Given the daily hardships that involve dealing with family responsibilities, stress, and work-life challenges, many often tend to consider retirement a distant goal, which can be attained later in life. Is this really correct?
While immediate short-term priorities like arranging corpus for home renovation, purchasing a 4-wheeler, or planning an international trip, it is equally important to put your retirement fund planning on your financial goal list. Whether you are in your early 20s, or late 30s – with every passing day, time is passing by too and urging you to begin with your retirement investment at the earliest. Discussed here are the benefits of beginning with your retirement savings and investments early.
- Allows you to make the most out of the power of compounding
As mentioned above, many consider retirement to be a distant goal and think it can be achieved at a later stage in life. Here, what many fail to understand is investing for retirement fund creation early permits one to make the most out of the compounding effect. Owing to the power of compounding, you as an investor can build an adequate retirement corpus with small investible amounts. For instance, if you begin to invest in an equity fund through the SIP mode at an age of 25 years, a small investible amount of Rs 3,000 per month at an annualised rate of 14 per cent per annum, you will form a retirement corpus of Rs 3.33 crore by the time you reach 60 years. However, if you start investing late, say at 55 years of age, you will require making a monthly investment of Rs 3.86 lakh in the same fund generating a similar return rate for building the same corpus of Rs 3.33 crore. Note that you can easily compute your monthly contribution requirement through an SIP in any mutual fund of your choice using an online SIP calculator.
- Helps generate higher returns if you invest in equity mutual funds
Usually, risk-averse investors avoid equity funds when investing for retirement and give higher preference to fixed-income investments like public provident funds, bank fixed deposits, voluntary provident fund, etc. Note that returns generated by such fixed-income options have negligible potential to beat inflation. Thus, you must choose an equity fund to form your retirement fund. Equity funds as an asset class have a high potential to overcome returns generated by fixed-income instruments and inflation by a wide margin over the long term.
So, when looking to form a retirement investment corpus, an equity fund must be your only choice to create an adequate retirement corpus over the long term.
- Allows you to enjoy a lower premium on your health insurance
Many during their work life tend to avoid the need for buying medical insurance and are content with the health policy provided by their employer. Here, it is crucial to understand that the medical policies provided by employers are available just till the time you are working for the organisation. Once you switch the organisation, your medical insurance provided by your previous organisation will expire.
Given the rapid rise in medical costs, the need for buying an adequate medical policy is important. As age is one of the crucial factors considered for determining your medical insurance premium, buying the policy late unfortunately makes you incur a higher insurance premium. Also, if you buy the insurance late, you may have to wait for around 2-3 years to claim the policy in case you face any pre-existing disease. Thus, buying a medical policy early helps you meet the necessary waiting period at a lower insurance premium.
Building a financially robust retirement life is an important life goal you must add to your financial plan during your early work life. Doing so would not just allow you to form an adequate retirement corpus with smaller contributions but also meet your other crucial life goals with ease in different life stages.