Stepping into your thirties, you’ll find your responsibilities increase multi-fold. Not only will you be expected to handle tougher challenges at work, you’ll also be needed to secure your dependents – often your spouse, children, and retired parents.
Your income will no doubt increase, as will your expenses. It is important to not get carried away by the growth of your income. You’re still young and, no doubt, there will be plenty of temptations that you would want to spend your money on. But it is absolutely important you start thinking about your future as well – a time of your life when you won’t have regular income.
If you haven’t done so in your 20s, 30s is the best time to get started on planning your finances for your short, medium and long term goals. It is important to understand your expenses now, in order to determine your expenses 30 years from now, and how much you’ll be able to save in order to meet those expenses when you don’t have a regular income.
Why should you start planning for retirement now?
In their 30s, most people make the mistake of believing they have a long road ahead of them and can therefore start investing later to create a retirement corpus. This is not a wise choice. The earlier you start investing, the more time you give your investments to grow, therefore allowing you to accelerate towards your retirement goals.
For example, if you’re 30 now and invest Rs. 1 lakh in a mutual fund growing at 15% annually, you get Rs. 16 lakh when you’re 50. But if you make the same investment at 40 to be redeemed when you’re 50, your returns would be Rs. 4 lakh. See the difference time and compounded growth make?
You may have missed the bus in your 20s. But it’s not too late. Start investing now rather than delay it for your 40s, when you’ll have a curtailed working life and short growth span to reap the full benefits of your investments. Also, if you set yourself an ambitious retirement goal, trying to achieve it after your 40s would be tougher.
Suppose your desired retirement age is 60, and if you’re 30 now, you still have 30 years to get to your goals. This is a sizeable length of time to accumulate a decent retirement corpus with low-risk instruments. Delaying investment would imply having to take on higher risks later in order to achieve the same goals. You would have to invest in riskier funds, curtail your retirement corpus to reduce risk, increase your retirement age, and also increase your monthly investments to meet the goal.
Another common refrain we hear is that people in their 30s are so saddled with expenses that it becomes impossible to commit to a long-term investment plan. The key here is to commit to some form of investing that doesn’t strain your budget. Start with a monthly investment plan of Rs. 3000 if you can’t start with Rs. 10,000, but getting started is mandatory for your long-term financial health. As your income grows every year, scale up your monthly contributions that would help you accelerate towards your goals.
Let’s understand the need to start investing soon with the help of this illustration:
Keep inflation in mind
While planning for your retirement, focus on the corpus you need at your retirement age after adjusting the inflation impact. Suppose, your current monthly expenses are Rs 50,000. In 30 years, this amount would have multiplied due to inflation. Assuming an average inflation rate of 7% every year, you will need Rs. 380,600 to meet the same expense 30 years from now. Therefore, if you think that you need Rs. 1 lakh to live comfortably today, you’ll need Rs 761,225 per month 30 years from now. So plan your retirement corpus accordingly.
In the 30s, it is advisable to opt for an aggressive portfolio with investments in stock, and equity mutual funds consisting small and mid-cap schemes, and target a higher rate of return. Real estate investment is another attractive avenue that you can explore aggressively because you also get a long term home loan support and tax advantages.
Maintain funds in liquid investments for short and medium term expenses. While investing, take care of tax implications on your returns. You can diversify your portfolio to reduce risk further. For example, PPF holdings are tax-free, as are equity investments older than 12 months on whom security transaction tax has been paid.
It is important to keep a check on your expenditures. Plan your expenses and save funds to meet such expenses. Avoid making excessive use of debt instruments such as credit cards and personal loans to meet your short term expenses. Pay your EMIs and credit card bills on time. Segregate the fixed and variable expenses and make proper provisioning to meet such expenses. Such prudence will all add up to increase your savings and help you get to your retirement goals quicker.
Borrowing is an important tool to provide you the support needed to meet your financial goals. While borrowing, select your loan products and lenders smartly. Suppose you want to buy a car and for that you take a personal loan with an interest rate around 14 to 24% per annum. The better option here is to take a car loan whose rates are in the range of 9-10%. Such minor adjustments will also add up and help you save money on repayments—money that you can then direct into your investments.
Review your investment, expenses, borrowing, and future requirements regularly. If, your future requirements changes, then adjust your retirement plan accordingly. Take care of contingencies by taking adequate life insurance, health cover, critical illness, and permanent disability cover. Maintain a contingency fund to face uncertainties such as job loss or emergency expenses.
In the 30s, you get the flexibility to select the course of your life as you want and to achieve your retirement goals easily. But any delay in kicking off your investments could spoil your retirement plans and put pressure on your current financials as well.
The author is CEO, BankBazaar.com