Why Retirement Planning Should Start in Your 40s, Not Your 60s

By Dilshad Billimoria

In India, retirement is typically viewed as a financial finish line at age 60, a point when most people begin to seriously think about life after work and whether they are truly prepared for it. But starting retirement planning in one's 40s, as opposed to doing it in the 60s, can prove to be extremely beneficial, making retirement more comfortable and stress-free.

One of the main reasons for starting retirement planning in the 40s is the compounding effect. An early start gives investments a longer period to mature, resulting in a much bigger corpus at the time of retirement. Let us take an example here. Suppose you start with an investment of Rs 1.5 lakh every year when you reach 40. When you reach 60, you might possibly have a sum of Rs 74 lakh approximately with a return of 8 per cent per annum. Conversely, if you invest the same amount at the time you reach 45, the return you get will possibly be Rs 44 lakhs under the same assumption.

Postpone that onset to age 60, and even with the same investment, time is no longer a luxury you can indulge in. In 10 years, with the same returns, the corpus hardly crosses Rs 22 lakh. That deficit may be the difference between independence and dependency.

Additionally, the 40s are usually considered a period of peak earning potential, presenting a chance to invest more in retirement savings. It also gives us time to review and realign our investment approach, striking a balance between equities for growth and fixed-income instruments for security. As one gets closer to retirement, shifting slowly towards conservative investments can prevent the erosion of the accumulated funds.

Health expenses, which increase at a 10–15 per cent rate each year in India, provide yet another strong motive to plan early. By planning in the 40s, people can have sufficient money set aside to take care of health-related expenses later in life, reducing the financial burden on themselves & their loved ones.

The consequences of delaying retirement planning until the 60s are not just limited to the numbers. Time-constrained planning, with limited earning years remaining and rising health uncertainties, tends to be an emotionally daunting process. It lessens flexibility, increases tension, and allows for small margins of error.

The ability to take financial risks also dwindles exponentially. Equity, frequently the driver of long-term wealth building, becomes less of an option due to its built-in volatility. Investors in their 60s with little time to recover from market downturns are attracted to low-return, low-risk instruments such as fixed deposits or debt funds. These are stable, but they tend to fall behind inflation - particularly in a nation where healthcare inflation alone is estimated at 12–15 per cent per annum.

When you start in your 40s:

• You have two decades to make adjustment to your savings, investments, and lifestyle

• You can recover from market mistakes or disruptions in job

• You can tweak and rebalance your financial plan as life evolves

But if you wait till your 60s, there is little time to fix poor decisions or missed opportunities.

Planning early also allows:

• Strategic use of tax-advantaged products, such as Public Provident Fund (PPF), National Pension System (NPS), Employee Provident Fund (EPF), etc.

• Smoother transitions between different types of investment

• Reduced tax-liability at withdrawal stage

Consequently, those who start late will have to make sacrifices, such as reducing discretionary expenditures, selling homes and downsizing, delaying vacations and recreation, and so on. In extreme instances, they will even be found unprepared for medical crises or other surprise expenses, relying heavily on their children or extended families for help, something that undermines the very financial autonomy most desire in retirement.

In contrast, retirement planning during the 40s means a more inclusive approach, involving not only savings and investments but insurance coverage as well as estate planning.

To conclude, starting retirement planning at the age of 40 is not just advisable, but it is necessary. By utilising the power of compounding, capitalising on one's earning capacity, and preparing for future expenses, individuals can ensure a safe and happy retirement. Delaying retirement planning until the 60s could allow little time to maneuver and may hamper the standard of living during the golden years.

(The author is the founder, managing director, and chief financial planner at Dilzer Consultants Pvt. Ltd. Views expressed are personal and do not reflect the official position or policy of Outlook Media Group and/or its employees. The article is for information purpose only; please consult your financial planner/s before investing.)