Millennials are increasingly seeking to pursue valuable investment options to accomplish life goals. However, in the constant pursuit of short-term goals, they barely consider planning for long-term investments in their 20s. This is a missed opportunity that, if prioritised, could help them build a retirement corpus to fulfil their life goals including going on a world tour or buying a luxury retreat by the seaside.
Here are a few reasons why the 20s are the best time to start retirement planning with life insurance :
Building a bigger retirement corpus :
The retirement corpus should be adequate to cover health contingencies and day-to-day expenses, alongside enabling investors to fulfil life goals. Millennials can create a bigger corpus if they start at an early age as they can give time to their corpus to grow.
A higher risk-taking ability :
Millennials, in their early 20s, will have comparatively fewer responsibilities towards EMIs on a house or expenditure on dependents. This time provides a golden opportunity for them to invest in avenues with higher risk and higher returns. ULIPs is one of the preferred choice here due to the flexibility in investments, option to invest in diversified funds and potential to earn higher returns.
Advantage of power of compounding :
Compounding essentially means earning from the interest or gains on the initial investment. The principle of compounding, simply put, incorporates earning by 'interest on interest'. By starting to invest at an early age, millennials can see exponential growth in their investments till they reach the retirement age due to compounding returns.
Let's understand the concept of compounding with an example. Priya, aged 25, starts investing ` 5,000 every month towards her goal of retiring comfortably. If she stays invested for 30 years, then at the age of 55, her retirement corpus will amount to ` 75.01 lakhs, assuming an annual return of 8%. On the other hand, Anil, aged 35 starts investing ` 10,000 monthly, towards his retirement corpus. Assuming that Anil also earns 8% annual returns on his investments, his retirement corpus at the age of 55 would amount to 59.29 lakhs. Priya managed to generate a relatively bigger corpus for retirement (` 75.01 lakhs) despite a lower investment (18 lakhs) as she started early, gave more time to her money (investment duration of 30 years) and thus, benefitted from power of compounding.
Tiding over market risks through rupee cost averaging :
The concept of rupee cost averaging involves the averaging out of cost in the long term with investments of a fixed amount at regular intervals. The investment risk is spread across market movements through the purchase of more units when prices are low and fewer units when prices increase. Thus if one stays invested for long term the probability of lower returns reduce significantly.
Ensuring financial discipline :
Prudent investments at an early stage can inculcate the habit of saving and control expenditure. This also establishes a secure financial position in the future. By making long-term investments in a systematic manner, millennials can fulfil their retirement goals with ease.
Opportunity for tax savings :
Most of the millennials would have or will be joining their first job. With the paycheques also comes the liability to pay taxes. ULIPs offer tax benefits with deductions of up to ` 1.5 lakh under Section 80C and exemption on maturity benefit under Section 10 (10D) of the Income Tax Act 1961 subject to provision stated therein
Exploring financial investment options at an early stage (right from the first paycheque) can help in stress-free retirement planning. People at a young age tend to take financial advice from well-meaning friends and relatives, but the best way is to receive prudent financial advice from a trustworthy financial planner. Honest conversations around life goals can help investors understand the best avenues for investments to fulfill their life goals. Investors can also use a retirement planning calculator to understand the interplay of the investment amount and time horizon in maximising their retirement corpus.