Why early planning helps?
Retirement planning is important for all of us. But what is the right time to start and why? Experts say that you must start from the time you start earning. At the initial stages of career, when the payouts are small, why is it necessary to burden yourself with the retirement saving? Let's go in detail to find out the benefits of starting early.india Updated: Feb 28, 2013 15:53 IST
Before we begin discussing how to plan for a successful retirement, it is important for us to know that when should we start. Many investment planning experts are of the view that it is best if we start as early as we start earning. The reasons for this are many. Let us look at them in detail:
Avoid uncertain future
Retire planning is an important tool in our hands to make sure that uncertainty gets wiped out from the future. The entire endeavour of planning your investments is that you would not wake up empty-pocketed.
Also, as the future holds a degree of an uncertainty with it, retirement planning is vital to make you live your dream your way. Here, one looks at the regular pay-outs, either in the form of annuity or rental income, etc. Annuity is the regular pay-out that an insurance company or in PPF account gives at the age of retirement on accumulation of corpus there or handing over a lump sum, in case of insurer. These regular pay-outs can be disbursed every month or your chosen interval.
The entire of annuity is to help the individual meet the basic necessities, besides living a comfortable yet controlled lifestyle. If we have a corpus, we tend to spend more; however, with a little but regular income in hand, we are more likely to manage our finances.
Most of such retirement planning instruments - insurances, mutual funds, EPF, PPF, etc. -- aim at annuity pay you a fixed monthly income until death.
Benefits of compounding
Most of the financial instruments work on the basic principal of compounding, either on half-yearly or yearly basis. Insurances are of the vital importance among them as the wide range and variety of insurance policies available in market, make them all the more lucrative for end-consumers to invest in, besides giving the required option to withdraw money at any stage.
Compounding is one of the widely-known ways to accumulate wealth. Compounding helps you earn interest not just on the principal amount but also on the interest accumulated on the principal amount, and that too, at the same rate of interest. For instance, if you invest Rs.100 today at the rate of interest of 10 per cent, compounded yearly, you will receive Rs. 110 (Rs. 100 + Rs. 10) next year. And Rs. 121 (Rs. 110 + Rs. 11) a year later as it is the interest accumulated on the Rs 110. Going on this pace, Rs. 100 you invest today, will be equal to Rs. 612 after 20 years at the rate of 10 interest rate growth.
Hence, it is always advisable to invest as early as possible to take advantage of the compounding factor. Also, the earlier your investment scheme compound, the more it is beneficial for you. For instance, half-yearly compounding is better than yearly compounding, and quarterly compounding is better than half-yearly and yearly compounding.
Coverage to shooting medical expenses
Without your own savings to add to the mix, with the rising inflation, all of us find it difficult, if not impossible, to enjoy much beyond the minimum standard of living. This situation can quickly become alarming if your health takes a turn for the worse, especially in your golden years when income avenues goes in for a toss.
Old age, typically, brings medical problems and increased healthcare expenses. Without your own nest egg, living out your golden years in comfort while also covering your medical expenses may turn out to be a burden too large to bear. To prevent such a situation, it is advisable to invest in health insurance policy to take care of your medical needs. Hence, making arrangements to take care of the foreseen expenses also comes in retirement planning, so that they don't wipe off your retirement savings when time comes for you to enjoy the life.
However, there is no best health insurance policy for all, as one should also look at the history of disease while opting for a health insurance plan.
Leaving the legacy behind
Switching to a more positive angle, let's consider your family and loved ones for a moment. Part of your retirement savings may help contribute to your children or grandchildren's lives, be it through financing their education, passing on a portion of saving or simply keeping sentimental assets, such as land or real estate, within the family.
Without a well-planned retirement, you may be forced to liquidate your assets in order to cover your expenses during your retirement years. This could prevent you from leaving a financial legacy for your loved ones, or worse, cause you to become a financial burden on your family in your old age.
Live your dream
It's every working individual's dream to say sayonara to the daily grind while you still have your own teeth. By start investing early for the retirement, you will have the liberty to take the decision when do you want to retire by looking at the corpus saved for retirement.
One of the early retirement fantasies is to be able to do what we could not have done earlier in our lives, due to the hectic work schedules. It can be anything, from indulging into your hobby to traveling the world, or taking your wife to her favourite destination to spend quality time with family.
However, if we don't start early and keep on juggling with the finances in the later part of the life, like most of us, we will lately realise that we are too old to enjoy any of this. Furthermore, the trick lies in enjoying every such thing by keeping the key to finances in hand, so that you don't be viewed as a burden, even on your own family.
And don't forget that life can get tricky during those last five or 10 years. Very few fortunate souls drift away in their sleep at age 88 without ever having major surgeries, hospitalizations or chronic (and expensive) conditions to manage -- not to mention the ever-increasing costs of medical insurance and prescription drugs.
Retirement planning coupled with tax-saving benefits comes as a double whammy. To maximize your retirement planning, you'll want to invest in tax-advantaged accounts and investments that don't have early withdrawal penalties. Here are a few to consider:
Although defined benefit pension plans are rare, some employers still offer pensions that begin paying out immediately when you separate from service. As an added bonus, some employers, especially in government service, will also offer a continuation of insurance coverage to eligible retirees.
If you are lucky enough to work for an employer that offers an immediate, defined benefit pension plan (such as the military, police, or fire department), this can partly or even entirely fund your early retirement and in some cases can offer tax advantages, depending on your state of residence.
Holding equities long-term is not only tax-efficient, but possibly essential to position your portfolio for growth. Taxes on long-term capital gains and dividends are currently capped at 15 per cent, and you only have to pay this tax in the event that you receive dividends or sell shares.
Dividend paying stocks can also be a nice complement to an early retirement portfolio when you begin withdrawals. Not only can you benefit from the low dividend tax rate, but since most blue chip stocks consistently raise their dividends, they're an effective hedge against inflation as well.