Retirement might not be an overriding priority for most youngsters. However, as many youngsters take up jobs at the private sector where there is no guarantee of any retirement income, it is essential for them to give a serious thought to this topic.
In this article, we will look at how advisors can go about teaching the importance of saving for retirement to youngsters, especially in the age group of 26-30 years.
As the younger generation has age by their side, advisors would do well to teach the benefits of starting early and power of compounding to young clients. Since youngsters are more susceptible to a lavish lifestyle funded by EMIs and credit cards, a good starting point for financial advisors is to help them settle their high interest debt first.
Youngsters may not be so excited to save for the sole purpose of building a retirement kitty. Thus, advisors can at least inculcate a habit of saving through SIPs as a first step to meet their short term goals. As they realize the benefits of investing regularly, advisors can start setting aside some portion of savings for a long term goal like retirement.
Nisreen Mamaji of Moneyworks says that youngsters must start saving from their first job. “The best time for youngsters to start saving is as soon as they get a job. This will not only inculcate a habit of saving but also help to build large retirement corpus.”
Another aspect which advisors need to deal with is client’s temptation to redeem to make impulse purchases. Youngsters may be tempted to dip into Employee Provident Fund (EPF) when they accumulate some years of savings. Vishal Dhawan of Plan Ahead Advisor says that advisors should see to it that clients don’t use EPF for funding other goals. “As soon they start earning, they indirectly start saving for their retirement through EPF. But you need to make sure that they don’t withdraw to meet other goals.”
Where to invest?
Financial advisors suggest that mutual funds are best suited for retirement planning. “Investing in diversified equity funds will yield higher return over a long term. If tax-benefit is a priority then they can invest in retirement plans offered by mutual funds,” suggests Hemant Rustagi of Wiseinvest Advisors.
Nisreen adds, “Youngsters have age by their side, so they must invest aggressively in equity. They can invest 70% in large caps and 30% in mid-caps funds to generate good returns.”
NPS & PPF
Pension plans become the backbone for people post retirement when there are no other source of regular income. Suresh Sadagopan of Ladder7 Financial Advisories advises youngsters to invest only in NPS and PPF to save for retirement. “Generally, while saving for retirement, people tend to use their money for other goals. Thus, NPS is best suited for retirement since the money is locked-in till you attain the age of retirement.”
But Nisreen has a different view. “Youngsters must not opt for NPS or PPF. They can invest in mutual funds to build a retirement corpus. Equity funds will fetch higher returns as compared to pension products.”
“The drawback of NPS is that the maximum equity exposure is limited to only 50%. NPS may not be suited for people who want to invest aggressively in equity,” advises Vishal.
To sum up:
- Demonstrate the benefits of starting investments early (power of compounding, time value of money, etc.
- Recommend auto pilot investments like SIPs which will in a way force them to save
- Young clients could be more susceptible to redeeming their money early. Thus, it is important for you to clearly align investments with goals
- Provide a comprehensive financial plan rather than a piecemeal approach, if possible.
- Communicate to them in an easy to understand manner
- Give them convenience of investing online and through SMS
- Reach out through social media (for e.g. :- write a blog and invest in attracting traffic to your blog/website as most youngsters first try to find information though internet)
Let us know your views.
