How To Balance Your Financial Priorities While Saving For Retirement

In today’s age of rising costs, increasing financial demands, and the constant demand to keep up with your neighbors (and their Instagram posts!), it’s becoming increasingly difficult to achieve a distant goal like retirement – which is typically between 10 and 30 years old – prioritize a way. Our shorter-term financial goals invariably take precedence, and we often tend to either postpone our retirement savings or frequently use them for other purposes — unaware of the colossal impact even small withdrawals or delays can have on our life after retirement!

If you belong to the category described above, you can benefit by following the 5 simple pieces of advice given below.

Retirement first, education second

It’s common for parents to prioritize their children’s college education before they start saving for their own retirement. While we appreciate the sentiment behind it, it would be wise not to focus all of your savings on a single goal! Because your retirement goal is several years after your child graduates, you have the opportunity to earn interest on your early savings for a few more years by starting early.

To put the above in perspective, if you save 5000 rupees a month for your retirement between the ages of 25 and 30 and compound it for the next 30 years until you retire – that meager savings comes to 1.22 Billion rupees times when you reach 60!

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Since your retirement goal is a long way off, you can take advantage of compound interest and save in small increments for many years compared to your children’s education goal, which typically requires a much larger monthly outlay. After all, there’s no way you want to spend your savings on your child’s education and then use it to fund your post-retirement lifestyle!

Benefit from unexpected strokes of luck

It would be wise to invest any lump sum payments you receive over and above your regular income into your retirement savings. These could include income tax refunds, unexpected dividends, inheritances, and performance bonuses.

Because these inflows aren’t required for your normal lifestyle, it doesn’t force you to put them into your retirement savings right away!

Boosting your retirement pool with lump sums often can significantly speed up your final retirement. Even Rs 1 Lac invested at 12 per cent per annum for 30 years will add up to Rs 30 Lacs when you retire! Keep that in mind the next time you’re tempted to squander idle funds on equipment that will be obsolete a year from now!

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Getting aggressive

Regardless of your risk tolerance, you should ideally resist the urge to invest your retirement savings in conservative asset classes like bonds or recurring deposits. Since your retirement goal will typically be many years away, chances are market volatilities will smooth out your returns over multiple market cycles.

Even a small difference in after-tax returns over a long savings period can make a big difference in your future retirement savings. Rs 10,000 saved monthly at 8 per cent per annum for 30 years will mature at Rs 1.49 crore. The same saving of 12 percent per year brings Rs 3.49 crore! That’s the power of the extra 4 percent.

It’s worth considering more aggressive savings options (such as SIPs in mid-cap stock funds) if you’re making a monthly contribution to your retirement fund. Your savings portfolio can go up and down in the medium term, but will result in a significantly larger stock in the end. The key – save dispassionately regardless of market cycles. Let the rupee cost average work its magic.

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Keep it sacrosanct

A human psychological phenomenon called “hyperbolic discounting” creates a tendency to place infinitely lower importance on rewards reaped in the distant future.

Our pension fund bears the maximum risk of this phenomenon! If only we had a rupee when a client broke into their retirement plan to fund an immediate need…

It would be wise to set strict personal rules and limits when it comes to your retirement planning. Consciously save in funds with strict lock-ins to protect your corpus! Systems like NPS, which have strict restrictions on early withdrawals, were specifically created with the above points in mind.

Even “wants” or desires can seem like “needs” when you face them. Take a break before you embark on your retirement – think ahead and consider the longer-term implications! If you do math and think logically, you can either delay your spending or reduce your needs.

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