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Why are young Indians severely unprepared for retirement?

by Tavaga Invest

What comes to your mind when you think of retirement? Peace? Luxury? Health?

For many individuals, retirement is the golden time when one can finally relax and pursue their leisure goals. With no active income, this is a phase in life where one needs to be financially well-prepared in order to live a hassle-free retired life.

However, the Indian youth do not seem keen on planning for their later years. According to a survey conducted by Max Life Insurance India in 2021, 80% of young Indians in urban areas are not prepared for retirement. It revealed that 1 in 4 have not even thought of retirement, which highlights concerns over financial preparedness.

The young population places greater emphasis on other financial needs like a kid’s education, wedding, purchasing homes over retirement. The focus on current satisfaction which when combined with a “You only live once” attitude can leave insufficient funds for future safety.

But why do young adults need to pay attention to early retirement planning?

Easier to save

Firstly, it is easier to save for retirement during the early stages of one’s career when there is no pressure to support a family and minimal health expenses.

Let’s take the example of Mr and Mrs. Rahul who are currently 35 years old. They intend to retire at 60 years and have annual expenses of Rs. 6 lakhs (Rs. 50k per month). Assuming 7% inflation, expenses at retirement can be estimated to be around Rs. 23 lakhs. With a life expectancy of 85 years, the corpus required would be around Rs. 5.7 crores in order to receive inflation-adjusted income for the post-retirement years. Yes, that’s quite a huge sum but that’s where the importance of early retirement planning comes into place.

Better inflation adjusted returns

Second, India has been witnessing a steep cost-of-living for years now which hurts the retired class the most. Inflation can eat up the value of your money and impact your lifestyle, medical and other expenses in the future. Strategically mapping out your retirement can help tackle inflation and maintain your future expenses and savings.

Avoid financial dependence 

Lastly, many Indians are largely unprepared for retirement as they rely on their children to bail them out during difficult financial circumstances. This financial dependence can create troubles between families. Thus, selecting and investing in the right retirement plan means you will not have to depend on anyone else for your needs.

So, planning as early as you can even with a small amount of money can go a long way to accumulate a significant pool of money.

What should you do to improve your preparedness for retirement?

First, it is important to accept that retirement is an inevitable scenario and not having a financial plan can result in undesirable consequences for you and your family.

Second, identify and quantify your retirement goals to see where you stand and where do you have to reach. This can be based on several factors like age of retirement, inflation, lifestyle, taxation etc. Using a systematic approach such as goals-based investing can help in your journey of accumulating wealth towards the decided retirement corpus amount.

Third, investors need to adopt to simple but intelligent investment techniques during their working years to build an appropriate nest egg. Below are some common ways to start retirement planning.

  • Equity Mutual Funds: Young Indians have a relatively higher risk tolerance than other age groups. This means they can allocate a significant part of their portfolio toward equities, especially when starting early for retirement.

    Equity Mutual funds are a popular monetary vehicle that generates wealth by pooling money from investors and investing in different segments of the Indian Equity Market including large cap, mid cap, flexi cap and value stocks. Such schemes allow investors to invest either a lumpsum or in small amounts regularly through Systematic Investment Plans (SIPs).
  • Exchange Traded fund (ETFs): Exchange-traded funds or ETFs are passive funds that are similar in many ways to a mutual fund except the fact that they can be purchased and sold on a stock exchange. The underlying investment funds are generally invested in stocks passively mirroring the composition of indices. The underlying asset can be an Equity Index, Bonds, Commodities and Gold. For example, if the bechmark is Nifty 50, the ETF invests in the same constituents as the benchmark as per their weightage in the index. This is particularly suited for young investors as it requires a very low investment, is easily accessible and does not have any fund manager bias. Click here to learn more about investing in ETFs. 
  • An Insurance plan ensures regular monthly returns at the time of retirement and is an appealing option for many investors because of the perceived safety and tax breaks available. 
  • Small Savings schemes such as Public Provident Fund (PPF), National Savings Certificate, and Senior Citizens Savings Scheme are managed by the central government. These schemes provide returns higher than bank fixed deposits but lower than equity. Since it provides guaranteed returns, these schemes are considered safe modes of investments and is suited when someone is very close to retirement.

“Invest in wealth for a better tomorrow!”

Retirement investment is a matter of choice and working towards it is key to leading the retirement life you hoped for. The secret is to start early. Plan your retirement under the guidance of a professional financial advisor who will help you build a portfolio that safeguards your interests while ensuring high returns.

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