Three colleagues aged 30, 35 and 40 want to retire at age 60 with a corpus of Rs 2 crore. Assuming a 15 per cent annualised growth, the 30-year individual has to save Rs 3,000, a 35-year-old has to save Rs 6500 while a 40-year-old person has to save Rs 14000 each month. An early start to saving for long term helps.
Many youngsters in their 20s may want to start saving only when they are 35 or 40. But, the amount of savings could double if they start saving late. Therefore, saving for retirement in your 20s can be hugely rewarding in the long term.
What this shows is that the single most important factor that works in favour of young investors is that they will have to save a lot less than those who start saving at a later date. This is primarily because of the power of compounding. What it essentially means is that even a small amount saved regularly, grows to a sizable amount over time. The more the corpus, the more is the income generated on the accumulated savings for the young investor.
So, if you are in your 20s and are still contemplating whether to start saving now for retirement or after a few years, it’s time to start saving now. A late start to saving by 10 years can mean a huge difference in the amount you are able to accumulate after a long term.
Sample this – You start saving Rs 10000 a month for 20 years. Assuming a growth rate of 12 per cent per annum, the total corpus will be about Rs 1 crore. Now, even if you do not make any fresh investment and leave Rs 1 crore to grow, it will be over Rs 3 crore in another ten years. In the same example, if someone wants to save Rs 3 crore, he or she will have to save a higher amount to accumulate a similar amount at the same age.
Depending on your income, you may devise a savings plan but most importantly inculcate a savings habit. Divert savings out of income each month and use what remains on your monthly expenses. Most financial planners suggest saving at least 10 per cent of take-home pay and then keep increasing it as income increases. Starting to save for retirement early can be several times less expensive than starting to save with a gap of a few years.
Making an early start towards retirement will help you build a robust savings plan. There will be lots of volatility and uncertain periods which may threaten your retirement plan but with time in your hands taking risks will be easier. An earning period typically spans 30 years while with life expectancy going up, you may have another 30 years of no earning period after retirement. Plan for your retirement early and leave the power of compounding to do its magic!