Retirement Planning………..are you serious?

Longevity is defined as ‘a long duration of individual life’.

Data shows that the average life expectancy of an Indian individual is 62 years (male) and 64 years (female) and is improving. Medical advancements have taken care to see that a person’s life is prolonged. The cost of medical treatment is going up year after year. Longevity is definitely a risk if one is not prepared for it. The lifestyle is also improving a lot and so also the lifestyle costs and expenditure.

Personal risks can be classified in six categories:

· Earning risk – unexpected decline or stoppage in income due to death, sickness or unemployment.

· Medical expense risk – Cost of hospitalization and medical treatment to recover from sickness.

· Liability risk – Due to negligence.

· Physical asset risk – Loss of home, car or other property.

· Financial asset risk – Decline in the value of financial assets.

· Longevity risk – Living too long and running out of savings.

The first four risks can be covered or insured. Look out for low cost insurance. This allows the remaining savings to be invested in proper manner to provide for your various financial goals. The last two risks has to be taken care of by you and managed meticulously. Proper allocation of funds, rebalancing the portfolio as per requirement and monitoring the same is the key to success of managing your retirement goals and also helps in achieving your other important financial goals of life.

Definitely living too long is a risk if one outlives his or her savings. Those mainly affected are the pensioners and retirees depending solely and entirely on monthly benefits from the pension fund which is insufficient due to increased cost of living and those who have not been able to build up the resources to fund the costs of living too long especially for medical, hospitalization and care-giving services. As a consequence one has to either continue working or depend on their children or relatives which affects one’s self esteem. Like someone said that when you have silver on your head, you should have gold in your pocket. You will be respected by your family and society if you are financially independent after your retirement. If not, you may not be lucky enough to have children like Shravana and may find yourself dumped in some remote old age homes or even thrown on street. Such cases are often reported in print and electronic media or you might have witnessed it near your vicinity. Our society is fast changing from the old traditional joint families to nuclear families. They have their own limited income and expenses and might not be in a position genuinely to support their parents.

While it is great that people are living longer than ever before, the downside is when one’s lifetime savings may be insufficient to cover costs related to longevity. It is not uncommon for the people in the accumulation phase to place their funds in fixed deposits or post office deposits wherein the interest income post tax is generally below the inflation rate. Also the pensions are taxable and factoring in the inflation during the retirement period makes it very difficult to maintain the standard of living throughout the remaining part of the life.

One therefore has to plan in advance for the future requirements anticipating the hurdles that may come across. Avoid the urge to spend unnecessarily. For the money to last, the person during the retirement period should withdraw the amount at a rate that is sufficient to sustain a comfortable standard of living, while minimizing the risk that one would drain the corpus fund before he dies.

For example, a couple’s living expenses today at age 30 say Rs. 25,000/- p.m. would become Rs. 1,44,000/- p.m after 30 years at retirement at age 60 considering the inflation rate of 6% p.a. This will be just to maintain the same standard of living as of today.

If they wish to improve their standard of living by 5 % p.a, the amount required at the time of retirement will be an astounding Rs. 5,72,000/- p.m! Are you ready for this?

Retirement fund can be generated in many ways by investing in one or combination of different asset classes like equities, real estate, bullion, debt, etc. depending on the risk appetite and amount of investment one can afford either lumpsum and / or on regular basis throughout the accumulation phase. The investments can be done in the assets directly if he has knowledge, expertise and time or via mutual funds, ETFs, REITs, etc. One does not have to necessarily go for retirement / pension fund schemes only through insurance companies buying endowments or ULIPs that may be coupled with insurance and high costs. The need for insurance has to be calculated separately and opt for term insurance. Moreover the pensions generated by these schemes after vesting age are taxable.

One more option has been opened up recently is reverse mortgage scheme that is actually a boon to the retired persons having a clear title property in their name and who does not have anything to support them. However, it is has not been very popular for various reasons and one of them is that, mortgaging the property for money is not considered as a good thing in our society and reflects the financial weakness of a family.

However according to me the self occupied property can be considered as an asset like any other asset build up for retirement period and can be used up during their retirement if that property does not need to be passed on to the next generation.

One therefore has to start saving early as the power of compounding gives a great value to your savings. Also one has to choose the asset class for investments to achieve the required corpus at the required age. Make the allocation in such a way that the retirement income is tax free or with minimum taxes as possible so that the post tax income is in line with the requirement . The portfolio has to be monitored regularly and re-balancing has to be done as and when required and necessary.

Thus similarly many other goals and objectives would be there for a person or family and those may be inter-related that require more complex analysis and solutions.

The author of this article is Mr. Atul Mishra a Certified Financial Planner and can be reached at atulnmishra@gmail.com