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Aug 08, 2013

Start Saving Early For Retirement Kitty

Money Talk/V. Devaki
image It is never too early to start saving for retirement as you are likely to need a decent pension when you grow old and eventually stop having a regular job. Here are five points to nudge you into a saving habit, if you already don't have one.

 

1. Power of Compounding

The earlier you start saving, the more time your money has to grow. Here, the magic of compounding applies where you earn interest on the interest you have already earned.

For example:-

A 30-year old starts saving Rs. 1000 every year at 5 percent interest compounded annually, he/she will earn nearly Rs 71,000 at the age of 60.

At the same time, a 45-year old will have to put aside thrice the principal amount, i.e. Rs 3000, every year at 5 percent to get the same amount at the age of 60.

2. Cost of Waiting

Delaying to start saving for retirement could cost your retirement kitty a lot. Put aside even the smallest amount you can save now, with the hope that you can enhance that amount once your annual salary raise comes.

For example:-

If a 25-year old invested Rs 1,000 at 8 percent interest, it will earn Rs. 21,57,352 at the age of 60, provided there are no withdrawals in between.

While a 30-year old investing the same amount at the same interest will only earn Rs 14,18,613 at 60.

So, a gap of 5 years results in a difference of Rs 7,38,739. In other words, if one starts saving early, one can accumulate more.

3. Less Pressure

A young individual would be able to save more because the demands of life are likely to be less at that age compared to those faced by someone older with more responsibilities such as family, kids and aging parents to support. The ability to take risk or bear any financial loss is also greater for a younger investor. Hence, it would be ideal to start saving for retirement at the start of your career itself. This can also help the individual to prioritize and cultivate a prudent spending habit that will be useful in future.

4. Efficient Tax Savings

Starting early in saving for retirement can also help in planning investments, so as to save maximum tax. Payments to most pension plans as well as long-term investment schemes such as PPF are exempt from tax and anyone starting early has the benefit of time to explore various tax saving options and adjust the portfolio regularly.

5. Start Small and Grow

If you are starting early and regularly investing small amounts, it will grow big over the years. Such small amounts going to long-term savings can help to build a stable financial position and boost the individual's confidence. You can always boost the saving amount as and when earnings improve.