TL;DR
Starting your retirement savings as soon as you begin earning money is a crucial step towards securing your financial future. Retirement planning is a unique financial goal because it’s non-linear and conditional on how long you live. This means the value of the goal and the inflation rates you must consider are complex and multifaceted. Beginning to save early is essential because it reduces stress, allows you to benefit from the power of compounding, and gives you more flexibility to take on market risks that can lead to higher returns.
It is one of the trending questions on various social media platforms. At what age should one start their retirement plan?
If my answer is that one should start from the day they start earning money, many might find it delusional.
Financial requirements for retirement are different from any other financial goal. It doesn’t follow a linear path, and the variables impacting it are much more than any other goal. It may be pretty similar to planning for emergencies that we cannot cover using traditional risk management techniques, such as buying insurance.
Understanding the Non-linearity of a retirement goal
Unlike any other financial goal, where you generally know the term because you know when you want to execute, and can predict the goal value with ease by factoring in inflation. However, retirement as a financial goal and planning can’t be that linear.
- The value associated with a retirement goal is a conditional function of how long one lives. It means the term of the goal spans multiple years, not just at the end of a particular year.
- Inflation rates taken into consideration for a retirement goal can’t be just one linear rate. In other goals, we can still consider an average rate because the goal is connected to a future spending against a specific category, but that is not the case with retirement. Since the term spans multiple years and categories, we must always consider category-specific rates and their impact on future budgets. We also have to factor in the potential fluctuations.
- One can consider insurance as a risk management tool if you are unable to fulfill your part of the contribution for other goals, but that is not possible for retirement. Even if you are trying to do it, the cost implications are much higher.
- Changes in tax rates over an extended period can impact hand withdrawals from the retirement fund, forcing one to make unwanted adjustments in their post-retirement lifestyle.
When to start executing your retirement plan?
Suppose you arrived at a number by looking at the non-linear nature of the retirement goal, and maybe looking at other factors that affect your execution journey. It’s better to start early.
According to the most accurate definition of financial planning, it is always essential to start the journey by saving for emergency life scenarios. One should also consider allocating a portion of their savings towards building a retirement fund. The question here is why starting early is essential:
- Since the value in consideration is always much higher than other financial goals, starting early will ensure less stress.
- Investing for retirement from a young age enables one to benefit from the compounding effect, where gains generate further gains, creating exponential growth in the retirement corpus. Additionally, it helps one develop a hedge against potential periods of weakness in any asset class.
- Since the term is much longer, many people end up de-prioritizing retirement. You may end up routing money from retirement to other near-term goals. However, since you started early, you can mitigate the possible gaps and risks associated with rerouting.
- Starting early can give one better leverage in taking risks, which in turn opens opportunities to get better rewards multiple times, but starting late will not only put stress but also reduce one’s ability to take market risks.
Considering all the factors discussed above and looking at non non-linear nature of retirement goals, one needs to understand that it not only requires extensive planning, looking at multi-faceted variables impacting it over a more extended period of time, but it is also essential to start allocating a part of one’s savings from day one.