Expert advice

Aug 02, 2014,17.37 IST

How to live hazaaron saal: Factors to watch out

Amit Trivedi
Karmayog Knowledge Academy

Tum Jiyo hazaaron saal, saal ke din ho pachaas hazaar.” I was listening to this song and thought to myself: “The song may remain a superhit for years to come, but wishing someone like this – Oh My God! That must be a pre-inflation era.”

Many of us have yet not fully understood what a long life can mean. While living long could be an indication of one’s good genes or good health – I mean physical health, but what about the financial health?

Are we suggesting that long life is always bad? Not really. It is important to understand the situation before declaring whether it is good or bad. It is also possible that it may be bad for some and good for some.

Let us say, someone starts working at the age of 25, works till 55 and dies at 65 years. This person earned and saved for 30 years and used the money for another 10 years. Now consider another person, who started working at 25, worked till 55 and lived till 85. The numbers change completely. This person would spend for the exact number of years that he earned and saved.

Solution to this problem is very simple: start saving 50% of your income from day 1. Easier said than done, for most. At the same time, saving half of your income is only part of the solution. The other part is what you do with that saving. If the investor seeks safety of capital over anything else, then one will have to be satisfied with low returns. Such low returns are unable to keep pace with inflation – rising expenses.

Inflation, or the rise in expenses over a period, reduces the purchasing power of one’s money. If the inflation were at 8%, one would need Rs 108 to buy what is worth Rs. 100 today. This doesn’t look threatening if we are looking over a short period. However, if one assumes the same rate of inflation over a 30 year period, we start seeing a huge problem. If the household expenses are Rs10,000 today, the same would be more than Rs. 1 lakh after 30 years at an inflation of 8% p.a.

Let us go back to one of our earlier examples. The person earns and saves for 30 years, to consume the savings over the next 30 years. In case of this person, the expenses would grow 10 times only during retirement, if the inflation continues to be at 8% p.a.

If the investments are unable to keep pace with inflation, even 50% savings would not suffice to fund retirement for the whole life. Many investors and advisers are concerned about fluctuations in the prices of their investments and hence they tend to avoid such investments. However, such investments have the potential to beat inflation over a long period of time.

The solutions are simple and obvious: (i) start investing in inflation beating assets as early I life as possible, or (ii) delay retirement such that you get more years to earn and save – by the way, one still would not know the number of years in retirement. Delaying retirement is only possible if health permits.

So next time you wish someone, wish for a long, wealthy and healthy life. If you wish for a long life, make sure you add the words “healthy” and “wealthy” in your prayers.

The author runs Karmayog Knowledge Academy. The views expressed here are his personal views. He can be reached at amit@karmayog-knowledge.com.

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