The importance of early investment is directly connected with an investor's early retirement plan. A good investor always plans, keeping in mind long-term investment objectives, and also takes calculated risks in life. One should always focus on building a retirement corpus, which should beat the future inflation rate. The present value of money will always keep changing based on the inflation rate. If you compare today's Rs 100 value with 20 years ago, there is a huge difference in purchasing power and the number of commodities one can get for the same amount.
Similarly, the basic, essential product pricing also gets changed considering other external factors. That's the main reason 20 years ago a consumer used to get a 200-ml bottle of Pepsi for Rs 5 and in 2020 for Rs 10. Below is a hypothetical analysis of the value of money after 30 years, or, as we can say, at the time of retirement.
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| Inflation Rate - Present vs Future |
Based on the above example, in 2020, if an investor at the age of 30 has Rs 1,00,000 or 100K in hand and invests it in a retirement plan, the same amount will be almost equivalent to Rs 10,11,758, or approx. 1 million, after 30 years. So the value of Rs 1,00,000 is less after 30 years, and one should work 1000 times more to have a handsome amount in hand (withdrawal) after retirement.
Similarly, if the same amount, which is Rs 1,00,000, is invested for 30 years in a good financial instrument with a hypothetical rate of return of 11.2%, then at the end of 30 years investors will have approx. Rs 24 lac, or 2.4 million.
In simple words, this is how the time value of money works, where the value of money does not remain the same across time. The value of Rs 1,00,000 today is not really Rs 1,00,000 30 years from now. Likewise, the value of Rs 1,00,000 30 years from now is not really Rs 1,00,000 as of today.
If an investor has a current expense of Rs 1,00,000 with a 5% inflation rate, After 30 years, the same investor needs to pay Rs 4,32,194 with a 5% inflation rate. So due to inflation, the extra money required to continue the same expense in the future will be Rs 3,32,194.
4% Retirement Withdrawal Rule: It's a thumb rule based on which, post-retirement, if an investor withdraws 4% of their portfolio each year, the kitty will last at least 30 years. So one should focus on long-term investment at a younger age by diversifying their portfolio into risky and non-risky financial instruments. If an investor wants aggressive (highly risky compared to balanced or fixed financial instruments) investment options, then the percentage of investment in an equity-based portfolio needs to be high.
For example, if, at the time of retirement, an investor managed to save Rs 1 crore, based on the 4% retirement withdrawal rule, he can withdraw Rs 4,00,000 (400K) per annum, which will be Rs 33,333 per month. By following the 4% withdrawal approach, investors can continue to withdraw the same amount year after year until the age of 90.
Retirement Withdrawal Calculation - Expected Monthly Amount Post Retirement Rs 30,000
If an investor at the age of 30 had an expense of Rs 30,000 on a monthly basis and wanted to have the same amount as a retirement withdrawal after the age of 60 with an inflation percentage of 5 and a return on investment of 10%, then ideally one should save approx. Rs 11,859 on a monthly basis minimum to build a corpus of Rs 2,48,21,389 or 2.4 billion.
That's the main reason one should have a good amount of money saved by the age of 60 if anyone wants to retire or in case of early retirement, and that too before the age of 60 is totally dependent upon the investor's decisions, choices, level of income, regular or known expenses, and backup in hand to meet unexpected expenses in this phase of life.
Based on the above expense calculation, investors should assess the expense percentage along with the inflation rate. A good corpus can be possible if all the factors are included or considered while planning the retirement corpus amount. If an investor wants a good in-hand withdrawal amount post-retirement, then their primary focus needs to be on having more money invested at an early age in good financial instruments. A smart investment leads to a comfortable retirement withdrawal amount.
The biggest question here is why people withdraw money from planned retirement account prior to retirement ?
As per the random sampling done below is the result - 33 % withdraw money before retirement because of unemployment & 26% owing to Medical expenses
As per considering that there is high volatility in the market in the present scenario, one should only withdraw 3.3% rather than 4% to have a good in-hand amount on a year-on-year basis for the next 30 years post-retirement. So in the crux, whether it's 4% or 3.3%, before reaching retirement age, investors should focus on building a good portfolio with a higher rate of return by investing in good financial instruments and opting for diversified ways of pooling money.
"Retirement is wonderful if you have two essentials — much to live on and much to live for"