As Life Expectancy Increases, A Retiree Must Ensure That His Money Outlasts Him

With retirement comes a new era of life, free of the exhaustive chaotic routine of responsibilities that have taken up most of your life, and take a step into a world that is planned and managed for you. Most of us have this vision of a ‘Retirement of choice’; however, very few would have a definite strategy to make this reality by fulfilling the three essential components of the Golden years, i.e.,- Income generation, Capital preservation, and Real growth. This interview with Mr. Rajiv Bajaj, Chairman and M.D., Bajaj Capital,  aims to elaborate on the same cerebration of how to make retirement the best phase of all life stages.

People are living longer and leading a more active life than before. How should one plan a 100 year living as far as retirement needs are concerned?

Indeed more and more people are living longer as life expectancy has increased materially from 60 years before 2000 to 70 years in 2020. Life expectancy has a positive correlation with Per Capita Income. As India continues to grow at a healthy pace, life expectancy is only likely to go higher. Globally, 20% of people were expected to live till age 90 years in developed economies. This number should go up to 70% by 2031 as per Office for National Statistics, UK.

Hence, it is important for a retiree to ensure that his money outlasts him. Nothing is worse than running out of money as you get old. There is a belief one has to constrain their lifestyle after retirement; we believe one has a right and responsibility as well as the ability, through the right investment choices, to continue to improve one’s lifestyle post-retirement. The way to ensure it is by making sure that you don’t eat out of your retirement corpus. The corpus should be large enough that the income generated from it is sufficient to take care of living expenses, forever. This is easier said than done though. Inflation and falling interest rates are your biggest enemies in achieving this, as expenses keep rising while your income falls. Probably the only way to guard against this is through judicious asset allocation. One must have a calculated exposure to growth assets in her/his retirement portfolio, after retirement, so that while one part of the corpus generates regular income with capital preservation, the other part compounds at a healthy rate and beats inflation.

Also, as people live longer, they need a purpose in life. The Japanese call it the Ikigai. It can range from sharing your expertise and experience as a consultant, following your passion for music and arts, or, philanthropy. Once you are assured of your finances, you can truly live your Ikigai. But finding your true Ikigai is the key. An Ikigai coach can help you find it and ensure a fulfilling retirement life.

"Retirement as a goal has its due visibility, but not enough people are able to plan properly for it beforehand. To this end, we have been tirelessly working to ensure that not just those who are immediately retiring, but people of all ages take the most well-planned and smooth route to this destination."

—Mr. Jai Bajaj, Head of Special Projects at Bajaj Capital also quoted.

Why should a youngster plan early to save towards retirement? What is the cost of the delay?

As people tend to live longer and cost of living rises, the optimal retirement corpus needed also rises. The larger the retirement corpus, the better it is. There are two ways to ensure that - start saving and investing early, or, save and invest more. We live in a world that is getting increasingly consumerist. People’s needs, aspirations and lifestyles are improving thereby reducing their ability to save more. Hence, starting to save and invest early is preferred.

For instance, if one needs to have a retirement corpus of say Rs. 5 crores at age 60, there are 2 ways to get there - A. Start saving and investing every month at age 25, or, B. Start saving and investing at say age 35.

In the former case, you need to save and invest only Rs. 10000 per month (assuming CAGR of 12% in equities), while in the latter case, you need to save and invest Rs. 30,000 per month at the same rate of return. By starting 10 years later, one needs to save 3 times more than in the case where he/she starts early. This is the cost of delay.

Of the several investment options available, how should one decide?

There is no single panacea or elixir to ensure a comfortable retirement life. The key is asset allocation, which essentially means mixing various investment options according to their risk-return characteristics. The investment options have to vary with the stages in one’s life. A youngster who is far away from retirement must invest in growth assets like equities, realty, etc., while a person who is to retire in less than 5 years (Pre-Retiree) should have a more balanced asset allocation to avoid sharp drawdowns towards the fag end of his career. Similarly, a person who has already retired needs a mix of income generating and compounding assets, a mix of fixed income options as well as growth options. There are prudent investment options for all these stages.

Equity Mutual Funds, PMS, AIFs are good for a youngster, while a pre-retiree should mix these with some fixed income instruments. A retiree has plethora of options right from income generating instruments like Senior Citizens Savings Scheme (SCSS), Pradhan Mantri Vyay Vandhan Yojana (PMVVY), Pension Plans and Debt Mutual Funds, to growth-oriented instruments like Hybrid or Equity Mutual Funds.

In a nutshell, one has to follow an asset allocation approach in line with one’s stage of life and investment objective i.e. income generation or growth or a mix of both.

"Throughout our lives, we work diligently to provide for our loved ones - our parents, siblings, partners, and eventually our children. even all of our life goals, such as a house, car, vacation, and education, are inextricably linked with our responsibilities. there is only one goal where we actually care and provide for ourselves, and that is retirement. therefore, whether we are 25 or 55 years old, a portion of investing should be focused on retirement savings."

—Rajiv Bajaj, Chairman & MD, Bajaj Capital

How to make use of mutual funds to create a retirement corpus? How do SIP and SWP help in meeting retirement needs?

Mutual funds are the best investment options for retirement planning, across life stages. Initially, SIPs in Equity Mutual Funds can help a youngster build a large enough retirement corpus by compounding at a high rate and lower cost. At a later stage, SWPs in debt mutual funds and investments in hybrid mutual funds can give retirees or pre-retirees a highly liquid, relatively safe and tax efficient way of achieving the triple objectives of income generation, capital preservation and real growth. SWPs are of particular importance to retirees looking to generate regular income as they are extremely tax efficient and liquid, as compared to most other regular income options.

How should one plan early retirement?

We live in a VUCA world - Volatile, Uncertain, Complex and Ambiguous. Work lives today are more competitive and stressful than they were a couple of decades ago. It is normal for people to burnout early in their careers. The concept of Early Retirement is gaining ground in the society where people want to work hard for say 20-25 years, accumulate enough wealth and then retire early in their 50’s to follow their Ikigai.

The way to plan for an early retirement is simple. The first step is to know how much money you would need at the time you wish to retire, say age 50 years, to ensure that you never run out of money for the rest of your life and fulfill all interim goals too. Most of us falter in accurately calculating this amount, underestimating it more often than not.

Once the amount needed is correctly estimated, you need to have your savings and investment plan to reach there. Estimating how much one already has, how much more is needed to be saved every month and where to invest it, are the key factors in deciding a positive outcome. Here, making a Retirement Plan and assessing your Cash Flows over your lifetime is the key; it will give you comfort and confidence, and freedom to pursue what you truly cherish.

A good retirement planning tool can help you estimate the amount required, with a high degree of accuracy and also help plan the savings and investments required to get there within the desired time frame.