Globally, on an average, there are 3.4 working people to support 1 retiree. Fast forward to 2050 and this number will drop to 2. Japan is already there and in next two decades, more than 35 other countries would join Japan. Countries with aging population are already on their way to adapt to this challenge by improving financial literacy, raising retirement age, providing comprehensive sponsored medical facilities and even building” care robots” to assist their senior citizens.
But what about a young country like India? While our median age is currently at 30, we would experience major demographic shifts in the next 20 to 30 years. We are living longer, thanks to the development in science and technology. Also, we are working for a lesser number of years, as we are studying more and joining the workforce later. Thus, the key risk in retirement now is outliving our finances. Are we prepared for this risk? Let’s look at a few facts to determine our preparedness.
Taking a realistic approach at pillars of retirement income
There are 4 pillars of retirement income namely, social security, employment-based plans, personal retirement assets and family / social structure. Social security in India is not as developed or as widespread as the ones in advanced countries. Only people working in the organized sector and for the government are eligible for employment-based pension plans. With social structures changing, and people moving away from joint-family systems to nuclear family systems, one cannot depend on family support for retirement income. That leaves only one dependable retirement income pillar for Indians – personal retirement assets.
Inflation the silent troublemaker
Inflation is always on the rise. From groceries to electricity cost, taxi fares to medical costs, inflation affects prices of all goods and services. For example, monthly expenses of mere Rs 30,000 will rise to Rs 1.40 lakhs in the next 30 years (assuming inflation rate of 5.3%). That is if we consider the same lifestyle. Adding lifestyle inflation to this calculation will shoot up, one’s monthly budget even further. This becomes critical in the post-retirement years where there is no inflow of new income and inflation can erode the accumulated retirement corpus. Hence adequate planning is imperative. How much are we investing?
A study by the Indian Institute of Retirement, in collaboration with the CFA Institute and the University of Pennsylvania, found that the median retirement savings rate in India is just 8% of annual income. Assuming the average annual salary of a 30 something is Rs 10 lakhs. So, on an average, an they would put aside Rs 80,000 per year for retirement. If one continues this for the next 30 years, he or she will accumulate a corpus of Rs 1.75 crores. Is this enough?
How much do we need?
If we assume monthly expenses of Rs. 30,000 growing at an inflation rate of 5.3% will reach Rs 1.40 lakhs in the next 30 years. Assuming life expectancy is 90 years, one needs a retirement corpus of Rs 5.1 crores to sustain the same lifestyle. There is a sizeable gap of Rs 3.5 crores between the retirement that we want and the one that we are preparing for.
So, what is stopping us from investing in retirement?
Psychological Myopia
Psychological Myopia means our tendency to focus on today’s needs, neglecting the distant future. This is what happens in the case of retirement planning where we prioritize the immediate needs and desires, leading to under saving for retirement. Retirement may seem far away, and it can be difficult to grasp it’s importance. Overcoming this mental hurdle is crucial for a long, happy retired life.
Here are a few steps to overcome this problem:
Following the age-old advice: Start Early, Invest Regularly and Retire Peacefully
Going back to the previous example, to build a corpus of Rs 5.3 crores in 30 years, one needs to invest Rs 17,000 per month assuming a return of 11.50% p.a. (Returns calculated by taking mean of 10-year rolling returns between 01/06/13 and 30/05/23 for Sensex and Nifty. Rate of return prescribed by AMFI for SIP illustrations). Consistent and disciplined investing helps build a long-term corpus.
Start early. Starting early and investing consistently over a long term gives investors the opportunity to benefit from the power of compounding. Starting just a few years later will burn a significant hole in your retirement corpus. The best time to start your retirement planning is as soon as start working, and the second-best time is today!
SIPs are a great tool for retirement planning.
SIPs in solution-oriented retirement funds are a great way to build your retirement income. SIPs help build discipline in investing. One can also benefit from the rupee cost averaging i.e. buying units of mutual funds at different prices, which brings down the average cost.
Do not put all your eggs in one basket.
Retirement is a long-term investment product. Depending on investors’ risk appetite, one should allocate a good proportion of their investments to equities. However, equity as an asset class comes with inherent volatility. To balance out the volatility one can allocate some portion in fixed income securities. Alternatively, one can also invest in a retirement fund which allocates at least 65 to 70% of the portfolio in equity and the balance in fixed income securities. Equities aims in wealth creation while fixed income aims to bring stability to the portfolio.
Moreover, retirement funds also come with Auto – SWP (Systematic Withdrawal Plan) which helps investors get a regular cashflow at retirement age in a tax efficient manner.
Beyond finances
Retirement is a phase for major change in an individual’s life. Leaving the “work” which often defines us, can be slightly stressful and confusing, leading to a question – what next? Not going to work and meeting colleagues can also disrupt one’s social life and wellbeing. Hence investing in strong and happy relationships during your working phase and retirement phase is equally crucial. Finding interests that you may want to pursue full time after retirement can add color and excitement during the “golden years”. Not having to stress and worry about money can significantly enrich your retired life.
Remember this: Retirement is a phase where you stop working and start living. Making the best of this phase is in your hands. Start early, invest regularly and retire peacefully.
(Suresh Soni, CEO at Baroda BNP Paribas Mutual Fund)
