Greetings from PenguWIN
Across the globe, including US, Germany, UK and India, surveys conducted among retired people, have revealed one common response – “We should have saved more for retirement”
Retirement is one of the most critical financial goals that needs a corpus (sum of money) to be built, for a period of time (like 25 years from age of 55), adjusted for inflation (money value going down). In rupee terms, a person who is 35 years old today, planning to retire by the age of 55 (2039), needing 50,000/- per month in today’s value, at an inflation rate of 6%, would need a sum of approx. Rs.1,60,000/- per month in 20 years or 3.21 times of what is required today. If he earns a return of 7% after taxes and the inflation rate continues to be 6%, his retirement fund needs to be Rs. 4.28 crores by 2039 (retirement year), assuming he lives till the age of 80 years (2064). i.e. 25 years post retirement age. This value would be higher if he lives for more than 80 years.
Hence, a contingency need to be built so that he does not outlive the corpus. On the contrary, if he lives lesser than 80 years, the wealth can be passed on his beneficiaries.
Retirement Planning has the potential to become an enormous problem for Indians, with increasing life expectancy. People are diagnosed with lifestyle ailments including Diabetes, Blood Pressure, Cardio problems at an early age. However, they would continue to live long due to advancements in the field of medicine which means increasing health care costs. Unlike western countries where hospitalization and prescription medicines are covered, health insurers in India cover only hospitalization and regular medication including insulin, tablets, regular tests need to be borne by us. On the other hand, the retirement age is declining in private sector with availability of young talent pool resulting in people getting relieved of their services by age of 50-55 and is expected to decrease further, in future. Essentially, this means that one needs to accumulate a substantial corpus in 20+ years of their active earning life which should help sustain for 25+ years.
Government servants who joined service before 1 Jan 2004 were fortunate enough to be eligible for pension, that is adjusted for inflation. For the rest, retirement planning has to be done meticulously (including the Govt. servants for whom the pension may not be sufficient) so that they can lead an independent life with esteem and not dependant on their children or relatives or friends.
While the retirement corpus number might look daunting, please remember that these are numbers for future and adjusted for inflation. To quote an example, I remember having a plate of Idly in Saravanan Bhavan for about 2 to 3 rupees in late 80’s and if I were told that the same would cost about 40 Rs. in 2019, I would have had an extra plate then thinking that I can afford 3 more rupees and may not be able to afford that high a price in 2019. But today we continue to consume Idlis paying 40 rupees.
Given the variety of products that are available in the market including Bank and Postal FDs, Senior Citizen Savings Scheme, Post Office Monthly income Scheme, RBI bonds, Corporate FDs, Non-Convertible Debentures (NCDs), Public Provident Fund, Employee Provident Fund, National Pension System, Annuity, Mutual Funds, Direct Equity Investments, it is very much possible to plan and build a portfolio for retirement. It’s just that the planning and accumulation process has to start as early as possible where the money to invest on a periodic basis would be less than try to start late in the game when the monthly investment requirement would be significantly higher.
Most investors want to do today what they should have done yesterday. - Larry Summers
<Blog # PenguWIN 1071 – Retirement Planning>