Retire Early and Rich: Investing in Your Future as an Indian Millennial
Retire Early and Rich: Investing in Your Future as an Indian Millennial
16 Financial Tips I Wish I Knew at 22: Your Ultimate Hack Guide to Securing Your Financial Future in India.
Why should I care? My retirement is decades away!
Retirement may seem like a far-off event, but it’s never too early to start planning for it. In my previous article “Top Twelve Retirement Tips”, I had suggested several steps — both financial and non-financial — that a retiring professional can take to ensure a comfortable retirement. However, after the publication of the said article, I was deluged with messages from many young professionals, in their 20’s and 30’s, including IAS and IPS officers— and not excluding their parents — wondering if they should be thinking about their financial planning, if not retirement, already.
My answer is essentially and emphatically in the affirmative. YES! Retirement is an important aspect of financial planning, and it is something that should not be neglected by anyone, at any stage of their career, especially in India, where the state-led social security system is weak and sketchy, if not altogether non-existent. With the changing economic scenario and rising costs of living, it has become essential for you to plan for your retirement at an early stage. Whether you are just starting your career or have been working for a few years, it is imperative to start thinking about your retirement now.
In this article, we will discuss some essential tips that young professionals in India should keep in mind while planning for their retirement. These tips will help you create a strong financial foundation for your retirement, giving you the freedom to live life on your own terms in your golden years.
Traditional wisdom and advice
When I started researching this subject, I found that most of the advice was either too general or too generic and usually given by Financial Advisors whose basic objective was to rope in new clients. Just to let you have a flavour of what was being dished out, I summarize their observations below — although my objective is eventually to give a clear-cut and point-wise prescription, wherein each bullet-point could preferably be acted upon independently, if not a isolation.
The general suggestions no doubt make a lot of sense, but these do not leave a young person with any “call to action”, apart from their reaching out to the “advertising” finance/ tax professional. Consider these, by all means, but there’s more beneath the surface, as we shall soon discover, as we delve deep.
Start with a budget: One of the best ways to prepare for retirement is to start with a budget. This helps you understand your current expenses and how much you need to save to maintain your lifestyle during retirement.
Contribute to your employer’s retirement plan: Many employers offer retirement plans GPF/ EPF or CPF or other Pension Schemes. Some employers also match a portion of your contributions, which can help grow your retirement savings even faster.
Diversify your investments: Diversification is key to any investment strategy. By spreading your investments across different asset classes, you can minimize your risks and potentially maximize your returns.
Consider long-term care insurance: As we age, our healthcare needs often increase. Starting early can help lock in lower premiums and ensure coverage when you need it.
Plan for unexpected expenses: Life is unpredictable, and unexpected expenses can quickly derail your retirement plans. Set aside an emergency fund to cover unexpected expenses such as a car repair or medical bill.
What young professionals need to do today?
As I have already accentuated and underscored, retirement planning is not just for those nearing the retirement age. Starting early can provide more flexibility and opportunities to secure a comfortable retirement. In a complementary juxtaposition to the “Top Twelve Retirement Tips”, here are some precise tips, especially and specifically for those who are just embarking upon their work careers. Parents of such professionals may also consider educating themselves with the express purpose of giving unsolicited advice to their children, who might otherwise be too busy in their respective professions to pay any heed to this important aspect.
It’s never too early to start planning for your retirement — times flies sooner than you think.
Tempus fugit — time flies, and the earlier you start saving, the better off you will be. Starting early allows you to take advantage of compound interest, which can help your savings grow exponentially over time. As a matter of fact, the parents need to start the financial planning for their children even while they are minor, but this is perhaps a complete subject in itself that deserves a separate article.
2. Starting early gives you more flexibility, as you have more time at your disposal.
Starting early gives you more flexibility to adjust your retirement plan as your needs may change over time. You can take advantage of market fluctuations, adjust your investment strategy, and make any necessary lifestyle changes to meet your retirement goals. You can also take benefit of new investment opportunities and schemes that come along the way and also tweak your plan to take optimal benefit of the new income tax provisions that tend to be introduced with each Finance Bill (Union Budget).
3. The magic of compound interest.
Compound interest is the interest earned on both the principal amount and the interest already earned. It can have a significant impact on the growth of your retirement savings over time. Starting early allows you to take advantage of compound interest and see your savings grow exponentially over time. Remember what the one and only Albert Einstein said: “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t… pays it.”
4. Save more at the beginning of your career, especially when you are single and current liabilities are limited.
Starting to save early in your career, when you have fewer financial obligations, can make a big difference in the long run. Saving more when you are single can help you build a solid foundation for your retirement savings and provide a cushion for any unexpected expenses that may arise later in life. Longer investment horizon also gives you the benefit of more compounding, especially in your 50’s when your investment corpus is relatively higher.
5. Consider the impact of inflation.
Inflation can erode the purchasing power of your retirement savings over time. It’s essential to consider the impact of inflation when planning for retirement and adjust your savings accordingly to maintain your lifestyle. Try and choose assets like real estate and gold that are perhaps the best hedge against inflation. On the question whether equity shares are also such a hedge, there’s no unanimity among the experts, but these must be a reasonable part of your portfolio, depending on your risk appetite.
6. Good life insurance, health insurance, and medical insurance policies should be taken up early on — the premia at low rates can be locked-in.
Purchasing life insurance, health insurance, and medical insurance policies early can help lock in lower premiums which can save you money in the long run. These policies can also provide protection for you and your family in case of unexpected events. Also, have a tie up with a hospital in advance so that you don’t start searching for one, when the medical emergency strikes. Contribution of such insurance policies or schemes no doubt provide tax breaks but these must be taken up even on stand-alone considerations.
7. Savings from an Income Tax perspective are important but should not be the sole or overriding consideration.
While saving on taxes is important, it should not be the sole focus of your retirement planning. It’s important to consider other factors, such as your retirement goals, risk tolerance, and investment strategy when planning for retirement. Saving Income Tax is an important factor but not the sole or overriding one. Also, don’t confuse tax savings with tax deferment. Similarly, do not forget that some of the funds in respect of the tax-saving schemes get locked in — you lose in terms of the liquidity.
8. Must have your own PPF and NPS scheme accounts, irrespective of your employee’s schemes.
Having your own Public Provident Fund (PPF) and National Pension System (NPS) accounts can provide additional retirement savings options. These accounts are portable and can be carried forward if you change jobs, making them a great option for young professionals. PPF is a beautiful scheme — accrued interest is totally exempt from income tax, irrespective of the amount and the withdrawals are not added to your income for tax purposes. Even if you cannot make a full investment of Rs 1,50,000/- per annum in your younger years, open the account and keep it alive with small contributions.
9. There’s now a debate between rent or buying a flat or residential unit. Do buy early on — especially when both the husband and wife are earning. Will also give you tax breaks.
A number of youngster argue that owning a flat could tie them down to a particular city, if not a locality. If the professional is mobile and shifts from one city to the other, with the same employer or a new one, an ill-liquid immovable property could turn out to be a virtual liability. The stamp-duty that you pay on sale-purchase is a dead-weight loss. On the other hand, owning a home can be a great investment, especially if you start early. Your EMIs (Equated Monthly Instalments) consistently contribute to your capital, while in case of rent the amount paid by you is a total expense. Even here, the rent paid by a salaried person is not fully set-off for the purposes of income tax, and only a limited sum can be deductible against the HRA (House Rent Allowance). Buying a home when both partners are earning can thus provide additional savings options and tax benefits, and must be seriously considered by young professionals as soon in their careers as possible.
10. While the housing prices may be stagnant in the short-medium term, these are bound to beat inflation in the long run.
Real estate can be a great investment option for retirement savings. While housing prices may be stagnant in the short to medium term, they are likely to beat inflation in the long run, providing a solid investment option for young professionals. This could also turn out to be your retirement nest, when your pension may not be able to afford the high rentals that could be prevailing when you superannuate, decades later.
11. You can rent out the flat if you are not going to live in it — effective income tax rate on rental income is about 20%.
If you purchase a property but are not planning to live in it immediately, you can always rent it out. Renting laws in most states are now governed by the specific contracts that you sign and the tenants cannot get away with continuing to occupy your property, while persistently defaulting in the payment of rent regularly. Renting out a property is an excellent source of passive income and can help to supplement your primary income. However, it is essential to keep in mind that rental income is taxable, and it’s necessary to file your income tax returns accordingly.
The effective income tax rate on rental income is around 20%, making it a tax-efficient second source of passive income. However, there are several deductions that can be claimed against rental income, such as property taxes, mortgage interest, repairs, and maintenance expenses. Therefore, it’s important to keep track of all rental income and expenses to file tax returns accurately.
12. Set up your HUF as soon as you get married. It’s a lovely arrangement to cut your income tax liabilities.
A Hindu Undivided Family (HUF) is a separate legal entity that is permitted to be created by a family that follows Hindu customs and traditions, and is widely recognised under the Indian laws. Apart from Hindus, persons professing Sikh, Jaina and Buddhist faiths can also take benefit of this arrangement. HUF can be set up by married couples and their immediate family members. The primary objective of creating an HUF is to reduce the tax burden on the family by availing of various tax benefits.
Setting up an HUF can be a great way to save on income tax, especially for married couples who are just starting their wedded lives together. An HUF has a separate PAN number and can avail tax exemptions and deductions over and above that are available to individuals. Moreover, an HUF can also receive gifts, bequests and inheritance, which are exempt from tax up to a certain limit and also raise loans.
Therefore, setting up an HUF is an excellent way to reduce the overall tax burden on the family and to avail of various tax benefits. Strong advice — set up your HUF the day you get married, irrespective of the fact that you might be the coparcener in or a member of your bigger family HUF. There’s wrong perception that a married couple can set up an HUF only when they become parents of a male child. You can — and should — do so as soon as your nuptial rites are solemnised.
13. Can resident Indians legal invest in foreign currency assets?
Investing in foreign currency assets has become an attractive option for Indian investors looking to diversify their portfolio and potentially benefit from a depreciation in the Indian rupee. In recent years, the Reserve Bank of India (RBI) has relaxed regulations, making it easier for resident Indians to invest in foreign currency assets. This allows investors to take advantage of potential gains in foreign markets and protect their investments against currency fluctuations. However, it is important to note that investing in foreign currency assets also comes with risks, and investors should carefully consider their investment goals, risk tolerance, and tax implications before making any decisions. Investing through reputed companies and intermediaries as well as taking independent professional advice is strongly recommended here.
14. Take and gift gifts with care — clubbing of income may apply under the tax laws.
Gifts are an excellent way to show appreciation, gratitude, and love towards your family and loved ones. However, it’s important to keep in mind that gifts can also have tax implications, and it’s necessary to give and receive gifts with care.
Under the tax laws, if a gift is given to a relative or friend, the income from that gift may be clubbed with the giver’s income for tax purposes. This means that if the gift generates any income, it will be taxed at the giver’s tax rate, or clubbed with the income of the donor, in certain cases. Therefore, it’s essential to be careful while giving and receiving gifts to avoid any unnecessary tax implications. Cash gifts on the occasion of birthdays or other occasions should be deposited in the bank accounts of the minors, with proper annotation or record as to from whom these token amounts were received. Gifts through cheques should be encouraged/ preferred.
15. Use SIPs to invest in good stocks or Mutual Funds — review the portfolio regularly.
Systematic Investment Plan (SIP) is a simple yet elegant investment method that allows you to invest a fixed amount at regular intervals. It is quite painless and does not consume a lot of your mental bandwidth. It is a great way to invest in the stock market or mutual funds, as it helps in averaging the cost of investment over time. This means that you get more units when the market is low and fewer units when the market is high. SIPs are a great tool to help you achieve your financial goals, whether it is saving for a down payment for a house, children’s education or retirement. However, it is important to review your portfolio regularly to ensure that it is aligned with your financial goals.
16. Take the benefit of long-term capital gains to cut your tax liabilities wherever possible.
Long-term capital gains (LTCG) are profits made on the sale of an asset that has been held for more than a specified period, usually 3 years for immovable property. For listed equity shares, this period is 1 year. In India, LTCG on equities and equity-oriented mutual funds are taxed at a concessional rate of 10% if the gains exceed Rs. 1 lakh in a financial year. LTCG on other assets like real estate, gold, debt mutual funds are taxed at a higher rate, usually 20% after the benefit of indexation. Therefore, it is important to understand the tax implications of the asset you are selling and take advantage of the tax benefits wherever possible, especially when you are re-investing the total sale proceeds on the sale of a long-term capital asset into the purchase of a residential house.
Do consult your Tax Advisor or Chartered Accountant but take time to be financially literate yourself.
While it is important to seek the advice of a Tax Advisor or a Chartered Accountant, it is equally important to be financially literate yourself. Being financially literate means having adequate knowledge and understanding of financial products, tax laws, and investments. This will help you make informed decisions and manage your finances better. Therefore, take the time to educate yourself about personal finance and tax planning, even if you use the services of a tax advisor or a chartered accountant to help you make the best decisions for your financial future.
Not the conclusion — just the end of the beginning
In conclusion, while it may be tempting to focus solely on your career in the early stages of your professional life, it is crucial to remember that your financial health is just as important as your physical and mental health. Planning for your retirement may seem like a daunting task, but by following the tips we have outlined in this article, you can take the first baby steps towards securing your future. Remember, it’s never too early to start planning for your retirement, and the earlier you start, the more flexibility you will have in terms of investment options and financial goals.
As young professionals in India, it is time to take control of your finances and invest in your future. Don’t let the irony of being a lawyer, CA, or civil servant, who advises others on financial planning while neglecting your own retirement planning, befall you. Start today, and you’ll be amazed at how much progress you can make towards your retirement goals. Best wishes for a successful career and a happy retirement, whenever, and wherever, that may be!1
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Sir, One and only retirement tip.
'Never Retire'
Only change ur field as per new interests or liking.
Retirement is as if you wait for ur old age and ultimately death.
So never even think of retirement.