How To Balance Your Financial Priorities While Saving For Retirement
In today’s age of rising costs, increasing financial demands and constant demand for ‘keeping up with the neighbours’ (and their Instagram posts!), it’s become increasingly challenging to prioritize a distant goal like retirement – which is usually anywhere between 10 and 30 years away. Our shorter term financial goals invariably take precedence and we often tend to either delay our retirement savings or frequently dip into it for other purposes – without realising the colossal impact even small withdrawals or delays can have on our post retirement lives!
If you belong to the category described above, you may benefit from following the 5 simple points of advice detailed hereunder.
Retirement First, Education Second
It’s common for parents to prioritise their children’s higher education before starting to save for their own retirement. While we appreciate the sentiment behind this, it would be prudent not to concentrate all your savings towards a single goal! Since your retirement goal is several years after your child’s education, your early savings will have the opportunity to compound for several more years, if you start off early.
To put the above in perspective – if you save Rs 5000 per month towards your retirement between the ages of 25 and 30, and leave it to compound for the next 30 years until you retire – this meagre savings will amount to Rs 1.22 crore by the time you hit 60!
Your retirement goal being a long distance away, you can take advantage of compounding and start saving in small increments for many years, compared to your child education goal which will typically require a much larger monthly outlay. After all, the last thing you’d want is to overcommit your savings to your child’s education, and then have to fall back on them to fund your post retirement lifestyle!
Cash in on unexpected windfalls
It would be wise to commit any lump sum payouts that you receive over and above your regular income, into your retirement fund. These could include the likes of income tax refunds, unexpected dividends, inheritances and performance bonuses.
Since these inflows are not required for you to lead your normal lifestyle, it won’t pinch you to deploy them into your retirement fund straightaway!
Strengthening your retirement pool with lump sum amounts frequently can lend some serious acceleration to your final retirement corpus. Even Rs 1 lac put away for 30 years at 12 per cent per annum will compound to Rs 30 Lacs by the time you retire! Think about that the next time you are tempted to fritter away idle funds on gadgets that will become obsolete in a year from today!
Go Aggressive
Regardless of your risk appetite, you should ideally resist the urge to deploy your retirement savings into conservative asset classes such as bonds or recurring deposits. Since your retirement goal will typically be many years away, odds are that market volatilities will smooth out your returns over several market cycles.
Even a small difference in post-tax returns over a long saving period can make a huge difference to your eventual retirement fund. Rs 10,000 saved monthly for 30 years at 8 per cent per annum will mature at Rs 1.49 crore. The same saving made at 12 per cent per annum will yield Rs 3.49 crore! That’s the power of the additional 4 per cent.
It’s worthwhile to consider more aggressive savings avenues (such as SIP’s in midcap equity funds) when committing a monthly amount to your retirement fund. Your saving portfolio may go up and down in the medium term, but will yield a significantly larger corpus in the end. The key – save dispassionately without heeding market cycles. Let rupee-cost averaging work its magic.
Keep it sacrosanct
A human psychological phenomenon called “hyperbolic discounting” creates the tendency to attach infinitely lower significance to rewards that are going to be reaped in the distant future.
The maximum risk of this phenomenon is borne by our retirement fund! If only we had a rupee for every time a client broke into his or her retirement fund to finance an immediate need…
It would be wise to set up strong personal rules and boundaries when it comes to your retirement funds. It’s a good idea to deliberately save into funds with strict lock-ins to safeguard your corpus! Schemes like NPS, which have severe restrictions on premature withdrawals, have been created specifically with the above in mind.
Even “wants” or desires may seem like “needs” when you are face to face with them. Pause before you break your retirement corpus – think ahead and consider the longer-term ramifications! Doing the math and thinking logically may drive you to either delay your spending or reduce your need.
