Broach the subject of retirement planning to a young earner, and you might get a response like, “I have just started earning. Let me enjoy life for a while and worry about this later.” When that “later” does arrive, it does so with its bag and baggage – home loan, car loan, older parents, older in-laws and so on.
Here is a simple illustration explaining why you need to plan for retirement as soon as you start earning. Your future self will thank you profusely. Investing is becoming popular instead of saving among young earners. However, their idea of investing is often synonymous with trading – earning a quick buck.
Young earners are better off spending time improving their skills and income and deploying a chunk of their income into passive funds. Once they get this started, we strongly recommend doing a retirement planning calculation ASAP.
Let us see why with a ballpark retirement planning estimate. For a full calculation with existing investments and post-retirement income sources, you can use the freefincal robo advisory tool.
| Current age | 25 |
| Anticipated post-retirement rate of return (post-tax) | 6.00% |
| Current expenses per month (annual/12) | 30,000 |
| No of years you expect to work (retirement at age 55) | 30 |
| Expected inflation throughout your lifetime | 6.00% |
| Estimated years in retirement | 30 |
| The average rate of return expected from all asset classes (post-tax) until retirement | 9.00% |
| The annual increase in the monthly investment you can manage | 5.00% |
Result: Monthly investment needed as % of current expenses: 74.92%
So, the 25-year-old should invest at least 75% of her current expenses of Rs. 30,000. This investment included mandatory EPF/NPS contributions.
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Now let us find out the cost of delay.
| Delay by (years) | Monthly investment needed as % of current expenses |
| 1 | 78.49% |
| 2 | 82.31% |
| 3 | 86.42% |
| 4 | 90.85% |
| 5 | 95.64% |
| 6 | 100.83% |
| 7 | 106.48% |
| 8 | 112.64% |
| 9 | 119.39% |
| 10 | 126.82% |
| 11 | 135.04% |
| 12 | 144.17% |
| 13 | 154.37% |
| 14 | 165.85% |
| 15 | 178.87% |
Not only will the investment required increase alarmingly, but the expenses will also increase yearly! So, financial independence after retirement will become increasingly harder unless your salary can keep pace. Another problem is our risk-taking capacity. We cannot recommend someone over 60 to go overboard on equity to compensate for time lost.
It is, therefore, crucial for young earners to take a few minutes and plan their retirement. See, for example, A simple thumb rule for retirement planning. They should do their best to (1) invest at least 75% to 100% of their current expenses (including EPF/NPS contributions) and (2) aim for an asset allocation of 50% to 60% equity and the rest in fixed income.
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Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 14 years of experience publishing news analysis, research and financial product development. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice. Connect with him via Twitter(X) LinkedIn YouTube Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (Published by CNBC TV18) for DIY investors. 
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Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain? What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management. What readers say! 
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