It's Never To Early To Start

Don’t be fooled by all those adver-tisements featuring relaxed retired couples sipping cocktails on sunny, picturesque beaches. Retirement planning is serious business; and a multitude of social, cultural, and economic factors are making it imperative that every young and middle-aged Indian starts according it the highest priority in 2017.

The ‘India 2016 Retirement Readiness’ survey published by Aegon Life indicated that only 64 per cent of Indians are “prepared for their retirement”. That’s quite disconcerting, to say the least.

Further, the report went on to infer that the above stated number may be a result of inconsistent savings habits; only 59 per cent of us 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 globalisation, and the growing trend of nuclear families, you need to fend for yourself; and life expectancy is only increasing,” warns Lovaii Navlakhi, Founder & CEO, International Money Matters, Bangalore.

As Navlakhi points out, there are three principal factors that are contributing to the burgeoning need for a more structured, disciplined and better thought out retirement plan: inflation, increased lifespan, and the gradual breakdown of the joint family system.

Inflation
Inflation needs to be considered while planning your retirement. The long-term inflation trend in India has hovered around 6.5 per cent per annum, and this isn’t expected to go down anytime soon given our country’s growth ambitions. If this trend continues, the uncomfortable truth is that a 30-year-old spending Rs 80,000 per month today will need Rs 5.29 lakh per month in the first year of his retirement to maintain the same lifestyle.

Increasing Lifespan
Over the past decade, we have witnessed giant leaps forward in medical care, immunisation, nutrition, and the prevention of infectious diseases. The Union Ministry of Health and Family Welfare suggests that life expectancy in India has gone up by five years within a mere decade: 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.

Five years of additional retirement funding isn’t inconsequential: extending upon the previous example of the 30-year-old, this addition of five years to one’s lifespan creates the need for an additional corpus of roughly Rs 1.5 crore.

“To live all your retirement years comfortably, you need to be ready with a solid financial plan, from a very early stage in life,” says Naveen Kukreja, CEO and Co-founder, Paisabazaar.com.

The Breakdown of the Joint Family System
Urbanisation, overpopulation, social legislations and widespread 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. This trend could pick up pace over time; the obvious corollary being that you need to be more retirement ready, as you can’t depend on your children to fully support you in your post-retirement phase.

Common Mistakes In Retirement Planning
Despite wide spread efforts to create awareness about retirement planning, a few all too common mistakes resolutely persist. We explore the three most common ones here.

Mistake #1: Delaying Until the Penultimate Moment
It’s common for people to procrastinate their retirement planning to the very last moment, relegating it unceremoniously to the very bottom of their financial to-do lists. If you find yourself doing this, you are not alone. In fact, you are the unsuspecting victim of a very common mental bias that afflicts millions of otherwise smart investors around the world, namely, the “Hyperbolic Discounting” trap. What this essentially means is that although we all know deep down that retirement planning is critical, the length of time at hand deceives our minds into attaching an exponentially low significance to it; thereby forcing the delay.
“One should ideally start investing for their retirement as soon as they begin their professional life,” advises Kukreja.

Even a cursory understanding of the dynamics of long-term savings might alter your thinking. Here’s an example: A mere Rs 5,000 per month, invested in a mutual fund SIP that compounds your money at 12 per cent per annum for instance (this is just an example, returns are subject to market risks), will grow to an impressive Rs 5.88 crore in 40 years (say, from age 25 to age 65). If, however, you were to delay this saving by ten years until your 35th birthday, you would end up saving just Rs 1.74 crore. The cost of delay in this case is a sizeable Rs 4.14 crore.

“If you are starting off in your 40’s, you are very late. You may need to re-look at your post-retirement lifestyle. So get really disciplined and start saving as much as you can,” cautions Kukreja.

Here’s an encouraging statistic: if you were to start off with the previously described mutual fund SIP of Rs 5,000 per month, but also increase the amount in a disciplined manner by 10 per cent each year for the next 40 years, your final retirement fund would be a whopping Rs 17.52 crore. The bottom line is: start early, commit to increasing your monthly savings amount each year, and you will end up with a healthy retirement fund with very little pain.

Mistake #2: Saving in Traditional Life Insurance for Your Retirement
It’s important to understand the cataclysmic impact that the default action of ‘buying an insurance policy for your retirement can have on your final corpus. While some low-cost ULIPs may prove to be useful for your retirement planning needs; it’s the so called “traditional policies” comprising the lion’s share of premiums in our country that can end up devastating your retirement corpus.

Traditional policies generally provide very low returns (3.5 per cent to 7.5 per cent annualised), their benefits are represented obscurely, and their surrender penalties are designed to keep you locked into the payment cycle for a very long time; throwing good money after bad. When it comes to retirement planning, squarely avoid traditional or ‘non-linked’ policies; opting instead for more aggressive, potentially higher return investments such as blue chip stocks or mutual funds.

Navlakhi believes that there is a lot more awareness today about the need to diversify retirement savings into high-growth assets. He says, “Indians are starting to realise that having all their eggs in one basket, only depending on rental income from property, or not taking equity exposure is a risk that they can ill-afford.”

Mistake #3: Livin’ in a Fool’s Paradise
The third and most common folly is the ostrich-style “bury-your-head-in-the-sand” approach to ignoring retirement planning altogether. Truth be told, some of the numbers can be daunting, and this triggers off the typical reflex reaction of comfortably disregarding facts and continuing to dwell in a fool’s paradise.

“The first step towards retirement planning is to use an online retirement calculator from a reliable source,” says Kukreja.

There are thousands of otherwise smart individuals who are mistakenly provisioning for a post-retirement income equal to their present day spend. How wrong are they! In fact, the adequate retirement fund for a 30-year-old spending Rs 80,000 per month today works out to be a formidable sum of Rs 11 crore, assuming a life expectancy of 85 years.

Here’s an encouraging adjunct to the above though: by starting off with a monthly SIP of Rs 12,500 today, and increasing the savings amount steadily by 10 per cent every year, you are most likely to achieve this Rs 11 crore corpus target in 30 years. When broken down into a structured plan, the task doesn’t seem quite so Herculean anymore!

While planning for your retirement, it’s vital to crunch the numbers and become a realist. Take a hard look at your current spends, extrapolate them by factoring in inflation, consider your currently provisioned savings and come up with a robust plan. Thereafter, in Kukreja’s words, one needs to “work towards a disciplined execution of their plans”.

A financial planner can help you plan for your retirement; if you find yourself all at sea, you may want to consult one immediately. Your retirement may appear distant today, but you simply cannot afford to ignore its criticality.

Navlakhi drives the point home aptly when he says, “We do not start planning early enough for retirement, and we 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.”