- Date : 27/08/2021
- Read: 8 mins
Indians rarely plan for retirement as a standalone objective, a study has found. Don’t be one of them.
For today’s employed millennials, the word ‘fire’ may not necessarily imply the dreaded pink slip; to them, it can spell the acronym FIRE – short for ‘Financial Independence, Retire Early’, which is quite different from losing one’s job.
American followers of the FIRE concept – first put forward in the 1992 bestseller Your Money or Your Life – seek to save up to 70% of their annual income so they can retire earlier than the conventional US retirement age of 65. Comprising mostly millennials, this group believes they can call it quits once their savings swell to about 30 times their yearly expenses, or roughly around $1 million.
Today, the FIRE concept seems to have evolved into a movement of sorts in the US – with Google searches for it by Americans registering a 94% rise between 2013 and 2018.
In contrast, are the Indians; with retirement age at 58 leaving them with less working years than Americans, they may not be as fond of early retirements as the Americans. However, their preparation for their twilight years also seems weak, as per a 2020 study by consultancy AC Nielsen. .
Related: How is asset allocation linked to retirement planning?
How do Indians view retirement?
The Nielsen study, taken on behalf of asset management firm PGIM India, shows Indians view retirement as an important but a distant prospect, and therefore deemed less pressing than children’s needs and financial security against illnesses or accidents.
The study – which sought to gauge the “retirement readiness” of Indians – noted that the pandemic could “accelerate changes in the retirement landscape”, but as of now, more than half of urban Indians have no retirement plans at all, and hope to have one by the time they turn 50.
Also, unlike followers of the FIRE movement, younger Indians lay less emphasis on savings and more on spending. As per Nielsen, Indians today allocate nearly 59% of income to current expenses, resulting in household savings shrinking in the last decade – from 23.6% in 2011-12 to 17.2% in 2017-18.
This trend can perhaps be understood from how Indians approach retirement; they know “planning (for it) is vital, but they don’t want to talk about it”, says Nielsen. “They put off thoughts of retirement for as long as possible – many won’t even talk to their families about it.”
As a result, Indians rarely plan for retirement as a standalone objective, the study noted.
Less dependence on children for post-retirement support
The Nielsen study also points to a new trend: As job requirements force more young Indians to migrate away from their hometowns, their parents get less sure of being able to live with their children in old age, as their own parents did.
In fact, 26% of elderly Indians who have planned for retirement planning say a crucial trigger for it was, “the dread of being dependent on their children or family”. Only 37% of urban Indians said they are financially dependent on their families for life after retirement.
“This is a profound shift in a country where close-knit families have often served as a safety-net for the elderly and the infirm,” Nielsen said.
In fact, it also said that Indians are increasingly pessimistic about their children’s prospects due to prevailing economic conditions issues and falling employment levels; they not only fear for their children’s ability to fend for themselves, they also fear their own ability to help will decline with age.
Thus, retirement planning for themselves has become important not just for themselves but also to have the ability to provide for their children if required.
What are the benefits of early retirement?
Despite what emerges from the Nielsen-PGIM study, there are some people who want to quit working before time; what does it portend for them? Actually, there are quite a few upsides to retiring early. Let us examine what they are.
First, leaving behind the daily office grind can prove physically healthy, say various studies. For instance, a study published in the prestigious British health trade journal The BMJ says “mental functioning declined among those who continued to work and improved among those who had retired”.
Another study published in the Journal of Health Economics, a reputable online health magazine, talked of how early retirement helped government officials in Holland live longer.
Second, the decision also allows one to start a new career minus the unhealthy rat race or the stifling monotony that a nine-to-five job is often reduced to. This should appeal to Indians, who look favourably at a second source of income, as per the Nielsen study. Apparently, 51% of older Indians interviewed want to start a business.
A new venture would not only keep new retirees intellectually busy with new challenges, it is also bound to brighten their CVs should they seek reemployment later. What’s more, early retirement facilitates travelling for pleasure, which can be spiritually and intellectually uplifting, and beneficial for one’s physical health.
Related: Living in home versus living in a retirement home in India
How important is retirement planning?
Retirement planning means setting aside funds and investing with one specific goal in mind – lead a financially independent and comfortable life even in one’s golden years. There are many reasons why it is advisable to accord it high priority, as listed below:
The first reason is the obvious one – a person cannot work forever, and it is our nest egg that takes care of expenses when we stop working for pay. Plus, it makes us financially self-sufficient.
Second, ever rising inflation makes it risky to rely on one source of income after we retire (our pensions). Consider this: a 30-year-old with monthly expenses of Rs 50,000 today would need about Rs 2.87 lakh a month when they turn 60. A regular pension may prove inadequate.
This brings us to the third reality: as we grow older, we also become more vulnerable to age-related diseases, entailing new healthcare costs we are not used to. What makes it worse is medical inflation; for instance, it jumped from 8% in May this year from around 6% in January.
The fourth factor has to be seen against the earlier three: Our average life expectancy is increasing thanks to better healthcare and nutrition, meaning we need to fend for ourselves for a longer period.
A retirement fund also allows us to fulfil life aspirations, and contribute to family expenses even during retirement.
How to save Rs 5 crore and retire early
The above-mentioned points do not change if a person wants early retirement; if anything, there is more pressure to have a retirement plan in place, as the pension amount gets naturally smaller.
It is not necessary to have high-paying salaries to retire early. What is needed is judicious investment planning and discipline especially as we have fewer years to save during our salaried years. One way to go about it is to invest via a Systematic Investment Plan or SIP.
This method involves investing a fixed amount in a mutual fund scheme of one’s choice at fixed intervals, which can be weekly, monthly, quarterly, or annually. An investor can start with as little as Rs 500. Basically, a small amount is invested over a longer period time instead of a big lump sum being invested in one go. This results in a higher return.
The table below explains how a 25-year-old investor can accumulate a corpus of Rs 5 crore via SIP by the time they are at various life stages – from age 40 to 55 – and take early retirement.
People from other age groups can use this data to plan their monthly SIP requirement for a retirement corpus of Rs 5 crore.
Last words
It is not possible to determine accurately what your expenses will be when you retire; you can at best make a back-of-the-envelope calculation based on your needs and inflation. But getting a fix on your current lifestyle expenses will help you gauge your financial readiness for early retirement. Remember, you must prepare for life expenses for at least 30-35 years without there being be any source of regular income.
Alongside, you should also have a clear understanding of areas that require money to be spent. For instance, is your home in need of long overdue renovation? Are all dues such as home loans cleared? Have you made provisions for your children’s marriage and higher education? It is essential that when you start your retired life, such expenses do not come out of your retirement corpus.
Finally, as shown by the projected monthly investments required for a healthy nest egg for early retirement, mere tightening of expenses may not create the investible funds that are required. It is advisable to sit with a qualified investment advisor and see how else you can get some extra income to invest.
For today’s employed millennials, the word ‘fire’ may not necessarily imply the dreaded pink slip; to them, it can spell the acronym FIRE – short for ‘Financial Independence, Retire Early’, which is quite different from losing one’s job.
American followers of the FIRE concept – first put forward in the 1992 bestseller Your Money or Your Life – seek to save up to 70% of their annual income so they can retire earlier than the conventional US retirement age of 65. Comprising mostly millennials, this group believes they can call it quits once their savings swell to about 30 times their yearly expenses, or roughly around $1 million.
Today, the FIRE concept seems to have evolved into a movement of sorts in the US – with Google searches for it by Americans registering a 94% rise between 2013 and 2018.
In contrast, are the Indians; with retirement age at 58 leaving them with less working years than Americans, they may not be as fond of early retirements as the Americans. However, their preparation for their twilight years also seems weak, as per a 2020 study by consultancy AC Nielsen. .
Related: How is asset allocation linked to retirement planning?
How do Indians view retirement?
The Nielsen study, taken on behalf of asset management firm PGIM India, shows Indians view retirement as an important but a distant prospect, and therefore deemed less pressing than children’s needs and financial security against illnesses or accidents.
The study – which sought to gauge the “retirement readiness” of Indians – noted that the pandemic could “accelerate changes in the retirement landscape”, but as of now, more than half of urban Indians have no retirement plans at all, and hope to have one by the time they turn 50.
Also, unlike followers of the FIRE movement, younger Indians lay less emphasis on savings and more on spending. As per Nielsen, Indians today allocate nearly 59% of income to current expenses, resulting in household savings shrinking in the last decade – from 23.6% in 2011-12 to 17.2% in 2017-18.
This trend can perhaps be understood from how Indians approach retirement; they know “planning (for it) is vital, but they don’t want to talk about it”, says Nielsen. “They put off thoughts of retirement for as long as possible – many won’t even talk to their families about it.”
As a result, Indians rarely plan for retirement as a standalone objective, the study noted.
Less dependence on children for post-retirement support
The Nielsen study also points to a new trend: As job requirements force more young Indians to migrate away from their hometowns, their parents get less sure of being able to live with their children in old age, as their own parents did.
In fact, 26% of elderly Indians who have planned for retirement planning say a crucial trigger for it was, “the dread of being dependent on their children or family”. Only 37% of urban Indians said they are financially dependent on their families for life after retirement.
“This is a profound shift in a country where close-knit families have often served as a safety-net for the elderly and the infirm,” Nielsen said.
In fact, it also said that Indians are increasingly pessimistic about their children’s prospects due to prevailing economic conditions issues and falling employment levels; they not only fear for their children’s ability to fend for themselves, they also fear their own ability to help will decline with age.
Thus, retirement planning for themselves has become important not just for themselves but also to have the ability to provide for their children if required.
What are the benefits of early retirement?
Despite what emerges from the Nielsen-PGIM study, there are some people who want to quit working before time; what does it portend for them? Actually, there are quite a few upsides to retiring early. Let us examine what they are.
First, leaving behind the daily office grind can prove physically healthy, say various studies. For instance, a study published in the prestigious British health trade journal The BMJ says “mental functioning declined among those who continued to work and improved among those who had retired”.
Another study published in the Journal of Health Economics, a reputable online health magazine, talked of how early retirement helped government officials in Holland live longer.
Second, the decision also allows one to start a new career minus the unhealthy rat race or the stifling monotony that a nine-to-five job is often reduced to. This should appeal to Indians, who look favourably at a second source of income, as per the Nielsen study. Apparently, 51% of older Indians interviewed want to start a business.
A new venture would not only keep new retirees intellectually busy with new challenges, it is also bound to brighten their CVs should they seek reemployment later. What’s more, early retirement facilitates travelling for pleasure, which can be spiritually and intellectually uplifting, and beneficial for one’s physical health.
Related: Living in home versus living in a retirement home in India
How important is retirement planning?
Retirement planning means setting aside funds and investing with one specific goal in mind – lead a financially independent and comfortable life even in one’s golden years. There are many reasons why it is advisable to accord it high priority, as listed below:
The first reason is the obvious one – a person cannot work forever, and it is our nest egg that takes care of expenses when we stop working for pay. Plus, it makes us financially self-sufficient.
Second, ever rising inflation makes it risky to rely on one source of income after we retire (our pensions). Consider this: a 30-year-old with monthly expenses of Rs 50,000 today would need about Rs 2.87 lakh a month when they turn 60. A regular pension may prove inadequate.
This brings us to the third reality: as we grow older, we also become more vulnerable to age-related diseases, entailing new healthcare costs we are not used to. What makes it worse is medical inflation; for instance, it jumped from 8% in May this year from around 6% in January.
The fourth factor has to be seen against the earlier three: Our average life expectancy is increasing thanks to better healthcare and nutrition, meaning we need to fend for ourselves for a longer period.
A retirement fund also allows us to fulfil life aspirations, and contribute to family expenses even during retirement.
How to save Rs 5 crore and retire early
The above-mentioned points do not change if a person wants early retirement; if anything, there is more pressure to have a retirement plan in place, as the pension amount gets naturally smaller.
It is not necessary to have high-paying salaries to retire early. What is needed is judicious investment planning and discipline especially as we have fewer years to save during our salaried years. One way to go about it is to invest via a Systematic Investment Plan or SIP.
This method involves investing a fixed amount in a mutual fund scheme of one’s choice at fixed intervals, which can be weekly, monthly, quarterly, or annually. An investor can start with as little as Rs 500. Basically, a small amount is invested over a longer period time instead of a big lump sum being invested in one go. This results in a higher return.
The table below explains how a 25-year-old investor can accumulate a corpus of Rs 5 crore via SIP by the time they are at various life stages – from age 40 to 55 – and take early retirement.
People from other age groups can use this data to plan their monthly SIP requirement for a retirement corpus of Rs 5 crore.
Last words
It is not possible to determine accurately what your expenses will be when you retire; you can at best make a back-of-the-envelope calculation based on your needs and inflation. But getting a fix on your current lifestyle expenses will help you gauge your financial readiness for early retirement. Remember, you must prepare for life expenses for at least 30-35 years without there being be any source of regular income.
Alongside, you should also have a clear understanding of areas that require money to be spent. For instance, is your home in need of long overdue renovation? Are all dues such as home loans cleared? Have you made provisions for your children’s marriage and higher education? It is essential that when you start your retired life, such expenses do not come out of your retirement corpus.
Finally, as shown by the projected monthly investments required for a healthy nest egg for early retirement, mere tightening of expenses may not create the investible funds that are required. It is advisable to sit with a qualified investment advisor and see how else you can get some extra income to invest.
