Retirement planning as a concept has been picking up in the recent past. The terminology has changed though. Retirement is generally seen as connected to old-age when we think about it which we want to avoid. So, there is a new word now which is used in conjunction, especially when talking to youngsters and this financial freedom!
We may say that retirement is something which was not planned by the previous generations of our parents and grand-parents. They had just taken to it as it came to them, so what’s the big deal now?
Let’s understand how it is different now from the past.
It has increased significantly from only about 32 years in 1947 at the time of independence to 70 years as in 2020. Remember this is average and it is now not uncommon to get past 90 years of age. So, what it means is that we have far more years to take care during our retirement life, with no earnings during that time but only withdrawals.
Our parents and fore fathers generally had a public sector job wherein they may have worked throughout their working life. At their retirement, they were rewarded with a good pension scheme and perhaps medical care for self and spouse throughout their lives. No such facility is available in the private sector, where medical benefits are available till the time we are working with the company. While pension could be available, the amount may be too minuscule to make any significant impact. More so reason, for everyone to take personal health insurance at the earliest.
If we are unlucky not to have any medical insurance, or for a lower sum assured amount than needed, then life at retirement could be very expensive. Medical advancements have been happening at a rapid pace and so are their costs. What this could mean is an extended life with more expenses to bear!
Interest rates were high in the 1990s and early 2000s. I recall having invested in a fixed deposit at 14% pa. While the previous generation may have been comfortable investing in simple products like bank deposits and post office schemes, we all know that for us to beat the inflation, the investment has to be done in equity-related products. Not taking any risk is the biggest risk. But, of course, it should be done in a calculated manner considering our risk appetite.
Dependency ratio means the ratio of the old age population versus the young population. More and more people are going to be in the old age group soon, and therefore additional pressures on the economy.
The joint structure living is on the decline, with more and more families splitting apart for their “me and private” zones. In a lot of cases, it is more to do with relocation due to education, jobs etc as globalisation increases. Parents get more emotionally attached to the places they have always stayed and with good social connections. They do not want to move along with the kids and therefore preferring to lead separate lives.
There is currently lot of stress in people’s life. Wanting to keep up with the status of neighbors and relatives in the lifestyles, there has been an excessive pressure to lead busy lives and earn more money. This causes work style related health issues eventually leading to a burnout. The private sector jobs too have been more demanding. People want to retire early as a lot of times they are not able to keep up which means more years of retired life and therefore a need for more money.
Which could mean exotic travels, luxurious purchases, abroad education, or even a desire for a start-up which may not become a unicorn which everyone aspires for? Therefore, burning up money and also the potential for earning money during that time. All this costs money which can eat up into the retirement kitty
Having understood the need for retirement planning, now let us discuss how do we go about it.
First of all, we need to assess our current lifestyle and estimate how we want it to be in our retied life. Know much would be your estimated expenses in today’s value. Build-in inflation and calculate the future value at the time of retirement.
Again, based on some assumptions, predict the number of years of your retired life and calculate the lumpsum corpus needed at the time of retirement.
After subtracting for the assets already acquired for the retirement purpose and expected returns from them, calculate the savings you need to invest to achieve this goal.
Considering your risk appetite, horizon time for the investment, decide where would you like to invest. Asset allocation becomes very important for this determination. The returns which could be expected would also depend on where you want to invest and the risk you are willing to take.
Would you be able to achieve the corpus based on the returns which you can expect out of this investment? Do you have the cash flow/savings available for investments? If either of these is negative, then there is a need to rework the numbers. There could be a need to downscale some of the goals and then start working towards achieving it. You can of course upscale the goals in future, if there is an improvement in cashflows or projected returns out of your investments. It is also pertinent to note that more the tenure, lower would be the risk. So, even more important to start planning towards retirement early in life.
A professional financial planner can help you achieve all your financial goals, not just retirement planning, but even other goals like planning for a house, education goals, travel goals etc.
You could be living at least for around 30 years after retirement and therefore it needs to be planned not just from monetary aspects, but from other areas too so that it gives you total fulfillment. You may have always wanted to do something in your life, but never really had the time to do like writing a book, gardening, social work, travelling, etc. This could be a time to pursue your passions. Also, if you have all the money, but are not healthy and cannot eat what you want, you will still consider your life unfulfilled, so think about these aspects too.
Retirement can be the greatest gift for all of us. But can also be a curse if not planned well. I hear about people talk about wanting to leave an estate, money, properties for their children when they pass away and want this included as part of succession planning. My view is that we do give the best of education and values to our children. Then we let them charter their way into their respective careers as they navigate through the nuances of the World. If we can plan our retirement in such a way that we are not monetary dependent on our children, then according to me, that would be the greatest gift to them.
Feedback and comments welcome. To read more blogs on topics regarding personal finance, please visit my website. If you would like us to help you in your retirement planning, then do get in touch with us.