For an early retirement, think long term, buy high-quality securities that can grow rapidly in the future, and remain invested to let compounding do its work
Due to the effects of compounded growth, a small shortfall in retirement savings now could protract into a massive shortfall in one’s old age, especially for millennials. As life expectancy improves, so will the need for higher retirement savings. Money is important, but time is of the essence, too. Time has been lost due to the pandemic, and therefore the need for getting back on track quickly must be acknowledged. The sooner millennials can restart their quest for retiring at their preferred age, the better for them.
Long-term investing is about repeating small steps consistently over a very long period. Assuming your finances are able to support small investment contributions every month, start from there to get back on track again. An SIP of Rs 10,000 in an equity fund that returns 15% per annum over 30 years creates a purse of Rs 7 crore. Your income will also rise with time, and an annual step-up of just 10% in your monthly contribution in the same plan will create Rs 15.02 crore. If such a plan works out, you could retire peacefully.
Retirement planning isn’t about savings. It’s about investing for higher returns, which will allow you to beat inflation. For example, a one-year FD today will give you around 5%. However, the current inflation rate is also around 5%, so your real returns are 0%. Unless you invest for higher returns through the securities markets, you will not be able to beat inflation. Retirement planning is a tricky process, and it is important to not make your mistakes long-term.
For example, in the above investment plan, if you invest for 5% for annum, where the interest gets taxed at 30%, you’ll create a purse of just Rs 2.77 crore instead of Rs 15.02 crore, thus falling short of your savings needs by a long margin. Consult investment planners and read up about how best to save. You also need to think about tax savings. At the start of your career, mixing long-term investments such as EPF and ELSS with your tax-saving needs can help achieve wealth creation as well as tax savings. Avoid opaque investment plans where you must lock-in your money and where you’re guaranteed an ‘assured’ rate of return that may be in no way adequate for beating inflation.
Avoid get rich quick mentality
As fixed income returns fall, the elderly are becoming long-term investors for higher returns while the young are looking to make a quick buck from the stock markets in the short term.
The chances of you buying that one stock that instantly changes your life are slim to none. Most people are not going to become rich quickly via investing. But they can achieve their wealth creation goals by being systematic and thoughtful over a very long period. For the youth, the most sensible approach to an early retirement would be to think long term, buy high-quality securities that can grow rapidly in the future, and remain invested to let compounding do its work.
The pandemic poses its set of challenges. And retirement for the youth today seems like a journey of a thousand miles. But that journey needs to start with a single step. And that step might as well be a small, monthly contribution to your investment account.
The writer is CEO, BankBazaar.com