Retirement Planning for Young Adults

Several financial and lifestyle trends have increased awareness regarding retirement planning for young adults. The following factors explain why young people are worried about retirement and why starting early has become increasingly important:

• Increased Cost of Living: The cost of housing, education, healthcare, and day-to-day living continues to increase due to inflation. It implies that a significantly higher retirement corpus might be required in the future to maintain the same standard of living. Building a retirement corpus early helps to compensate for these increasing expenses by growing savings over time.
• Increased Life Expectancy: With advancements in healthcare, life expectancy has increased. Therefore, savings for retirement might need to last 20 to 30 years after retirement, or even longer.
• Limited Employer Pension Benefits: The majority of private sector employers do not offer any form of pension benefits to their employees. Individuals are therefore responsible for building their own pension plans through disciplined investing and financial planning.
• Changing Career Patterns: Changing jobs frequently, being a freelance professional, contractual employment, and career breaks have become increasingly common. These may affect one’s retirement savings in the long run if retirement planning is not started early.
• Increased Financial Obligations: Young working individuals often have multiple financial obligations like education loans, mortgage costs, wedding expenses, and family responsibilities. If savings are delayed, it would decrease the amount that could be accumulated for retirement.
• Increase in Healthcare Costs: Higher medical costs are associated with old age. In cases where people do not have enough retirement savings, paying for medical services during old age will become financially challenging.
• Effects of Inflation: Inflation results in the gradual decrease of the value of money in the future. The retirement corpus that appears sufficient now will not offer the same financial security as it does decades later.
• Need for Financial Freedom: Young adults desire to secure their financial freedom in the future so that they do not have to rely on their family members after their retirement. Planning for retirement at a younger age is important as it provides greater flexibility in future career and lifestyle decisions.
• The Cost of Delaying Retirement Planning: Delay in retirement planning limits the amount of time during which the investments can grow through compounding. This will require an individual to make considerably higher contributions every month to build an adequate retirement corpus by retirement. Beginning early allows individuals to benefit from compounding and build wealth more efficiently.

These concerns highlight the importance of early retirement planning to create adequate retirement savings and achieve long-term financial security.

One of the major benefits of early retirement planning is that your investments get more time to grow through the power of compounding. Even if your monthly investment amount remains the same, delaying your investments by 10 years can significantly reduce the size of your retirement corpus. The example below shows why it helps to start early when planning for retirement.

*Figures are indicative and have been calculated assuming a 12% return per annum. Returns may vary according to the performance of the market and investment product chosen.

The Lesson: Despite investing only ₹6 lakh more in comparison with Rahul during the total investment period, Priya’s retirement corpus will be three times higher than Rahul’s. This is because she invests for extra 10 years compared to Rahul. This example demonstrates that early retirement plans can significantly increase long-term retirement savings, even with relatively small monthly investments.

One of the most common problems faced by young working professionals is the determination of the proportion of the monthly income that needs to be set aside for retirement purposes. Different types of pension plans are available, which can be selected based on an individual's financial objectives.

Though the amount may differ for different people, the well-known 50-30-20 budgeting rule can provide a useful framework for developing a balanced savings plan. Using a pension calculator before investing money is beneficial in determining the retirement corpus and monthly investments that need to be made to achieve the retirement objectives. This framework usually involves allocating the monthly earnings into three types of expenditures as follows:

The 20% reserved for savings and investments may be further subdivided according to personal financial responsibilities. Some part of it can be invested towards retirement planning, while the remaining amount can be used to build an emergency reserve or achieve other personal financial objectives.

However, the 50-30-20 budgeting approach is just a guide, which is not applicable to all people due to their varying financial obligations. People who have more financial obligations may be able to save a smaller percentage of their salary initially, while increasing their retirement investments gradually. Individuals with fewer financial responsibilities can allocate more than 20% of their income for retirement.

Nowadays, retirement is not seen as just an event in which an individual reaches a certain age and stops working. Many younger individuals look at retirement as being financially independent and having the ability to make life choices without depending on employment income.

• Financial Freedom: Retirement planning aims to help you achieve financial independence after you stop working. Having a proper retirement corpus gives one the flexibility to decide on the career path and lifestyle.
• Early Retirement Planning: Early retirement planning gives investments more time to benefit from compounding. It can also cut down on the future investment needed to reach the desired retirement corpus.
• Career Flexibility: With a well-planned retirement corpus, an individual can make lifestyle choices without much financial stress. Decisions can include early retirement, part-time work, consulting, entrepreneurship, or personal interests.
• Multiple Sources of Retirement Income: A retirement plan may include income from many sources rather than just one stream. Investments, pensions, annuity schemes, and other financial assets can collectively help build a bigger retirement corpus through regular monthly investments.
• Periodic Assessment and Modification: Goals relating to retirement and financial responsibilities tend to change over time. Regularly review retirement investments and increase contributions as financial circumstances change. This helps to keep the retirement plan aligned with long-term financial objectives.
• Planning for a Longer Retirement: Life expectancy has increased, and thus, retirement funds might need to last for many years. Planning early will help build the required corpus to meet future living expenses and healthcare costs.
• Financial Independence, Retire Early (FIRE): Young adults are implementing a new method called FIRE, where individuals save and invest a large amount of their salary to attain financial independence. While this approach does not seem to be suitable for all, it reinforces the importance of disciplined saving, long-term investing, and early retirement planning.

Retirement planning should ideally begin at a young age so that it helps in accommodating any changes in the financial plans and goals of the individual.

Plan for retirement at a young age. By planning early, investments can compound and accumulate more, enabling the formation of a bigger retirement corpus with frequent monthly deposits. This could be a sustainable stream of wealth over the long run when retirement planning is combined with investment planning. It also enables people to plan for rising living and healthcare expenses, as well as future financial obligations.

Planning for retirement is an individual matter, and no one retirement plan is appropriate for everyone. Other factors, such as income, financial goals, lifestyle, and increased financial obligations, help determine the best retirement plan for an individual. Assessing these factors can assist people with developing a retirement strategy that matches their long-term financial goals.