Financial security in retirement is a top concern for many youngsters today. Given the rising cost of living, the need for retirement planning has never been more critical, and so has the concept of “time value of money” that every young investor should know. Hence, an early start to retirement planning will allow them to set realistic goals and a roadmap to achieve their dreams.

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Why You Should Start Investing Early?

Investing early, even in small amounts, can help accumulate a large corpus over time. “Starting early provides you with more time to recover from market fluctuations. This time advantage allows you to navigate the ups and downs of the market with ease,” says Aditya Goela, CFA and co-founder of Goela School of Finance.

Early investing cultivates financial discipline through regular contributions to your investment portfolio. Automating investments through systematic investment plans (SIPs) can help build discipline, allowing you to grow wealth and ensure financial security and stability in the long run.

Moreover, you can allocate more money towards your retirement fund at a young age as you will likely have fewer financial responsibilities. “As you grow older, you may have more financial responsibilities, such as taking care of a family, paying for children’s education, healthcare needs, etc. This may not leave you with too much room to invest a higher amount,’ adds Goela.

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When You Should Start Investing?

Start Today: The best time to invest in retirement funds is now. The power of compounding works best with time, so the earlier you start, the better.

“In the beginning, it’s important to start investing through SIPs. As your income grows, increase your savings more than your expenses,” says Sumit Duseja, CFA and co-founder & CEO of Truemind Capital, an investment management and advisory platform. He further suggests that once an investment portfolio reaches a considerable size (upwards of Rs 25 lakh), one should consult a fee-only Securities and Exchange Board of India (Sebi)-registered investment adviser for professional help.

Set Clear Goals: Define your retirement goals, such as the age you plan to retire, the lifestyle you aspire to have, and the amount of income you will need post-retirement.

Where Should You Put Your Money?

There are various retirement fund options available to investors in India.

“Stocks can make you some serious dough if you pick the right ones,’ Goela says, but “it can also be a wild ride”. Mutual funds and exchange-traded funds (ETFs) are good options if you have little cash, but they are not immune to market swings and should be picked wisely.

Duseja suggests that instead of investing in a retirement mutual fund that has a lock-in period of five years, one can invest in open-ended mutual funds by way of SIPs to create a retirement corpus over the long term. Open-ended mutual funds have two major benefits:

1. There is no lock-in period. It offers quick liquidity during an emergency.
2. Fund managers must perform. Otherwise, they will risk investors’ exit from the scheme due to underperformance.

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How Should You Invest For Short- And Long-Term Retirement Goals?

One should prioritise retirement planning above every other goal. It’s important to know the appropriate retirement fund to sustain your lifestyle and the investment needed to achieve the same. “Once you have allocated your savings to secure your retirement corpus, you should direct the remaining savings to meet other goals like buying a house, children’s education, etc.,” explains Duseja.

Goela suggests automatic transfers from salary accounts to retirement accounts to ensure consistent contributions. To stay on track with multiple financial objectives, automate savings for short-term goals as well, such as a down payment for a house.

Common Pitfalls To Avoid

“The biggest pitfalls a young investor should avoid is believing that retirement planning should start a few years before retirement,” notes Duseja. He advises young investors to avoid taking excessive loans to fund their lifestyle or buying an expensive house or car, which could be detrimental to a comfortable retirement life.

Failing to understand one’s risk tolerance can lead to inappropriate investment choices. “Young investors should assess their risk tolerance honestly and choose investments that align with it,” says Goela.

Moreover, investments without proper asset allocation can accumulate huge risks and limit your returns over the long term. Therefore, you should diversify investments across various asset classes to optimise returns and avoid unnecessary risks.

Investing in retirement funds early is a smart financial move that can provide young investors with long-term financial security and peace of mind. By harnessing the power of compounding returns, weathering market fluctuations, and reaping the benefits of early investing, young individuals can pave the way for a comfortable and financially stable retirement. Remember, the key to a successful retirement plan lies in starting early, staying disciplined, and seeking professional guidance.