Retirement is an inevitable phase of every individual’s life wherein they bid adieu to their regular incomes and job. Though the income stream dries up, expenses don’t. In fact, given the deteriorating health, expenses increase after retirement. How can individuals live a worry-free retired life in such situations?
The answer is simple – through retirement planning. If individuals plan ahead and create a retirement fund during their active working life, they can live out their golden years with financial ease.
Experts always stress of the fact that retirement planning should be undertaken from an early age. If individuals even contribute little amounts regularly from an early age, they can build a substantial retirement corpus. This substantial corpus is built because of compounding returns provided by investments. Do you know what is compounding and how it affects returns? Let’s find out–
What is compounding?
Compounding interest means the interest paid on interests earned. Let’s simplify it. Suppose, INR 100 is invested in an instrument which gives annual compounding returns of 10%. After one year, the return would be INR 10. After the second year, the return would be calculated on INR 110 (principal + interest earned) because the interest is compounded. So, the returns for the second year would be INR 11. Again in the third year, interest would be calculated on INR 121. As such, through compounding, interest is paid on the interest earned in the earlier years. The corpus, therefore, grows at a good pace.
How does compounding help create a good retirement corpus?
To understand the effect of compounding on retirement corpus, here is an example–
Both A and B invest INR 5000 every month towards an investment avenue which gives an annual return of 12%. A starts investing from the age of 30 while B delays investments till he reaches 35 years. If the retirement age is deemed to be 65 years for both, the corpus for A and B would accumulate to INR 3.21 crores and INR 1.75 crores respectively. A huge difference with a delay of only 5 years!
Given this difference, retirement planning should start at an earlier age. In fact, retirement planning should feature in each financial stage of an individual’s life. Here’s how individuals can plan for their retirements at every financial stage they face–
|Age bracket||Financial stage||How retirement planning can be done|
|20 years to 35 years||New income or low-income stage||· A small amount should be put aside every month towards a retirement corpus.|
· Thereafter, as the individual’s age increases along with the income, the amount contributed towards retirement funding should also increase
|35 years to 45 years||Mid-income responsibility stage||· Despite numerous financial responsibilities, retirement planning should start in this financial stage if a substantial retirement corpus is desired.|
· If retirement planning has not started in the earlier stage, it should in this stage.
· At least 8% to 10% of the monthly income should be directed towards an earmarked retirement corpus
· Even if individuals are employed and are contributing to the EPF scheme, having an independent retirement corpus is advised. An independent corpus would increase the funds available after retirement.
|45 years to 60 years||High-income growth stage||· Contribution towards the retirement corpus should be high as the retirement age is close.|
· Since individuals have limited financial responsibilities at this stage, retirement planning should be the primary focus
|60 years and above||Retirement stage||· Most of the individuals would either be retired or would near retirement|
· At this stage, the benefits of the retirement corpus should be enjoyed
· The whole retirement corpus should not be liquidated though. It should remain invested with individuals drawing upon it as and when required. An invested corpus would earn further interests and continue to grow
· Individuals should also explore other sources of income after retirement to have an added income
Retirement planning should form a part of every financial stage of an individual’s life. You should help your clients understand why retirement planning is essential from an early age even when retirement is the last thing on their minds. Show them how compounding works miracles in creating a substantial corpus for their retirements. Also, advise them on the ideal retirement planning at each of their financial stages starting from the stage in which they are in. When you educate your clients about the correct financial planning, they would trust you with their investments and, consequently, your earnings would grow. Wouldn’t you want that?