Don't Delay Retirement Planning

It's time to move past the misconception that Retirement Planning is all about sunny beaches and pina coladas. Retirement Planning is serious business, and a multitude of social, cultural and economic factors are making it imperative that any middle aged Indian starts looking at it as the very cornerstone of their Financial Planning endeavor.

The India 2015 Retirement Readiness report published by Aegon Life indicated that "Indian employees are on course to achieve only 71 per cent of the income they will need in retirement". That's quite disconcerting, to say the very least.

The report further went on to note that the above stated may be a result of inconsistent savings habits; only half of us (51 per cent) are saving habitually for our retirement. This needs to change quickly.

"Retirement planning is critical as you may not have earnings during this time, and you want your money to outlast you. With globalization and the spreading of the nuclear family into even tinier parts, you need to fend for yourself; and life expectancy is only increasing", says Lovaii Navlakhi, Founder & CEO, International Money Matters, Bangalore.

Inflation
A number of factors are contributing to the burgeoning need for a more structured, disciplined and better thought out Retirement Plan.

Inflation, for one, needs to be taken into account. The long term inflation trend in India has hovered around 6.5 per cent per annum, and this isn't expected to go on hold anytime soon given our country's ambitions related to economic growth. At best, we can probably expect this long term trend to stay as it is - meaning that a 35 year old spending Rs. 80,000 per month today will likely be spending Rs. 386,000 or so per month in the first year of their retirement to achieve the same lifestyle. This might make you uncomfortable, but there's no arguing with sound logic and facts.

"There is far greater awareness about retirement planning today. Indians realize that having all their eggs in one basket (only depending on rental income from property), or not taking equity exposure (debt post-tax returns may sometimes be lower than inflation rates) is a risk that they can ill-afford", says Navlakhi.

Increasing Lifespans
Over the past decade, we've seen vast improvements in medical care, immunization, nutrition and prevention of infectious diseases. The Union ministry of health and family welfare has indicated that life expectancy in India has gone up by five years, from 62.3 years for males and 63.9 years for females in 2001-2005 to 67.3 years and 69.6 years respectively in 2011-2015. This means that one needs to provision for an additional 5 years of retirement expenses, at the very least. This isn't as insignificant as it may sound prima facie - extending upon the previous example of a 35 year old that requires the equivalent of Rs. 80,000 per month in today's terms, this addition of 5 years to his lifespan creates the need for an additional corpus of approximately 1.93 crore!

The breakdown of the joint family system
Urbanization, overpopulation, social legislations and changes in attitudes and beliefs are some of the factors that have contributed to the gradual breakdown of the joint family system in non-rural India. It is estimated that over 70 per cent of households in urban India now house just one couple - and this trend may pick up in the coming years; the obvious corollary being that one needs to be more retirement ready in themselves, sans the expectation of (at least complete) support from their children in their later years.

Common Mistakes
Despite all the efforts to create awareness about the nuts and bolts of retirement planning, a few all too common mistakes persist.

For one, we Indians as a collective group tend to be risk averse, exhibiting a distinct preference for low risk or 'safe haven' assets such as gold, real estate, deposits or bonds. While this has very little impact on short term savings, it has the potential to become the single biggest contributor to what is likely to be a full blown retirement crisis a couple of decades hence.

Navlakhi of International Money Matters believes that investors need a trusted, professional and concerned thinking partner to guide them through this phase which they are facing for the first time. "A registered investment advisor (RIA) or financial planner is best suited for this role in taking care of their requirements", he says.

Gold, traditional Life Insurance and fixed income instruments are very poor assets for creating a long term retirement corpus, and risk aversion cannot stand in the way of common sense. A certain acceptable level of risk is actually advisable when it comes to saving for goals that are ten, twenty or thirty years away. Rs. 10,000 saved in a PPF account for 25 years will mature to 96 Lacs - the same amount saved in a higher risk instrument yielding 12% per annum could grow to 1.87 crore.

Another common folly is assuming that inflation will go on pause, and that the amount you are spending today in rupee terms is the same amount you'll be spending 25 years later. Consider this - Rs 50,000 per month, 25 years down the line, will buy you as much as Rs. 10,000 per month will today. Not more than a pittance!

Stopping and starting is another all too common mistake. The mathematics of long term investing can deceive us into liquidating seemingly small saved up amounts to fund short term 'wants' (not needs), without a clear understanding of exactly how much retirement money we're frittering away in the process.

Another commonly ignored aspect of Retirement Planning is failing to factor in that women tend to live five to ten years longer than men. If you're a man saving up for your combined retirement with your spouse, make sure you perform the beau geste of provisioning for an additional ten years' expenses for your wife!

A Financial Planner can help you prioritize and plan for your Retirement Planning goal. If you find yourself all at sea, you may want to consult one immediately. Your Retirement may appear to be a distant goal right now, but you'll be doing something wise by planning for it today.

"We do not start planning early enough for retirement, and also give it a lower priority than say, children's education, their marriage or just getting them "settled" in life. They can get a loan for their higher studies, but you won't, for your retirement", concludes Navlakhi.