- Date : 04/12/2018
- Read: 8 mins
Have you taken these things into consideration while calculating your retirement corpus?
Known for her sardonic wit, the late actress Bette Davis – considered the greatest all-time female star in Hollywood after Katherine Hepburn – had wryly quipped in her later years: “Getting old ain’t for sissies.”
The comment is understandable: ill-health stalked the two-time Oscar winner in her old age; she had breast cancer, underwent mastectomy, suffered a stroke and partial paralysis, and even her iconic eyes, which inspired the 1981 hit song Bette Davis Eyes, were apparently showing symptoms of Graves’ disease – a serious immunological disorder.
But Davis managed her affairs well, even saving her estranged daughter’s house from repossession. When she died in 1989, she was worth $2 million, which would be worth eight times that amount today in rupee terms.
We are not Bette Davis
Not many of us can hope to have a career spanning 60 years, or assets similar to that of hers. But we too have old age issues to deal with, diseases to treat, and financial troubles to take care of. What if we are not ready for our sunset years?
The thing is, we have to save for our retirement – and meet other life goals, such as our children’s marriage etc., from what we save. And we have to save from our earnings – salaries and what little investments we make. We need not make $2 million, but we need not be penniless either. So here’s a list of don’ts to help you ensure you don’t goof up:
Don’t ignore retirement
This must be the single biggest mistake one can make: relegating old age and retirement to the bottom of the priority list, thinking it is all so far away, or the children will take care of us. Yet, that is exactly what many Indians think, says an August 2017 RBI report.
According to this report, a massive 77% Indians said they are not saving or planning to save for retirement. As they grow old, Indians are not insuring themselves against rising health expenditures either. If you are one of them, you will be doing yourself a great disservice.
Retirement planning has become a key facet of financial planning today, and increasing levels of job uncertainties mean you start taking it seriously from the moment you start working.
Its importance becomes clearer if you consider real-life examples of price hikes over the years. When Sholay was released in August 1975, ticket prices ranged between Rs 3.50 and Rs 5.50 in Mumbai; today, it would be upward of Rs 500. That’s an increase of between 900% and 14,000%.
Of course, not everything has become so markedly expensive over the past 40 years, but this is just a pointer. As a thumb rule, your retirement corpus should be about 25 times your current annual expenses.
If you are 26 years old now, and your current expenses are Rs 3 lakh annually (Rs 25,000 a month), your retirement corpus should be at least Rs 75 lakh.
Don’t underestimate inflation
The Sholay ticket example shows what time does to the net value of your money; while it does not lessen the total amount saved, it does reduce what you can afford with it. As living costs go up, the money you have saved will buy less.
This is called inflation – or the rate at which the prices of goods and services increase over the years. This is something you must not forget to factor in while calculating your retirement corpus. By one reckoning, if you take the inflation rate at 4.5%, what you can buy today for Rs 25 lakh will cost you almost Rs 39 lakh after 10 years.
If the inflation rate outstrips the interest rates of your savings, it means prices are climbing faster than what you are earning from interest. However, economic predictions say inflation rate will be about the same as current levels around the time you retire in 2048 – that is, about 4.53%.
Compared to this, our bank rates are currently higher, aggregating about 6%. Also, consumer price inflation for August 2018 fell below 4%. But do not forget to keep an eye on it over the long term. To get a rough idea of how long your savings will last, use this retirement readiness calculator.
Don’t discount health insurance
Medical inflation is a factor too; healthcare cost, one of the most significant expenses in your old age, is rising. Another big mistake you can make is forgetting that at the end of the day, it is your old age we are talking about, when you are most susceptible to ill health. As discussed earlier, medical inflation is rising, and the worst hit is the elderly.
A 2013 research shows that in India, the monthly per capita health spending of households with all family members at least 60 years old is about four times more than that of a household with no member above this age. Basically, if you were 60 today, you would be spending four times what you spend in reality now.
This is where health insurance comes in, as this high expenditure even for just one person is bound to hit monthly budgets, especially if there is no regular monthly income post-retirement.
Yet, says the RBI report mentioned earlier, as much as 40% of health insurance policies did not see the premium being paid in their second year in 2016. Of those who had their fifth premium due that year, only 29% paid up.
Don’t ignore savings schemes
Apparently, Indians also repose less faith in savings and investments, says the same RBI report. It says an average Indian household puts only 5% in financial instruments such as fixed deposits and savings accounts, company stocks, mutual funds, life insurance, and retirement schemes.
The bulk of its wealth is in real estate (77%) and gold (11%), while the remaining 7% is in durable goods (vehicles, livestock, and non-farming business equipment).
When you ignore savings and investments, you are basically depriving yourself of ready cash during emergencies. This is not required, as there are many long-term savings that come handy during retirement and emergencies such as hospitalisation, or for big occasions like children’s marriage.
There is a host of saving schemes to choose from for your long-term financial planning, on the basis of your needs when you retire; you can use a calculator. Two popular savings schemes to consider are the National Savings Certificate (NSC) and the National Savings Scheme (NSS), both government saving schemes, with excellent interest rates (8% and 9% respectively). Also, both offer tax exemptions.
There is also the National Pension System (NPS) which is tailor-made for old age, offering the security of a regular income (pension), with the lump sum benefit being broken down through an annuity plan, and paid on a monthly basis like any regular income.
There are other schemes as well, such as the Voluntary Provident Fund (VPF) or the Atal Pension Yojana, among many more. Read up on them, you can only benefit.
Don’t ignore investments
Alongside, you must also not forget to look at investments (equity investment, bonds, mutual funds etc.) to ensure that your retirement corpus is not outdone by inflation. Savings give you financial stability, but investments – done prudently – ensure wealth creation.
Do not fail to consider mutual funds; this instrument offers a monthly Systematic Investment Plan (SIP), through which you can build an attractive nest egg for your retirement years. You have to invest in a disciplined manner, of course.
Equity investment refers to purchasing and retaining shares of stocks and mutual funds on the stock market. In return, you get an income from dividends and capital gains, as the value of your stock rises. It is advisable to invest for tenures of at least 10 years or more to reap the maximum benefit. Don’t forget to review your portfolio regularly and switch to other products if necessary.
Which brings your options to diversification: rather than putting all your eggs in one basket; spread your capital across products. Exchange traded funds (ETF) can help you build a diverse portfolio, while gold ETFs are ideal for senior citizens. Bonds are a good investment too, but check their ratings before you invest. Here, the issuer pays you interest every year, and the principal amount on maturity.
When you draw from savings or save for the future, your aim would be to go into retirement without debt; clear your dues so your income funds your lifestyle, not past purchases. Also, don’t forget to strategise your savings from time to time, preferably once a year.
Bette Davis was correct regarding her take on old age – it takes planning and preparation to ensure that your hard-earned retirement is a success!