Good things and good opportunities, once ignored, go waste. This is the same with your retirement plan. A retirement plan should be done with great caution, as the channel was chosen shall be final. To prepare an effective plan and execute the same, you need to devote adequate time and seek expert advice. It is essential to hire an experienced financial planner for creating a sophisticated retirement life.
Besides, the essence of a good retirement plan is its timing. When you want to secure your retired life, you need to give your investments adequate horizon to grow at its best and provide you the requisite coverage. Hence, the best time to plan your retirement is when you attain youth and become capable of earning your part. Give your savings an early start, to accumulate maximum amount and also enhance your corpus with handsome returns. Time plays a considerable role in accumulating and multiplying your funds, but the advantage of this dynamic factor can be best taken by a younger person than an older one.
Mostly, young adults are seen to be reckless with their career and naive towards saving for future; but when they wake up and are forced to plan about wealth accumulation, they have already incurred a sizable loss that cannot be mitigated. Thus, one must not neglect the opportunity to save a considerable amount regularly and invest the same in some good avenues which can bear the fruits of multiplied return without much harvesting.
Admittedly, it is not possible to save big during the initial stages of your career; you might simultaneously be dealing with repayment of your education loan or any other monetary obligation. Planning for your retirement is a time-consuming affair and requires disciplined savings. But over time, you will need to stretch the blanket of earnings and set aside a good amount for securing your retired life.
When you plan your retirement, you need to cultivate the habit of regular savings; also you are required to select the mode of investment in order to allow your accumulations to grow. Investors can avail the advantage of multiplied returns by virtue of the phenomenon known as “Compounding Effect”. The best way to see your investments grow is when you invest the sum of money cumulatively. Under this method, accrued interest on the amount invested is added back to the principal sum and next time the interest is calculated on the total amount rather than just on the principal, this way, you earn interest on interest.
Let’s understand this in a better way with the help of an example:
Say, you invest INR 5,000 in a bond that earns interest at the rate of 7% per annum. At the end of year one, your investment will earn INR 350, thus, your net investment amount becomes INR 5,350. Interestingly, at the end of year two, you will accrue interest on INR 5,350 which shall be INR 374.50 and your total investment will amount to INR 5,724.50. This proves that compounding effect multiplies your money faster than simple interest method. So, if you allow more horizons to your investment by beginning savings and investments early, you can get a handsome amount of sum on maturity.
There are several modes of investment available in the market; hence, you have to design a diversified investment portfolio, like investment in bonds, a stock market, mutual funds, real estate and etc. depending on your risk appetite. If you plan to retire early, you need to be more conservative with your portfolio than your colleagues who wish to stay employed longer. You must review your investments frequently to judge which of those are still secured and which can turn vulnerable, to churn them in your favour.
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Evidently, most of the employers nowadays offer a contribution towards long-term employee benefit schemes such as provident fund, gratuity, superannuation fund, pension fund and more. In accordance with the type of plan, employers may offer a comparative percentage of contributions up to certain limits, which can result in huge compounded growth and the enormous amount available at the time of retirement. All such contributions constitute post-retirement benefits of the employees and are intended to provide regular income inflow for the employees and their families. These initiatives encourage the employees to be loyal towards the enterprise and perform efficiently without much worrying about their retirement life. Employer’s Contributions to employee benefit schemes incur additional expense to the company.
Such contributions are partially made by the employers and partially charged from the employees through deduction from their monthly salary. The deductions made from the salaries of the employees are allowed as tax benefits to them on annual basis under the Income Tax Act while filing their income tax returns.
Workplace retirement benefits provide leverage to the employees to save from their earnings for future without hassles. The Government has also imposed stringent employee welfare norms on the employers to secure the employees during and post-employment.
As you start progressing in your career, your earnings will definitely show a rising trend. But the question arises, what will you do with your additional income? An aspect that you need to consider, in order to save money and build a corpus for your retirement are your spending habits. Being a slave of natural tendencies, you begin to increase your spending with an increase in earnings; such addiction is called “Lifestyle Creep”. People usually fall into this trap without even realising how this dangerous habit is engulfing a substantial portion of your additional income by means of unnecessary expenditure. Thus, over the years you have expended a huge amount in gathering unnecessary belongings that cannot be reckoned as an asset to provide adequate security when you get old.
In here, the idea is to give a hint that you might also be hit by the lifestyle creep, which drains out your hard earned money, that can easily be saved and utilized towards securing your post-retirement life.