We all like to plan for the future. From planning the day ahead to planning a vacation, it’s always a good thing to plan for something well in advance. But, when it comes to planning for one’s retirement, not many show the same inclination. Hardly surprising, therefore, that a retirement survey conducted earlier showed that nearly 78 percent of Indians had not even started planning for their retirement.
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Here’s some more bad news. According to an EY/CII report published in 2015, “the percentage share of 60+ populations, which was 8 per cent in 2010, is expected to reach 12 per cent by 2030.” Going by what the above report suggests, it means a large proportion of retired population may not have a comfortable retirement as they will be ill-prepared for the same.
Although retirement is one of the most distant financial goals, it is in our own interest not to ignore it. Rather, an early start for this distant goal is easier to handle than a goal that would come knocking early. Here are some reasons as to why one needs to plan for one’s golden years especially during the earning phase of life.
Increasing life expectancy
With increasing life expectancy, the non-earning period in an individual’s life is expanding. Someone retiring at age 60 after working for 30 years could live on for another 30 years or more. What it means is – 30 years’ earning period feeds the 30 years of non-earning period! This is essentially the 30-30 rule in retirement planning.
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More and more people are planning to retire early. But this would require a larger corpus to retire with. Ajit Narasimhan, Category Head - Savings and Investments, BankBazaar.com, says, “Project a realistic retirement age. Just because our fathers and grandfathers retired at 60 years of age does not guarantee that we will retire at 60 too. Remember, there is something called job creation and demand-supply of jobs. Organizations and jobs are getting younger by the day. We may be forced into retirement by the time we turn 45 or 50. Therefore, be realistic about your retirement age.”
Cost of living
Year-after-year, the cost of living is increasing. Picture this: Rs 50,000 monthly household expenses will be close to Rs 1.70 lakh (3.5 times) after 25 years, assuming an annual inflation of 5 percent. Inflation will be active even in the post-retirement years and be more pronounced as there won’t be any income during these years. Narasimhan cautions, “Let your retirement calculations assume inflation at nothing less than 8 per cent annual. It would always be better to be on the higher side. If the inflation isn’t that high as projected, you would have more funds in hand. However, if your projections are substantially lower, you would be in tight straits.”
We don’t want to create panic, but just want to make you realize how inflation eats into your purchasing power. If one seems comfortable with a crore of corpus, let’s look at its worth or the purchasing power after 15 years at 5 percent inflation. Rs 1 crore will fetch you the value of about Rs 48 lakh!
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Cost of delay
The cost of making a delayed start to invest for retirement may be huge. There are two different aspects to it – one, early savers need to invest a lesser amount and secondly, early savers stand to gain from the power of compounding more than late investors.
From the table it can be seen that an early investor can accumulate the same corpus with 50-75 per cent less savings. Also, it is seen that nearly 90 per cent of wealth comprises earnings while for late investors, it falls to 75-85 per cent. This is possible because of compounding.
Before you start saving towards retirement, estimate how much is required. Without finding out how much is required to be saved, do not venture into investing.
Firstly, consider your present monthly expenses at current costs. Assuming an inflation rate of about 5 percent, inflate them for the number of years left for you to retire. This gives you the amount of inflated monthly expenses you would need to survive through your retired years. The reverse calculation comes here. Estimate how much you need to start saving from now till your retirement age to amass a corpus that could provide you the inflated monthly amount. Here’s a retirement planning calculator to know how much to invest.
After retirement, expenses may not necessarily come down. One may see a fall in some cost-heads but there could be an increase in health and travel-related expenses during retirement. Narasimhan says, “Assume no clamp down in lifestyle and consumption needs. Human beings are inherently averse to accepting changes. This is more so the case when it is a scale down instead of a scale up. Moreover, there would always be additional lifestyle expenses associated with aging.”
Therefore, it could be better to consider current monthly expenses for the purpose of calculation. Post-retirement inflation too is an important concern. Anil Rego, CEO & Founder, Right Horizons, says, “Monthly expenses required post retirement can be calculated by considering inflation and even this will be inflated every year post retirement. Thus, it would be an increasing number every year.”
Keeping a guard against the rising medical costs is equally important in during the years post retirement. Narasimhan says, “Medical expenses are a major expense, especially post retirement, and you need to have a comprehensive medical policy that covers you and your spouse in case of eventualities. This is extremely important as an ineffective policy or lack of a medical insurance policy can throw all your plans out of the kilter since the need for medical intervention and scope of medical expense are very difficult to predict.”
Choosing the asset class
In addition to making an early start to invest, choosing the right instrument is equally important. Rego says, “Usually people follow a thumb rule (based on one’s age) to identify the risk profile and asset allocation. However, this cannot be generalised because there can be an investor who is in the higher age bracket but wishes to take a high risk and prefers to invest subsequent portions of his investments in equities.”
Related: How is asset allocation linked to retirement planning?
When retirement is at least ten years away, opt to invest in equities. Studies in the past have shown that equities have delivered high inflation-adjusted real return than any other asset class, including gold, debt or real estate, over the long term. The role of debt-asset cannot be undermined in retirement planning. In order to preserve the capital accumulated, as one nears retirement, start shifting funds from equity to less-volatile debt assets through the process of de-risking.
Creating retirement portfolio
The allocation towards equities may not necessarily be the same for all investors. It would largely depend on one’s age and the risk profile. Youngsters with more time in hand may initially choose to go heavy on equities. Narasimhan says, “The typical approach is, the longer period for retirement, the greater the allocation to equity. Individuals who are less than 40 years of age should have about 80 per cent of their investments in equity and the assumption is at least 40 per cent of their income goes towards investment products. My observation is that anything less than these numbers will always lead towards a sub-optimal post-retirement corpus.”
Use the SIP approach to invest towards retirement. Rego informs, “In order to create corpus in the long term, it is advisable to invest on a regular basis and stay invested for long. Ideally the SIP mode of investment will be the best-suited option to create wealth in the long term.” A retirement portfolio with equity-backed instruments also needs diversification across large, mid and small caps. As one grows older, equity allocation may be trimmed towards debt assets. Remember, salaried employees already allocate a portion of their income towards provident fund, which is a debt asset.
Steps for a comfortable retirement
>Make an early start to save towards retirement. >Estimate the amount of monthly savings required to create a retirement corpus. >Create a separate portfolio for retirement and earmark funds towards it. >Choose to be primarily in equities till about three years away from the goal. >Use the SIP approach and, if possible, increase the SIP amount nearing retirement. >De-risk your investments with about three years away from retirement.
In cricket, scoring early in the initial overs of the game keeps the asking rate under control. Similarly, if you start to save early, the money required to save for retirement will be much less than the amount you will need to save if you start at a later age. Narasimhan says, “Start early. Ideally, start from your very first year of work. Retirement planning is a supremely important activity and something that young India will do well to have in their priority list.”
Source: Economic Times
Aegon conducted a series of surveys across 15 countries and discovered that Indians are most prepared and confident of living a comfortable lifestyle after retirement.
You may be a couple of years or decades away from your retirement, but it's imperative to plan and save for retirement, much in advance. Planning for retirement may seem an arduous task, but if done properly, will make your retirement stress-free and enjoyable!