01/01/2013
Why Should You Plan for Your Retirement?
Did you know that from the very first day you receive money, not at your job, but the pocket money you received as a child, you have been an 'investor'?
Think back to the first day you received pocket money.
You most likely spent it on food, toys, games, movies and other entertainment, and travel.
How much of it did you save?
Not much, if you were like most children in school and college.
You invested in instant gratification, as do most youngsters.
From this young age, your activities, your spending patterns, formed a habit. Your investment behavior started to get set. Your investor psychology began to solidify.
Then you got your first job and started to mingle in the workplace.
At work, you interact with your colleagues, slowly you hear about people making investments in Tax saving mutual funds, or in their PPF. Your HR talks to you about EPF so you know about that too.
You glean investment facts haphazardly from your colleagues and without really verifying the data, make further investment decisions.
For the next few years, your focus is mainly on saving tax and then you start to think about your life goals. You get married, then have children, educate your children, somewhere along the line you buy a home by taking a home loan.
The expenses continue, and your saving, spending, or investing continues as it did earlier. Your investments receive just enough of your attention for you to feel like you're doing something useful about it.
But are you doing enough?
With each well-intentioned step you take along this path, your biggest goal of them all suffers. Your Retirement.
The wealth that you could have built for this crucial goal, does not get built.
What we don't realize is that the success of all our life goals, from buying a car, to our children's educations, to going on a family world tour, to retiring young and retiring rich, depends on our investment behavior.
What are the investor traits that affect your retirement corpus?
Investor Trait #1: Procrastination
Procrastinating is bad for your Retirement. You lose out on time value of money and power of compounding both.
Let's look at the cost of delay:
Mr. A is 25 and invests Rs. 5,000 per month. He is investing into equity mutual funds and will likely earn about 15% per annum over the next 25 years, until he turns 50.
Mr. B is 35, and invests Rs. 15,000 per month. He is also investing into equity mutual funds and expects the same rate of return for the remaining 15 years, until he turns 50.
Mr. A achieves a corpus of Rs. 1.62 crores.
Mr. B achieves a corpus of Rs. 1 crore.
The solution is simple. You want to be an investor as early as possible, even if the amount is small. You must save, invest, and save some more and invest some more, and in doing so, you will build up your wealth.
Investor Trait #2: Overconfidence & Ignorance
Don't underestimate inflation.
Don't underestimate the benefit of saving taxes.
Don't overestimate your ability to deal with financial goals 'later'.
Don't overestimate your health, as you get older, it will get weaker.
These things might seem unrelated, but they all point towards one quality - your confidence, or overconfidence, as the case may be.
Inflation will erode the real value of your wealth.
Dealing with a financial goal now is easier than dealing with it later.
Saving taxes will add to your retirement corpus in significant ways.
Your health will flag as you age.
If you knew how much you need to retire, you would probably start planning and investing for it right away. You will suddenly realize the importance of dealing with goals immediately, saving taxes, and also of being adequately insured.
Investor Trait #3: Constant Tracking & Monitoring
Once you realize that you need to invest, and you identify the right amounts, the right schemes, the right asset allocation, and begin your investments, the one thing you must NOT do, is track your investments every day, or every week, or every fortnight.
If you track your investments on a daily basis, your emotions will go on the same ride as the markets - up one day and down the next. Human beings aren't built to handle this kind of emotional volatility. So invest in the right schemes, for the right amounts, for a particular goal, and monitor once a quarter or once in 6 months. If markets are crashing - excellent! Buy more - it's cheaper now! Don't follow the herd - eventually it might run off a cliff.
Investor Trait #4: Investing Alone instead of as a Family
No man is an island. We all have families, and our financial decisions will affect them. The best way to go about building a retirement plan is to first sit down with your spouse and figure out exactly what you're spending now - you have to consider household expense inflation, medical expenses inflation, travel expense inflation, and the kind of lifestyle you want to maintain in your retired years. Will you do more charity work after you retire? Will you travel more? Will you both take up hobbies?
Together, you both should sit down with your financial planner and work out your retirement plan.
The habits you built as a child dealing with your money can be modified, tweaked and bettered. You can, right now, stop procrastinating, realize the cost of delay, and start planning for your retirement. After all, who doesn't want to retire young and retire rich?
