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What's the bigger risk - premature death or living longer?
Yes, the question is what do you do if you run the risk of premature death - many would say they would buy an insurance policy for the same. But what if you live longer than you expected?
Our elders often bless us to live a longer life, but living longer entails many things like staying healthy (regular medical expenses), meeting regular expenses in the absence of regular flow of income, living off your assets with nothing or little to bequeath to your children.
Retirement is the time when one would like to spend their days doing what they love - travel, pursue hobbies, social work etc. However, we come across many people who are not very comfortable about retirement, thinking that their regular income will then become irregular.
Retirement perspectives : 2050
India is on its way to becoming the most populous nation in the world by 2025, surpassing China. By 2050, the number of Indians above the age of 65 will cross 200 million from about 80 million currently, while the number of Indians above 80 years of age will be at 43 million, second only to China.
India's average life expectancy is slated to increase to over 75 years by 2050 from the present level of close to 65 years. Lifespan has been increasing due to better health and sanitation conditions in the country. However, the average number of years of employment has not been rising commensurately. The result is an increase in the number of post-retirement years without regular income. Therefore it is more critical now than ever before to ensure regular income for life after retirement. According to a survey by HSBC titled, "The Future of Retirement--It's Time to Prepare," by 2050 India's elderly will equal the number of its children for the first time ever. Further, a United Nations study points out that, in line with the global trend of increased life expectancy and declining fertility rates, old-age dependency ratios will increase, particularly in developing countries like India.
What's the 30-30 challenge?
Inflation is playing havoc all the time by decreasing the buying power of your money. If your monthly expense is Rs 30,000, and you retire 30 years from now, you will need Rs 1.80 lakh every month, assuming that the annual inflation rate is 6%. Even if you can manage with 80% of your present expenses, that is, Rs 24,000, you will need Rs 1.44 lakh every month.
If you live till the age of 85, with rising living standards and progress in medical science, this is a conservative estimate-that is, for 25 years after retirement (assuming you retire at the age of 60 years), the value of the nest egg you need to build is a staggering Rs 4.5-5 crore. This, if we assume 6% annual inflation and 12% returns on investment before retirement. If we assume 8% inflation, the corpus required is a mammoth Rs 12 crore.
We are living in times where we are facing a '30-30' challenge'. So if one assumes average career start age to be 25 and retirement to catch up by the age of 55, it means one has to work for 30 years and have to fend for 30 years. This is the '30-30 challenge' that has to be overcome.
According to HSBC's survey, while India has a higher savings ratio compared with other countries, this is skewed toward saving for children, which accounts for 35% of savings. This money is typically set aside for marriage (especially in the case of a female child) and education. Meanwhile retirement funds account for only 12% of one's total savings.
Moreover, traditional social structures such as joint families and extended community support post-retirement are becoming less relevant as a society in flux embraces rapid urbanization, leading to an increasingly significant need for individual retirement planning.
Dealing with the 30-30 challenge
The traditional instruments like EPF, Super Annuation, Gratuity are not designed to beat the draining power of inflation. While they are certainly necessary, they are not sufficient.
One mistake people make is to defer retirement planning till its very late. For most, it means just contributing towards their Employee Provident Fund (EPF) or Public Provident Fund (PPF) accounts. Either they do not correctly estimate the amount they will need at retirement or are focused on just short- to medium-term goals such as buying a car or a house.
Retirement is one of the most important life stage for which one needs to define goals and make investments accordingly to ensure a comfortable retired life. It also gains significance as whatever is the stage, the expenses would continue although the primary source of income would be missing. The key to a healthy retirement is a well planned retirement.
Investing for retirement can be very simple if one understands the risk and reward proposition each of the investment avenues provide. Also, the investment needs of every individual may differ depending upon various factors like risk taking capacity, lifestage and savings.
As people age, their asset allocation has to undergo change. When they are young they need to accumulate wealth because they have "time" on hand. "Equity" is the wealth creation asset class. However, it yields returns in the long term. Therefore time is an essential "ingredient".
As people approach "middle-age" the proportion of "Equity" in their assets needs to reduce while the proportion of "Debt" needs to increase.
When people reach "old-age", a further decrease in proportion of "Equity" is warranted with a consequent increase in the proportion of "Debt".
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