Retirement Planning: How to build a strong financial foundation early | Mint

Retirement Planning: How to build a strong financial foundation early | Mint

Source: Live Mint

Retirement is a phase we all face, especially for salaried professionals. It’s a period when regular income from work stops, but expenses—monthly bills, healthcare, and leisure—continue. The key to enjoying a financially secure retirement lies in the preparation you do during your working years.

By saving and investing wisely, you can build a corpus large enough to support your lifestyle and needs after you retire. While it’s easy to focus on immediate priorities and push retirement planning aside, understanding the challenges of retirement can help you take timely action and avoid financial stress later.

Why is retirement planning crucial?

Retirement planning comes with unique challenges that require forethought and preparation:

  1. Longer retired lives: With increasing life expectancy, retirement can span 25–30 years. This means you’ll need a large enough corpus to ensure you don’t outlive your savings.
  2. Impact of Inflation: Inflation erodes purchasing power over time. For example, at a 4% inflation rate, your monthly expenses could double in 20 years.
  3. Rising healthcare costs: Medical advancements have improved healthcare quality, but they’ve also driven up costs. Aging increases health risks, making medical expenses a significant part of post-retirement spending.
  4. Compressed financial goals: Many people today delay marriage and starting a family, leading to overlapping life goals—like funding children’s education, weddings, and saving for retirement—all within a shorter time frame.
  5. Lifestyle expectations: As incomes grow, so do lifestyle standards. To maintain your lifestyle post-retirement, you’ll need a corpus that factors in these costs without compromise.
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The three phases of retirement planning

  1. Accumulation phase: This is the foundation of retirement planning, where you save and invest during your working years. The goal is wealth creation, making smart investment choices crucial.
  2. Transition phase: Typically starting 10 years before retirement, this phase involves balancing your portfolio’s risk while continuing to save. Asset allocation plays a pivotal role here.
  3. Distribution phase: This begins when you retire, where your investments are used to generate income. The focus shifts to preserving capital while ensuring part of your portfolio continues to grow to combat inflation.

In this article, we’ll focus on the Accumulation Phase, the cornerstone of retirement planning.

Why an early start matters

Time is your biggest ally in the accumulation phase. The power of compounding amplifies your savings over time, turning small, regular investments into significant wealth.

How compounding works

When you invest, the returns generated are added to your initial investment. Over time, these returns also earn returns, creating a compounding effect. This principle applies to investments like equity mutual funds, where profits are reinvested, increasing the value of your investment.

The earlier you start, the more time your investments have to grow. For example, a person starting at 25 will accumulate far more wealth than someone starting at 35, even if they both save the same amount monthly.

Common mistakes in the accumulation phase

To ensure a financially secure retirement, it’s essential to avoid these common pitfalls:

  1. Not saving enough: Modern lifestyles come with many temptations—vacations, gadgets, and dining out. While enjoying life is important, saving must take precedence. Identify areas where you can cut back and redirect that money into savings. Starting a SIP (Systematic Investment Plan) at the beginning of the month can instill disciplined saving habits.
  2. Impulse spending: Spending triggers like flash sales or product launches can lead to unplanned expenses. Resist the urge to buy things you don’t need. Ask yourself: “Do I need this, or do I just want it?”
  3. Credit card debt: Credit cards are convenient, but carrying over balances can lead to high-interest payments, reducing your investable surplus. Always clear your dues on time to avoid debt traps.
  4. Over-borrowing: Taking on excessive loans can leave little room for savings. Ensure your EMIs do not exceed one-third of your income. Plan large purchases carefully to avoid financial strain.
  5. Wrong investment choices: Investing in the wrong asset class can derail your financial goals. For example, expecting high returns from low-risk investments like fixed deposits isn’t realistic. Align your investments with your risk tolerance and goals.
  6. Lack of clear goals: Every investment should serve a purpose—whether it’s saving for a home, a child’s education, or retirement. Define your goals clearly to create a focused investment strategy.
  7. Speculative investments: Avoid “get-rich-quick” schemes like high-risk trading or unverified crypto investments. Educate yourself about risks or consult a financial advisor before investing.

How SIPs can help in retirement planning?

Systematic Investment Plans (SIPs) are a simple and effective way to accumulate wealth for retirement:

  1. Start Small, Think Big: Even modest monthly contributions can grow significantly over time due to compounding.
  2. Discipline and consistency: SIPs automate your savings, helping you stay committed to your financial goals. Setting up an auto-debit at the start of the month ensures savings come before spending.
  3. SIP top-ups: As your income grows, so should your investments. SIP top-ups let you increase your contributions periodically, helping you reach your goals faster.

For example, a Rs. 10,000 monthly SIP in an equity fund, assuming a 12% annual return, can grow into a substantial corpus over 20–30 years.

A Rs. 10,000 monthly SIP in an equity fund

Also Read | With UPS in the fray, is it now the time for govt employees to exit NPS?

Final thought

Retirement is often called the golden years—a time to reap the rewards of your hard work. Whether it’s spending time with loved ones, traveling, or pursuing long-postponed passions, financial freedom is the key to enjoying this phase.

The efforts you make during the accumulation phase—saving diligently, avoiding unnecessary expenses, and investing wisely—lay the foundation for a secure and fulfilling retirement. Start early, stay consistent, and let your money work as hard as you do.

Chakravarthy V., Cofounder & Executive Director, Prime Wealth Finserv Pvt Ltd

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