As young individuals in their early 20s, life can be chaotic and unpredictable, with so many important things to focus on. Trying to establish a career, figuring out life goals, and personal development sometimes leaves little time to think about retirement savings. Also, being young and new in the workforce, along with bills, rent, and other expenses, it can be difficult to save for your golden years.
However, saving for retirement is important and the earlier you start the better it is. In fact, initiating retirement savings in your 20s helps you achieve financial independence, stability, and freedom to retire early. You can save systematically, take advantage of the time factor, get more flexibility to make investment decisions, and, most importantly, establish financial security to support your golden years.
The benefits don’t end here. Let’s explore more such reasons why it is a great idea to initiate retirement savings in your 20s.
- Compound interest, the power of time
Initiating your retirement savings in your early 20s helps you maximise the power of compound interest. Compounding means you earn interest not only on the money you invest but also on the accumulated interest. By starting early, the power of compounding can boost your savings and bring significant long-term growth.
For example, imagine two investors, one starts saving for retirement in their early 20s and another in their 30s, both contributing the same amount monthly. The one who started in 20s will have a more substantial retirement fund due to the power of compound interest.
- Diversification through mutual fund investments
By starting early, you can benefit from different market cycles, getting more time to make calculative decisions and create a diversified portfolio.
To achieve diversification, you can invest in mutual funds. They are professionally managed and pool funds from various investors to invest them in equities, bonds, gold, and other securities. Such diversification can reduce the impact of market volatility, help you earn better returns, and secure your retirement.
- Lower risks
Time is the most important asset when investing in the long term. Starting early gives you more time to survive market fluctuations and risks. Thus, you can invest in risky, high-yield plans, knowing that, over time, the portfolios have the potential to recover from short-term fluctuations in the markets. This can help you create a more significant corpus than those who invest in safer options or delay their savings.
- Lower contribution requirements
By starting early, you can develop a consistent savings habit that becomes a normal part of your monthly routine. For example, imagine saving a small amount for retirement each month instead of spending it on unnecessary items. This consistency helps to instil financial responsibility, gives more control over impulsive spending, and promotes disciplined saving habits. Thus, you can avoid the trap of living pay cheque to pay cheque and prioritise a future-oriented approach.
A systematic investment plan (SIP) can help you in the process. It helps you invest in mutual funds at fixed intervals at an amount and frequency of your choice. You can automate your SIP investments from your bank account to maintain financial discipline and save for retirement without overextending your budget.
- Mitigate the effects of inflation
A product that costs 10 rupees today may cost more in the coming years. This is the effect of inflation which can reduce your purchasing power in the long term. By starting early, you can leverage compound interest to create a larger retirement corpus and manage inflation’s impact. Thus, you can maintain a comfortable standard of living even after you retire.
While it’s easier to enjoy today than worry about tomorrow, retirement planning is crucial for stability in your golden years. Starting in your early 20s has many advantages, from the power of compounding to more significant savings for the future, lower risks, financial freedom, and smart investment habits. Thus, the best time to start saving and investing for retirement is right now.