videos

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.

Print Friendly

Subscribe for TFL Weekly Guide

Do you believe in - An apple a day keeps the doctor away? Similarly, TFL Guide is your weekly apple, keeping you financially fit. Subscribe now and get Basics of Financial Planning E-Course FREE.

{ 4 comments… add one }
  • Ramesh December 3, 2014, 5:35 PM

    Two questions:
    1. Your comparative case study has some basic mistake, though the conclusion is very much correct.
    You are considering 25K monthly expense for a 25yr old and a 30yr old. Just by considering inflation (and keeping other factors identical), the monthly expense of the person would increase 25K once a 25yr old becomes 30yr to maintain same standard of living.

    2. A lot of experts are talking about power of compounding in case of equity investment. Can you please help me understand how the power of compounding is expected to work for equity as it may have negative return. The gain that a person has got in 15yrs can be wiped out in next 5yrs. So why are we saying that the duration is so important for equity?

    • Manoj December 4, 2014, 12:27 PM

      Hi Ramesh,

      I would like to answer your second question. The power of compounding works best when you invest through SIP. You are saying that whatever you have gained in 15 years can be wiped out in the next 5 years. That answer to that is one needs to have time horizon for a particular goal and that goal needs to be flexible as well between 3-5 years. When you are nearing your goal and the market is in high and you have gained close to what you have expected then you take that amount and put it in debt. Even if the market gets down like it did in 2008 when it reached to the low levels of 9000, it still recovered to get into the highest levels within the next 3 years. So whatever you gained will be recovered and also the SIP investment in low levels will also be gained. So a long term goal needs to have flexibility of 3-5 years.

      • Ramesh December 4, 2014, 3:54 PM

        Thanks Manoj for your detailed response. I understand the goal based investment strategy and agree with you on that. However, it still does not actually answer .. why power of compounding (the n in the formula) is so important for equity investment. As you have also mentioned that the amount needs to be moved to debt instrument to secure the gain.
        We love giving example of 2008-11 as it proved many experts wrong when sensex moved in either direction and the duration was so small. But we never talk about 1991-2000 as it took 10 years for the sensex to recover. A person retiring on 1991 with a significant portion of his portfolio in equity would have gone through some unpleasant surprises.

        • Manoj December 8, 2014, 12:33 PM

          Hi Ramesh,

          I agree with you that the period between 1991-2000 was perhaps the worst. But if everyone thinks that because of that period, i am not going to invest in equity then there will be no person to invest in equity. India’s economic reforms were very different couple of decades back. Today lot of foreign companies are investing in India. The kind of talent we indians have in many sectors is the reason why many western countries are getting attracted towards investing in India. We are developing as a nation at a very fast pace. We will have some hick ups here and there. But we have to remain positive and trust our markets to deliver at a long run.

Leave a Comment