A common mistake many people make is that they think about retirement only when they see it coming. “We will cross the bridge when we reach there,” is a common refrain. Youthful assertions about living for ‘today’ and enjoying life to the max sound good and may sell a few brands; but will not provide you with sufficient financial security during the twilight years of your life.
A simple mathematical calculation clearly reveals the necessity of starting early when it comes to retirement planning. In the majority of pension plans today, one of the factors that determine the amount of money that we get after retirement is the amount we have contributed to the pension fund. By starting early, one can build a large pension fund by contributing small amounts per month.
Advantages Of Planning Early
For most young people, retirement is what their parents need to take care of. Some people tend to provide self-assurance on the lines of “in the next one or two years”. But procrastination is the source of the retirement blues. Let us see how and why.
At present, the most favored type of retirement plan is the defined contribution scheme in which people have to contribute a certain amount. This amount will be deposited in some kind of financial instruments such as fixed deposits, government bonds and securities, mutual funds, and share market. The eventual pension that one gets depends on the amount one has invested and the performance of these financial instruments.
So, by investing in retirement early, a person can not only transfer more money into this account but also provide more time for the money to grow at a compound rate. It is everybody’s guess that the more the period of deposit, the more will be the interest and other benefits for any kind of deposit.
Even for stock market investment, which is considered as insanely volatile at present, the data over a long term reveals that the stock prices have gone only in one direction, upwards. In fact, a study has found that the stock market even now provides the maximum value for long-term investment. In this study, the growth of one dollar invested in 1950 on government bonds, fixed deposit, and stock market was calculated based on interest rates, deposit rates, and variations in stock index. It was found that the one dollar invested in the stock market still provides the biggest returns.
But if you consider the short term, stock market may not provide better returns. For example, if the study was about one dollar invested two years ago, the results would have been quite different. What it means is that if your retirement age is quite far away, say, 25 years from now, you can safely invest in plans in which you are likely to get maximum return for your money. On the other hand, if you are just five or six years away from retirement, you may not want to risk investing in stocks. You may thus have to settle for less beneficial investment options.
Moreover, if you start early you will be able to control the fund flow to the pension fund. Small amounts at the early stage of your career would not harm your financial position much. It is true that your salary would increase with age and experience but the expenses not just increase- they skyrocket! So you might just be able to set apart only a certain percentage of your salary for your retirement plan. That again illustrates why early birds have a better and safer retirement.