Retirement planning is not in the minds of the millennial or the younger persons. Life for them is just beginning and retirement is a long way off. You do not think of old age when are at the prime of your youth. And it is perfectly natural also. It is a natural thing for the young to enjoy their new found income (as they have just started earning) and spend on things that excite them, such as a new mobile instruments, eating out, travelling to places of their interest, buying things for home decoration, buying vehicles, and so on.

Save Less Today for More 30 years later

But at the same time there is no denying the fact that if we start savings at an early age, the compounding effect in investments makes more money than if we save a lot of money at a later age. Take for instance a person saving Rs. 1000 per month or Rs. 12,000 p.a. in a bank deposit which may fetch 6.5 % per annum. If this money is not spent for the next 30 years, Rs. 12,000 invested in a bank deposit today, after 30 years will be worth Rs. Rs. 79,372. If instead one were to invest Rs. 12,000 just 10 years before retirement the maturity value on retirement will be Rs. 22,525, at the same rate of interest – 6.5 %.

If Rs. 79,372 is the target on retirement then 10 years before retirement, an amount of Rs. 42,284 will have to be invested. The same amount can be had on retirement with an investment of just Rs. 12,000 for 30 years.

The Beauty of Compounding …

This is the beauty of compounding. While we go about out daily tasks and sleep comfortably at night, the money invested is compounding giving you more return for a smaller invested amount. Compounding is nothing but interest earned on the interest earned in the previous years.

… Only in Low Risk Investments

To get the benefit of compounding it is important to invest in a low risk investment. If Rs. 12,000 is invested in a mutual fund, for example, the volatility of the NAV of the mutual fund over a 30-year period will kill profits. Volatility does not allow compounding. So the benefits of compounding will never be realized in high risk investments.

The Beauty of Long Term, Low Liquidity Investments

This is also the beauty of not touching retirement funds for any other purpose other than the retirement itself. If the investment is made in low risk, but short term financial assets such as banks and post office, the financial liability of retirement (30 years away), is not matched by an asset that can be en-cashed after thirty years. The result is a asset liability mis-match. An asset liability mis-match usually results in the money not being available for the purposes it was planned. For example by investing in a bank deposit which may be maturing after 5 years, there is a very high chance that the maturity amount will be used for purposes other than for retirement planning. There will be other pressing demands on the investor such as purchase of some asset, or an emergency at home.

Only Life Insurance Endowment for Long Term Planning

It is therefore important for investors to plan to invest in low risk, low liquidity, long term financial assets, such as life insurance endowment, when planning for long term liabilities such as children’s education and marriage, retirement planning, etc.

A Tip From a Social Scientist

Emily Balcetis, a social scientist, has been working on how to get younger persons to take up retirement planning. (You can read the full article here:
https://www.cnbc.com/2020/02/25/millennials-can-retire-faster-using-this-simple-trick-says-psychologist-after-15-years-of-research.html

Emily Balcetis uses a novel method to convince youngsters to take up retirement planning. She takes a current photograph of the youngster and then using Photoshop (a software) she changes the image to show how the youngster would look in old age. She then shows the new image and asks the youngster how he or she would like to spend their time in old age. The discussion leads to the need and urgency for retirement planning.

Don’t Ignore the Young

Catch them young. When properly canvassed the young can be a big market for retirement planning. Sell on the basis of emotions, not only on the basis of logic. And …

Sell Risks Not Returns!