When Should You Start Investing In Retirement Plans?

When we are young and achieve financial independence, we have various dreams to fund from our incomes. We dream of buying a car, building a home, enhancing our lifestyle, buying a high-end Smartphone and what not. As we settle down, our priorities change. We invest to secure our children’s future and also want to secure our family’s financial stability. Do we ever think about retirement? We don’t. It is not until we hit late 40s or early 50s that retirement planning starts dominating our investments. We buy pension plans and other financial instruments with a goal to create a sufficient retirement corpus. Do we succeed?

While most of us consider retirement planning to be an important aspect of investments, we don’t know when to undertake such planning. As such, we delay investing for our retirement and finally end up with an insufficient corpus. Do you know when you should start investing in retirement plans?

The early bird catches the worm.

Ever heard this famous proverb? It is also applicable in case of retirement policies. It should be undertaken at the earliest possible age. I know it sounds strange but it is true. When you are young, retirement might be the last thing on your mind. After all, it is the time to enjoy life, isn’t it? However, apart from planning for other life’s goals (income replacement, child’s future, asset and wealth creation, etc.) planning for retirement is also important. If you want to have a sufficient corpus which would take care of retirement expenses, you should start saving early in life. Do you know how saving early yields a good corpus? Let us find out:

The power of compounding

Remember those dreaded Mathematics classes which taught us the meaning of compounding? Compound interest works wonders for  investments where the interest earned earns further interest. Through this compounding, the corpus increases manifold if it remains invested for a long period of time. Holding our investments for a longer tenure is possible only when we start investing early. Small investments made over a longer period would yield a better corpus than those made over a shorter tenure.

For instance take the below two cases

 

Case 1 Case 2
Monthly Investment – Rs.5000 Monthly Investment – Rs.5000
Rate of interest – 6% (assumed) Rate of interest – 6% (assumed)
Age at which investment begins – 30 years Age at which investment begins – 40 years
Retirement age when corpus is required – 65 years Retirement age when corpus is required – 65 years
Total investment tenure – 35 years Total investment tenure – 35 years
Corpus accumulated at 65 years – Rs.71,23,551 Corpus accumulated at 65 years – Rs.34,64,970

 

Just a 10 year lag and the accumulated corpus gets reduced by half! This is the miracle of compounding. So, if you too want to avail a substantial corpus, start early.

Buy a pension plan

Starting retirement corpus early has tremendous benefits as you must have seen in the numbers. It also lets you save an affordable amount to build a substantial corpus. But, which investment instrument should you opt for? The answer is simple – a pension plan. Yes, it offered by life insurance companies are solely for planning your retirement corpus. It  helps  you accumulate a corpus by saving small amounts regularly and also ensure a steady source of income by paying regular annuities throughout your lifetime. Other benefits are as follows:

  • It earmark your investments towards building retirement fund.

 

  • It come in two variants. While one allows you to save regularly for your retirement from an early age (Deferred Annuity Plans) the other lets you avail annuities immediately after you make a lump sum investment (Single Premium Pension policies in India or immediate annuity plans).

 

  • The annuities you receive from your plan are also of different types. You can choose to get an annuity for your entire life or include your spouse too under joint life annuities, you can choose to receive a fixed or an increasing rate of annuity payouts and you can also choose to get your investment back on death besides the annuity payouts made during your lifetime. Which other investment instrument gives you so many payout choices?

 

Retirement plan should be done from the earliest possible age and pension plans should be your chosen investment. So, go accumulate retirement corpus and live out your golden years without depending on anyone.

 

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