Most elders depend on families
In India, the majority of elders are heavily dependent on family support for financial, emotional, and other needs. According to recent reports, more than 70 per cent of those who are aged 60 and above rely completely on their families. More importantly, less than 10 per cent of them have enough retirement corpus, and have not made consistent contributions to pension and superannuation plans. This is worrisome as it implies that the social security net, either state-driven, or imposed by personal choices does not exist.
It is not that people are not aware of building a wealth nest for old age. It is not that individuals do not make efforts. It is not even that they have little post-retirement income, or savings. The truth is that we make too many mistakes, even blunders, as we plan for old age. We do not consider the relevant issues, and mostly under-plan for the purposes. At some emotional level, we believe, and hope, that our children will take care of us for the last 20 years, as we did for the first 20 years of their lives. The result is a challenging retirement.
Many people make unduly optimistic assumptions about future expenses, when they are in their 40s and 50s. For example, they expect to slow down lives, and reduce their monthly costs without considering additional and specific old-age-related expenses. Usually, costs related to healthcare, household help, lifestyle, and leisure increase with age. We possibly need more leisure, and entertainment when we are older. Inflation, even if it is on the lower side, adds other layers of pressure, silently reducing the purchasing power.
Underestimating inflation is one of the most damaging retirement errors. What seems like a comfortable amount today may fall far short two or three decades later. Even a five per cent inflation, which seems low or inconsequential, will play havoc in 20 years. “A consistent five per cent annual inflation rate over 20 years will lead to an approximately 165.33 per cent cumulative increase in prices,” states a web calculator. This implies that even if the price of an item remains the same, say, Rs 100, inflation will hike it to Rs 265.33.
Such calculation slips can creep in other areas. In most cases, we simply invest whatever surplus is available when we earn. We do not estimate the corpus that we are likely to generate, and what will be available in the post-retirement years. Most use unrealistic assumptions, vague estimates, or generic rules of thumb, as is the case with inflation. A retirement plan needs to be built on personal calculations that consider specific lifestyle, expected life span, financial dependents, inflation rate, and post-retirement sources. Mistakes result in large gaps between expected and actual corpus.
Another common mistake is to combine retirement funds that are needed for day-to-day living, and those that are needed in times of emergencies (healthcare). Without separate emergency reserves, unexpected expenses such as medical bills, and needed home repairs force individuals to dip into long-term investments. This disrupts the compounding effect, and reduces the corpus significantly. Even job losses, or income losses during the working years can dent the future savings. An ideal plan includes an emergency fund that covers 6–12 months of expenses, and is kept in liquid, accessible instruments.
It is never too early to prepare for retirement. Generally, we feel that we need to enjoy, and have fun, till we are in our 40s. The retirement planning begins then, for the last 20 years of working life. The truth is that time is the most powerful component in building wealth. Even modest contributions made early, when one is in the 20s, benefit from the compounding effect. Late starters need to contribute dramatically more amounts to achieve the same target as those who begin young.
For example, someone who begins to save, and invest at 25 may need only half the monthly savings compared to someone who starts in the 40s to reach the same retirement corpus. Or someone who starts early may end up saving twice more than someone who starts 20 years later. It is math and arithmetic. Delaying those first savings-and-investments steps takes a heavy toll. The earlier you start, the lighter the monthly burden becomes.
While we are working, the urge to start late comes from the assumptions that our best working years are ahead. In our 30s, we are confident that we will earn more in the 40s, get the due promotions, and these will enable us to save higher amounts. Hence, we will be safe within 15-20 years, and have enough to retire peacefully. This overconfidence obviously leads to postponement of disciplined saving early on, with a belief that ‘I’ll catch up later.’ Sadly, life rarely follows a predictable financial path. Indeed, life is full of googlies, rather than the straighter ones. Job instability, market cycles, health, or setbacks can derail strong career trajectories.
Most of us begin with a plan, which may be elaborate, and chalked out in consultation with a financial expert. However, experience shows that a retirement plan which is forgotten after the initial calculations is guaranteed to fall short later. Life changes the issues related to incomes, family responsibilities, market conditions, and financial goals. Failing to review and adjust retirement plans can render them outdated and ineffective. Regular reviews, ideally once a year, ensure that the investments stay aligned with the goals.
As retirement approaches, the ability to take risks declines. This means shifting a larger portion of the portfolio towards low-risk instruments such as debt funds and fixed deposits. Experts often recommend gradually moving money out of equities, and into safer avenues about 3-4 years before the planned retirement date. It is wise to prioritise investment options that offer easy liquidity so that one can access funds smoothly when there is no regular income. But most of us do not heed to this advice. In fact, in India, as in the developed nations, the elderly have acquired a higher risk appetite.
A question for near-retirees is: Where should I park my corpus? Ideally, look for avenues that provide steady returns without exposing the savings to undue risks. Many Indians choose annuity plans from life insurers. These convert lump sum amounts into guaranteed monthly or annual payouts for as long as you live, and provide predictable and lifelong income. A senior citizen health plan is usually the best fit for those nearing retirement. They offer coverage for common illnesses and may include benefits such as checkups, diagnostic tests, and cashless hospitalisation.
