- Date : 14/12/2019
- Read: 4 mins
Delaying your retirement plans could spell disaster if you leave it for too late. So, when and how should you start saving up for your golden years?
While it may seem too early to do so, planning for your retirement should ideally begin in your 20s, when you start working. It isn't difficult to understand why retirement isn't one of the priorities for a 20-something. After all, this is when you start laying down the bricks for the imaginary castles that you've long built--focused on grabbing every window of opportunity that may knock on your door. However, this is also when you have fewer responsibilities burdening your shoulders, making it easier for you to save for the future. This is in comparison to life in your 30s, when you're laden with home and car loans, and when family responsibilities kick in. Having drawn a clearer picture of the more rational option of the two, it is also obvious that the earlier you start, the more time you have to let your money to grow.
Timing is key
Financial gurus have, time and again, insisted on starting early when it comes to saving up for retirement. Certified Financial Planner Mr Kartik Jhaveri explains that saving up in a timely manner gives you more time to contribute to and build your retirement corpus. Besides, investing the money for a more extended period also ensures higher returns. He, in fact, calls it "financial prudence" to start retirement planning the day you start earning.
Since time creates wealth, starting early would also allow you to take advantage of the power of compounding, which has been called the 8th wonder of the world by Albert Einstein and has been praised by Warren Buffet and Benjamin Graham. That being said, you must carefully analyse your finances before starting off. While some people are comfortable starting as early as the beginning of their careers, others might want to dive in at a later point, when they have built a comparatively higher spending power.
Now, at this juncture, let us put things into perspective. Considering the improvement in healthcare and increase in life expectancy, most millennials are expected to live to a minimum age of 90 years. Thus, any individual will have to earn enough during his or her 35 odd working years to support their 30-something years of non-earning. In addition to this, you also need to account for inflation. Even at a relatively low 3% inflation rate, prices double roughly every 25 years. Your spending may also increase with time. Inflation can, therefore, be a huge spoiler to your retirement party. Hence, along with starting early, you need to diversify your portfolio by re-allocating a portion towards equity investments, as this may ensure the growth that you need for a comfortable retirement.
Another aspect of retirement planning – equity investment
While the economy's drift towards lower interest rates is good news; it does not hold any relevance for retired citizens. Since they are not in the earning and accumulating phases anymore, high economic growth and good fiscal management don’t mean much to them. However, while older citizens aren’t looking for jobs in the booming economy, they can hope for higher rates. This is where equity steps in.
The older, retired population needs to be acquainted with equity in a tax efficient and de-risked manner. This is especially important, considering fixed deposits (FD) tend to offer only 1.5% above inflation, as compared to the 3 to 5% that equity offers.
Furthermore, while a tax on long-term capital gains (LTCG) is back with Budget 2018, there are ways to lower tax liability. For the uninitiated, LTCG out of the sale of equity-oriented mutual fund schemes and equity shares will now be taxed at the rate of 10% without any benefit of indexation, if the capital gain exceeds Rs. 1 lakh in a year. Mr. Melvin Joseph, Founder, Finvin Financial Planners suggests that since LTCG on equities is tax-free for only up to Rs. 1 lakh per financial year, investors would have to begin trimming down their return expectations.
As per Mr Joseph, the next strategy would be to make use of the tax exemption provision and book profits up to Rs. 1 lakh per financial year and reduce the LTCG tax outgo. This is because of you cannot carry forward the Rs. 1 lakh sum. So, instead of accumulating capital gains forever, you might as well book profits each year and reinvest in other assets on a regular basis to lower your tax liability. However, keep in mind that reinvesting such proceeds, instead of diverting them for your consumption will reward you with the benefits of compounding.
Implementing this strategy, while starting early, will ensure that you aren’t faced with the challenges of old-age poverty. Additionally, the income from the equity investment, unlike the FD income, will be tax-free, making this option even more lucrative.
Writer profile: Manan Vyas is the founder of Qrius, a digital magazine with a monthly readership exceeding a million.