This is the most important financial aspect but is mostly ignored
As per demographic statistics, India has more than 50 percent of its population below 25 years and 65 percent of the population is below 35 years. With the decision of the government of India to stop defined benefit pensions to all its employees who joined after 1 January 2004, planning for a retirement corpus has attained paramount importance. For private sector employees, retirement planning is all the more important. This helps them be financially independent post-retirement.
Working for a living is a necessity for most of us. But there is a limit to human endurance and one must retire sometime in his life. In India, while most view 60 as normal retirement age, many retire before, sometimes with contributory causes such as job loss, disability, etc.
While in some professions, working well into 70s is the norm, some professions like sports and modelling may see early retirements. Each situation will have different financial implications and hence retirement planning needs to be dealt with accordingly. It is important to create a sufficient capital to maintain a decent living standard beyond retirement.
Factors which impact your retirement corpus:
1. Inflation: Inflation reduces the value of money year on year and eats away into your purchasing power. In 1998, a plate of idli used to cost Rs 5 while the same portion now costs Rs 25.
2. Falling rates on fixed returns: Earlier, it was possible to maintain a particular income level by selecting fixed income instruments for investments as these were yielding high returns. Even a passive investment strategy helped in getting good returns for earlier generation. However, in the present falling interest rate scenario, the present generation must manage its investments more proactively to sustain income levels, which helps in leading a better retirement life.
3. Increasing life span: With the availability of better medical technology, life expectancy is increasing. Sufficient corpus is required to maintain the same standard of living post retirement.
4. Shift from joint family system towards nuclear family: In India, the joint family system was widely prevalent, which meant people in their old age could rely on their extended family to take care of their needs. Now the generation is shifting towards nuclear family due to factors like better employment opportunities at different locations. This shifts the onus on the individual to ensure proper financial planning.
5. Increasing medical costs: Medical costs is a major component of expense post retirement. The cost on this front is rising year after year and this adds up to quite a sum. To handle such situations, one has to earmark sufficient amount towards medical costs.
Case Study: There are two friends, Ram and Shyam, both with similar lifestyles. They would like to retire at the same age. While Ram decides to save immediately, Shyam decides he has lot of time for retirement and decides on a monthly saving of Rs 40,000 after he attains the age of 45 till his retirement age of 60.
From the above illustration, Ram would just need to invest Rs 7,927 monthly. However, Shyam wouldn’t be able to achieve the corpus, even if he invests Rs 40,000.
Corpus Accumulation Strategy: Now you know how much Ram needs to invest monthly, but the question that arises is how to allocate his investment between fixed income and equity. Since Ram is starting early, he can have an aggressive approach and allocate 80 percent towards equity and 20 percent towards fixed income for the first 20 years. To mitigate risks, he can allocate 50 percent of his accumulated corpus to equity and the remaining 50 percent to fixed income for the next 10 years. The last two years, he can shift the entire corpus to fixed income.
Every individual should start planning their retirement as early as possible for smoother accumulation of corpus. However, it is always better to approach a financial planner and strategise your investments as per your requirement.
(The writer is Wealth Manager, Wealth First Finserv LLP)Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency of the Indian government. Examples of analysis performed within this article are only examples. They should not be utilized in real-world analytic products as they are based only on very limited and dated open source information. Assumptions made within the analysis may or may not be reflective of the position of any entity.