India is a country where traditionally people are not oriented for retirement planning in finances. There is a prevalent culture of joint family and the older generation expects the next generation to take care of them in the old age. Surely there is some form of retirement savings being done. But it falls far short of the actual need in absence of any proper planning with 100% financial independence. However, today there is an increasing need felt for retirement planning especially among those in the middle age group.
What is the need to plan/save for retirement:
Here are some of the reasons why the growing need for retirement planning is felt.
- Post-Retirement Life: Over the years, the average life expectancy has increased to almost 70 yrs. However, it also likely for one to live almost for 85-90 years since today. For a person, retiring at say age 60, it is likely that 30 years of his would be in retirement. This thought itself arouses a shock and concern, and any sane person would feel the need to plan wisely for the future. Post retirement, one would need to provide additionally for medical care, costs for any operations of surgeries, for any passion or hobby to pursue, etc. With rising costs of living, urbanisation & growing needs, factored with inflation for 30 years: the need for starting to save immediately for retirement assumes great significance.
- Self-Dependence: Earlier after retirement, children were supposed to assume the role of financial care-taker in times of personal/medical emergencies but off late people realize the importance of planning for retirement during their working life only. This has also to do a lot with growing complexity of life with multiplicity of needs, increasing importance to money, ambitions of the younger generation coupled with the desire for total freedom in decision making, etc. To put it in simple terms, the working generation today wish to have a dignified & independent retired life without taking any chances on the next generation for financial support & care.
- Urbanisation & Migration: The rapid urbanisation is reshaping how we live our lives. Trends show that there is a change from the joint family system to nuclear family system due to many factors. The houses are becoming more expensive yet smaller. A large number of the working population is also migrating to the bigger cities for better work opportunities, largely giving rise to the culture staying away from the parents.
- Uncertainty of pension benefits: Although you may get pension benefits and the amount compulsorily saved in public provident fund can provide some support, yet it may not be sufficient enough. Moreover, in India, the states do not provide any social security for the retired people, so it becomes even more important to plan for retirement.
What is Retirement Planning?
Retirement planning is the process of arranging finances to meet expenses during retirement period. The idea is to collect enough retirement kitty so that you get financial independence in managing your personal expenses. The important considerations that go into planning for retirement are...
- Financial assessment: What is the current income, expenses and savings and what amount needs to be saved to sustain the kind of lifestyle he/she wants at present and after retirement. Other inputs to consider are the kind of disposable assets & liabilities would exist after retirement and any business, hobby or other post retirement expenditure or income is foreseen.
- Goal Setting: It involves realistic goals about the standard of living that one wants post retirement and what should be the retirement income. Often, fixing the retirement age is also dicey as people may wish to retire early but may not be financially viable decision.
- Financial Planning: It involves ascertaining the retirement kitty requirement and managing resources to build the retirement kitty. It also involves managing the retirement kitty smartly after post retirement so as to comfortably provide for expenses during the retirement period.
Building Retirement Kitty:
Key inputs like retirement age, expected household expenses, retirement period, inflation, returns on retirement kitty, returns on existing or new investments to build retirement kitty, existing assets & liabilities and the savings potential are used will arriving at the retirement kitty. Each of the input stated above can impact the retirement kitty need drastically. While some of the inputs are in control of the person concerned, some, like inflation & retirement age are out of control. Building a retirement kitty is about taking smart decisions from today itself before it becomes too late. Some important factors that can be effectively managed and would help in retirement planning are:
- Create a retirement plan: Identifying your retirement kitty need, is very crucial. You may approach your financial advisor for the same. You may also try some of the online tools for same but it may match your exact needs.
- Save and invest regularly: Saving regularly, beginning now, is most important, even if you haven't yet prepared your retirement plan. Chances are that you would have saved only a fraction of the retirement kitty need when you do the retirement planning in future. There is perhaps no option than to save the most that you can in appropriate asset class depending upon the years remaining to retirement.
- Diversification and Asset Allocation: One should diversify the existing investments and divide the savings into equity and debt asset classes. We must remember that equity asset class in long term can significantly contribute to your retirement kitty, if adequate savings are done in early years of one's life. In many cases, debt investments done for retirement would never be sufficient for your true retirement need. Deciding the right asset allocation is very critical to the success of your retirement plan.
- Disposal of assets: When retirement actually arrives, there can be other possibiliites explored like disposal of assets (property) by sale or rent to meet retirement kitty need. There is also a trend of reverse mortgage wherein you receive payments from financial institution against your existing house which you mortgage to them but continue to keep possession for your retired life.
Retirement kitty is something which is doesn't easily figure on top of your 'list of goals'. Observations show that the more you delay planning for your retirement, increasingly, the dream of having an independent, dignified retired life becomes blur. Retirement planning can be easy when you are in the initial 5-10 years of your working life and is perhaps the best years to start planning for retirement. Quite often people are shocked to hear the retirement kitty requirement and mostly it is too late to do anything tangible. As investors we strongly recommend that you start planning & for your retirement at the earliest.