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Financial Planning
Start young, Retire rich: Retirement planning for 20-somethings
The best time to start retirement planning is now! See how early planning helps you grow wealth and enjoy a secure future.
Key takeaways
- Beginning retirement planning in your 20s can help you build a much larger retirement fund, thanks to compounding.
- Planning early helps you invest in options that grow faster than inflation, securing your future lifestyle.
- Whether you're in your 20s, 30s, or 50s, there’s a suitable approach to help you grow your retirement savings.
Robust retirement planning is essential to build a strong financial foundation for the future. Even though you can plan for retirement at any age, planning earlier is better. Through compounding, smaller investments early in your life can compound to a large corpus in your retirement years.
In India, where family commitments, rising costs of living, and uncertain economic situations influence financial security, planning for retirement at a young age is the way ahead. Here's how it can contribute to a more financially secure future.
The magic of compound interest
Compound interest is a simple principle but a powerful wealth builder. It helps small savings amount to a substantial sum over the years. Unlike simple interest, which grows on the principal amount alone, compound interest earns interest not only on the principal but also on the accrued interest.
When you invest in EPF, PPF, mutual funds, or fixed deposits, the returns are reinvested, which creates wealth over the years. Thus, early small savings can result in a large corpus.
Case study: How compounding works
If an investor puts in ₹1 lakh as a lump sum investment and leaves it untouched for 30 years, earning an annual return of 12%, here’s how the investment grows:
| Year | Corpus (₹) | Absolute gain (₹) in 5 years |
|---|---|---|
| 0 | 1.0 | |
| 5 | 1.8 | 0.8 |
| 10 | 3.1 | 1.3 |
| 15 | 5.5 | 2.4 |
| 20 | 9.6 | 4.2 |
| 25 | 17.0 | 7.4 |
| 30 | 30.0 | 13.0 |
Key Insights:
- In the initial 5 years, the corpus grows by about ₹80,000. But in the last 5 years, it grows by nearly ₹13 lakh.
- In the first 15 years, the investment increases by around ₹4.5 lakh. However, in the next 15 years, it grows by an additional ₹24.5 lakh—that’s more than 5x the earlier gain.
This clearly shows the power of compounding over a long horizon—most of the gains come later, when your money has had time to grow and multiply on itself.
Peace of mind and financial security
Retirement planning provides you with financial independence, enabling you to make lifestyle decisions without financial worries. You can retire from work, become an entrepreneur, or change careers without any financial stress. Most importantly, you can live comfortably without having to depend on anyone financially.
Saving early secures your way of life, keeps you financially stable, and provides peace of mind in your senior years.
Increasing cost of living and inflation
As a result of inflation, the cost-of-living increases annually. Inflation reduces the purchasing power of money, and therefore, a bigger retirement corpus must be maintained to enjoy the same standard of living. If investment returns do not exceed inflation, your money's purchasing power gets diluted.
At a normal 6% inflation rate, if you spend ₹20,000 per month now, you might need ₹1.14 lakh a month in 30 years to maintain the same standard of living. Therefore, you need to invest now to support your retirement lifestyle.
Pension schemes or Fixed Deposits with assured returns can prove inadequate if they do not keep up with inflation. Investment in diversified schemes such as equity mutual funds, NPS, and real estate have the potential to offer inflation-beating growth.
Best ages to start retirement planning
You must begin planning for retirement as early as you begin working. The earlier you begin retirement planning, the more advantageous it will be. Here is a how investment should look like in different stages of life.
In Your 20s: Headstart
When you begin investing small amounts in your 20s, it has the potential to grow into a large sum thanks to compound interest. The schemes offered by employers such as EPF and NPS lead to savings through discipline. SIP in equity funds help generate long-term wealth.
In Your 30s: Balancing priorities
You have to adjust your financial plans as there can be new responsibilities such as family, kids' education, and home loans. Increasing your investment contributions can help negate the problem of a late start. Invest in a combination of equity and debt investments for growth with minimal risk.
In Your 40s: Maximising savings
As you reach close to your retirement years, you have to start saving aggressively. Increase in contribution, cutting discretionary expenditure, and optimal investments are very important during this phase. Investment in high-return assets needs to be traded off against conservative alternatives such as fixed deposits and PPF.
In Your 50s and beyond: Late start strategies
You can invest in tax-saving schemes such as the National Pension System (NPS) and Senior Citizen Savings Scheme (SCSS) to improve the potential of your savings. Shifting investments to low-risk investments like annuities and bonds offers stability at a low risk.
Conclusion
Retirement planning is about working towards a future where you don't have to financially depend on family members or compromise your standard of living. A good retirement plan allows you to pay for medical expenses, outpace inflation, and absorb unexpected costs without draining your bank account. It lets you enjoy your golden years on your own terms - whether that means travel, pursuing hobbies, or just living a good life.
Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.
Mutual Fund investments are subject to market risk. Please read all scheme-related documents carefully. Axis Bank Ltd. is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Any purchase of Mutual Funds by Axis Bank’s customer(s) is purely voluntary and not linked to availment of any other facility from the Bank. This content is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future returns. Readers are advised to consult a qualified financial advisor before making any investment decisions. Terms and Conditions apply.
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