Retirement = Old Age?

Srikanth | 28-Apr-2009

A lot of young people in their 20's or early 30's think that it is too early for them to think about 'Retirement Planning'. For many people the word 'retirement' brings an image of grey hairs, wrinkles, big belly etc. The truth is that retirement is not about age. It is about a stage in life when you have an option to stop working for money and do something completely out of love and passion for something. This means that when you retire, you should have created enough wealth to fund your monthly living expenses. And you need not wait till you are in 60's. It can happen in 50's or 40's or even earlier!

I know of a wonderful couple who retired at 35. They were working in California for 8 years and were prudent enough to save and invest regularly to build a corpus that allowed them to return to India and pursue their passion - organic farming, yoga, ayurveda and several other social and community building initiatives in the rural India. (If you are curious to know more and want to get some inspiration, check out their blog: http://www.greenlocal.org/whatis)

While most people have a dream, very few plan their finances well enough to make it a reality. The sooner you start planning for your retirement the better. A lot of young people have a myth that it's too early for them to start planning for their retirement. When I share this classic example with them, it wakes them up from their slumber:

• Person A started investing for retirement planning at age 40 and invested Rs 10,000 every month till he was 65 years of age.
• Person B started investing for retirement planning at age 25 and invested Rs 10,000 every month till he was 55 years of age.

Assuming that both got a return of 12% p.a. on their investments, Person A accumulates 1.6 Crores at age 65 while Person B accumulates 5.2 Crores at 55 years of age.

This is possible because of the 'power of compounding', which has been referred as the 'eighth wonder of the world' by Albert Einstein. The sooner you start investing for your retirement, the more time you have for the magic of compounding to work wonders.

There are several investment products that are designed specifically for retirement planning. E.g. Public Provident Fund (PPF), Pension Plans from various Life Insurance companies, The New Pension Scheme etc. You can also build a part of your retirement corpus using mutual funds or buying shares directly from the stock market. There is no one product that fits all, hence discuss your retirement plan with your financial planner.

A few common principles that I would recommend for retirement planning, irrespective of where you invest are:

• Start as early as possible and invest regularly
• Do invest a part of your investments in equities when you are young
• Start switching more towards fixed-returns as you reach closer to your retirement age
• Take adequate inflation into account while you calculate numbers
• Consider the post-tax returns on your investments. Both, pre & post retirement

So, what is your idea of retirement? Do you have an investment plan for it? What do you think is the best investment option for retirement?