Should You Start Retirement Planning if You Are 25 Years Old? Here is the Answer

“I am 25 years old, should I start retirement planning?”

It’s a question that might not cross your mind when you’re just starting out in your career and life feels like it’s unfolding at full speed. You might think retirement is a far-off dream, something to worry about much later. But here’s a surprising truth: the earlier you start planning for retirement, the better your future can be. In India, where economic dynamics and cultural expectations shape our financial journeys, taking proactive steps now can make a significant difference later on. A 2020 survey revealed that 51% of urban Indians hadn’t made any retirement plans, highlighting a significant gap in financial preparedness. Let’s dive into why beginning your retirement planning at 25 could be one of the smartest moves you make:

Key Benefits of Early Retirement Planning:

Early Retirement Planning Helps you Experience the Power of Compounding:

The power of compounding is a cornerstone of effective financial planning, especially when it comes to retirement. By starting early, you give your investments more time to grow, allowing your money to work harder for you over the long term. Let’s explore how compounding works in two scenarios—starting at age 25 versus starting at age 35.

– Scenario 1: Starting at 25 Years Old

Imagine you begin investing ₹10,000 per month in a retirement plan at the age of 25. Assuming an annual return of 8%, by the time you reach 60, your investment would have grown significantly due to the power of compounding.

• Total Investment: ₹42 lakhs (₹10,000/month for 35 years)
• Amount at Retirement: Approximately ₹1.76 crores

Here, the long investment horizon of 35 years allows compounding to work its magic, turning your ₹42 lakh investment into a substantial corpus of ₹1.76 crores.

– Scenario 2: Starting at 35 Years Old

Now, consider starting the same investment at the age of 35. You still invest ₹10,000 per month at an annual return of 8%, but now you have only 25 years until retirement.

• Total Investment: ₹30 lakhs (₹10,000/month for 25 years)
• Amount at Retirement: Approximately ₹95 lakhs

In this scenario, the shorter investment period of 25 years results in a retirement corpus of ₹95 lakhs, significantly less than the ₹1.76 crores achieved by starting at 25.

– The Lesson:

The earlier you start investing, the more time you allow compounding to work in your favor, leading to a much larger retirement corpus. Even though both scenarios involve the same monthly investment, the difference in the final amount is substantial, highlighting the importance of starting early in your retirement planning.

Longevity and Rising Healthcare Costs can Impact Your Retirement:

India has witnessed a significant increase in life expectancy, with many individuals now living up to 70-75 years or more. While this is undoubtedly a positive development, it also means that retirement could span several decades, potentially requiring financial support for 20-30 years post-retirement. Compounding this challenge is the issue of rising healthcare costs, with medical inflation in India currently running in double digits and forecasts suggesting an average annual increase of around 10%.

These factors underscore the importance of starting your financial planning early to build a robust financial cushion. This cushion will not only cover your living expenses but also safeguard against unforeseen medical expenditures, ensuring that you can maintain your quality of life throughout your retirement years.

Does Inflation Impact Retirement Planning?

Yes! Inflation is a silent wealth eroder that can significantly affect your retirement planning. Over time, the prices of goods and services tend to rise, diminishing the purchasing power of your money. In India, where inflation has been a persistent economic factor, this impact is particularly pronounced. For example, what costs ₹1,000 today could cost substantially more in 20 or 30 years.

By starting your retirement planning early, you can factor in the effects of inflation, ensuring your savings grow at a rate that outpaces rising costs. This proactive approach helps secure a retirement corpus that maintains its value over time, safeguarding your financial well-being in your golden years.

A useful tool for this is a retirement planning calculator, which can help you estimate the amount you’ll need to save to maintain your desired lifestyle. By adjusting for inflation, the calculator provides a more accurate picture of the future value of your savings, ensuring that your retirement corpus grows at a rate that outpaces rising costs.

Early Retirement Planning can Help Fulfil Your Lifestyle Aspirations:

Retirement is not just about covering your essential expenses; it’s also an opportunity to fulfill your long-held aspirations and dreams. Whether you envision traveling the world, indulging in hobbies you’ve always wanted to explore, or providing financial support to your children and grandchildren, your retirement corpus should be robust enough to accommodate these lifestyle choices.

Starting your retirement planning early gives you the advantage of setting realistic financial goals and working towards them systematically. It allows you to build a sizable nest egg that can support not only a comfortable lifestyle but also the fulfillment of your dreams during your golden years. By planning ahead, you can enjoy retirement without financial stress, fully embracing the freedom that comes with this phase of life.

Lack of Job Security can Impact Your Retirement:

The job market has undergone significant changes in recent years, with traditional pension plans becoming increasingly rare and job security no longer a given. The rise of the gig economy, automation, and shifting industry demands have added layers of uncertainty to long-term employment prospects. In this evolving landscape, starting your retirement planning early is more crucial than ever.

By building a solid financial foundation, you create a safety net that can offer stability and peace of mind, even if you face unexpected career changes or economic downturns. Early planning ensures that you are not solely reliant on your job for financial security in your later years, allowing you to adapt to the changing job market without compromising your retirement goals.

Early Retirement Planning can Help with Tax Efficiency:

The Indian government provides several tax incentives to encourage retirement planning, making it a financially savvy move for early investors. Instruments like the Employees’ Provident Fund (EPF), Public Provident Fund (PPF), and the National Pension Scheme (NPS) offer substantial tax benefits under sections 80C and 80CCD of the Income Tax Act.

By investing in these schemes, you not only build a secure financial future but also reduce your current tax liability. This dual advantage makes tax-efficient retirement planning a smart strategy for optimizing long-term wealth creation while simultaneously easing your tax burden today.

Early Retirement Planning Helps You Lead a Stress-free Life:

Early retirement planning isn’t just a financial exercise; it significantly impacts your psychological well-being. Starting early allows you to accumulate a substantial corpus, providing peace of mind as you approach your later years. This financial preparedness alleviates stress and anxiety, giving you the confidence to enjoy your present without constant worry about the future.

Knowing that you have a robust plan in place ensures that you can focus on your current life, secure in the knowledge that your retirement years will be comfortable and worry-free.

Planning for Retirement Early Provides Flexibility in Investment Choices:

Starting your retirement planning early grants you the luxury of time, which in turn offers greater flexibility in your investment choices. With a longer investment horizon, you can diversify your portfolio across various asset classes, such as equity mutual funds, fixed deposits, and government schemes, to balance risk and reward effectively.

This diversification allows you to adjust your investments according to market conditions, ensuring that your portfolio remains aligned with your financial goals and risk tolerance. Over time, this flexibility can lead to higher returns and a more secure retirement.

Helps Set an Example for the Next Generation:

In Indian culture, elders are often seen as role models for younger generations. By prioritizing retirement planning from an early age, you not only secure your financial future but also set a positive example for your children and grandchildren.

This proactive approach teaches them the importance of financial responsibility, instilling a culture of planning and foresight within the family. By demonstrating the value of early retirement planning, you encourage the next generation to adopt similar habits, ensuring long-term financial security for the entire family.

Helps Address Social Security Concerns:

While India has made progress in developing social security systems, concerns remain about their adequacy in sustaining a desired lifestyle during retirement. Government schemes, though beneficial, may not provide enough financial support to cover all post-retirement needs. Therefore, relying solely on these measures can be risky.

Early retirement planning empowers you to take control of your financial future, allowing you to build a comprehensive retirement corpus that doesn’t depend entirely on external social security systems. This proactive approach ensures that you can maintain your lifestyle and independence throughout your retirement years.

Conclusion

Retirement planning is a journey that should begin early in life. The benefits of starting early extend beyond financial security; they encompass peace of mind, lifestyle choices, and the ability to navigate the uncertainties of the future. In the Indian context, where family and traditions hold immense value, early retirement planning is not just a financial strategy but a legacy that can positively impact generations to come. So, why wait? Start planning for your retirement today; your future self will thank you for it.

These tips are brought to you by expert Financial Planners at HappyWise Financial Services.

If you need any assistance in Financial Planning/Tax Planning or want to discuss your investment options, feel free to connect through Email or Whatsapp.