In today’s era of rising costs, increased financial demands, and the constant demand to “follow the neighbors” (and their Instagram posts!), it’s getting harder and harder to prioritize a distant goal like retirement – which is usually between 10 and 30 years away. a way. Our short-term financial goals invariably take priority and we often tend to delay our retirement savings or dip into them frequently for other purposes – not realizing the colossal impact that even small withdrawals or delays can have on our lives. after retirement!
If you belong to the category described above, you can benefit from the 5 simple tips detailed below.
Retirement first, education second
It’s common for parents to prioritize their children’s college education before they start saving for their own retirement. While we appreciate the sentiment behind this, it would be prudent not to focus all of your savings on one goal! Since your retirement goal is several years after your child’s education, your early savings will have room to accumulate for several more years, if you start early.
To put the above into perspective – if you save Rs 5,000 per month for your retirement between the ages of 25 and 30, and let it accumulate over the next 30 years until you retire – that meager savings will add up to Rs 1.22 crore by the time you reach 60!
Since your retirement goal is far away, you can take advantage of capitalization and start saving in small installments over many years, compared to your child’s education goal which will usually require a much larger monthly outlay. After all, the last thing you want is to spend your savings on your child’s education and then have to fall back on them to fund your post-retirement lifestyle!
Take advantage of unexpected deals
It would be wise to commit any lump sum payments you receive in addition to your regular income to your retirement fund. These could include income tax refunds, windfall dividends, inheritances and performance bonuses.
Since these contributions are not necessary for you to lead your normal life, you will not mind deploying them immediately in your retirement fund!
Bolstering your retirement pool with lump sums frequently can give your final retirement corpus a serious boost. Even Rs 1 lac set aside for 30 years at 12% per annum will accumulate to Rs 30 Lacs when you retire! Think about that the next time you’re tempted to squander idle funds on gadgets that will become obsolete a year from today!
Whatever your risk appetite, you should ideally resist the urge to deploy your retirement savings in conservative asset classes such as bonds or recurring deposits. Since your retirement goal will typically be several years away, chances are that market volatility will smooth your returns over multiple market cycles.
Even a small difference in after-tax returns over a long period of saving can make a huge difference to your eventual retirement fund. Rs 10,000 saved monthly for 30 years at 8% pa will mature at Rs 1.49 crore. The same saving at 12% per annum will yield Rs 3.49 crore! It’s the power of the 4%. 100 extra.
It’s worth considering more aggressive savings avenues (such as SIPs in mid-cap equity funds) when committing a monthly amount to your retirement fund. Your savings portfolio may go up and down over the medium term, but will ultimately produce a much larger corpus. The key – save without passion regardless of market cycles. Let the Rupee Cost Average work its magic.
Keep it sacrosanct
A human psychological phenomenon called “hyperbolic discounting” creates the tendency to place infinitely less importance on the rewards that will be reaped in the distant future.
The maximum risk of this phenomenon is borne by our pension fund! If only we had a rupee every time a client broke into their superannuation fund to fund an immediate need…
It would be wise to establish strict personal rules and limits when it comes to your retirement funds. It’s a good idea to deliberately save in funds with strict blocks to protect your corpus! Regimes like the NPS, which place severe restrictions on premature withdrawals, were created specifically with the above in mind.
Even “wants” or desires can feel like “needs” when you are faced with them. Pause before breaking your retirement corpus – think ahead and consider the longer term ramifications! Doing the math and thinking logically can cause you to delay spending or cut back on your needs.