Plan Early For Sunny Winter Of Life

You work and work

For years and years

You’re always on the go

You never take the minute off

Too busy making dough…”

The famous Doris Day number holds true for every working individual. We spend most part of our lives earning money to make ends meet and save for retirement. But how much is enough to lead a contented life even after superannuation?

People’s approach towards retirement is changing and so are their needs. After hanging up their boots people persue those goals that remained unfulfilled during their working life. Of course maintaining a proper lifestyle beating inflationary pressure is a major focus area too.

Now the question is when and how should one start investing? Domain experts suggested that for a sound retired life, the earlier one starts investing the better it is. Apart from traditional tools like fixed deposits, life insurance and public provident funds, experts harped on having mutual funds and systematic investment plans to beat the inflationary pressure.

The Aegon Retirement Readiness Survey 2017 found that Indian workers score highest among 15 countries surveyed when it comes to retirement preparedness. They also take their health seriously, with many establishing healthy habits in order to safeguard their future health in older age.

It highlighted that while Indian workers feel they are doing well in terms of retirement preparedness, especially compared to respondents in other countries, there is more that can be done to make sure that they are retirement ready. Conversely perhaps to other countries in the survey, the changes required tend to be more structural in nature in terms of the retirement options provided to them by both employers and private savings products.

This report focuses on the responses to an online survey of 1,000 people in India, including 900 workers and 100 retirees.

But how much money should one set aside every month to retire tension free? Though it is a relative concept, domain experts feel if a person sets aside 10-15 per cent of her salary from the very outset of the career then one can accumulate a handsome corpus that would take care of most of the needs post retirement.

Often financial investments made to save annual Income Tax are not aligned with our long-term goals of life.

Having said that it is extremely crucial to build a retirement fund keeping in mind inflationary trends of the future. The monthly requirement over time will keep increasing. For example Rs40,000 monthly requirement for someone who retires today at five per cent inflation will be almost Rs92,000 in 17 years. But the investments that most retired people make are into safe options like debt, where the amount they will get in year one versus year 17 would almost be similar or lesser, but not more, said Shweta Jain, certified financial planner and Founder, Investography.

“So, they will start to eat into their capital pretty soon.  Beating inflation is the single biggest problem retired people will have, simply because they have not provided for it in their plan. Medical costs and inflation are two major costs that people ignore. Our lifespan is increasing, but the quality of life still needs work. To get access to good healthcare we will need to ensure we provide for inflated costs and not just costs at today’s value. We also need to ensure that we don’t spend too much at the beginning,” she added.

Hence, while building the corpus overdependence on one single asset class to generate return should  be avoided.

Almost 9-in-10 (87 per cent) of Indian workers have a retirement strategy, far surpassing the global average (58 per cent). Thirty-one percent can be defined as “strategists” – they have a written strategy for retirement, more than twice the amount globally (14 per cent), stated the Aegon survey.

Of course, planning for retirement does not mean one has to sacrifice all the fun in life and only keep saving. It is important to understand the difference between spending on asset building and asset depleting expenses. A retired central government employee Subir Roy started planning for his retirement from the very beginning of his career. Being a central government employee, he gets pension every month and there is a provision of family pension also for his wife in his absence.

“In addition to this, as a central government employee, I also got a lump sum amount from the employer in terms of PF, leave encashment, insurance, gratuity at the time of retirement, in addition to my personal savings. So hardly I require any other plan to lead my life post retirement.  Only, I plan to invest all these savings in proper places like there are so many pension plans, which senior citizens can avail like Pradhan Mantri Vaya Vandana Yojana and LIC’s Jeevan Akshay,” said Roy.

Post-retirement how soon should one start investing the lump sum? B Sreenivasan, certified financial planner, said that ideally these plans should be worked out and implemented at least couple of years before retirement to ensure that one gets the income in most tax efficient way.

Indians expect the greatest portion of their retirement income to be funded by their own savings and investments (43 per cent), surpassing the amount expected globally (30 per cent). Only 27 per cent is expected to come from the government, compared to 46 per cent globally, highlighted the Aegon study.

Advance planning, especially for retirement always helps in life. “Yes, planning early for life after retirement is something that I learnt from my dad. One aspect is to secure your retired life financially and for that, planning is crucial. The other being how you wish to spend your retired life,” said Mumbai-based couple Moushumi Pal and Bhaskar Pal, both in their early 40s.

Outlook Money in its September 2018 issue highlighted the trend of early retirement. The concept is gradually gaining momentum in India as well. The phenomenon is termed as FIRE – Financial Independence and Retire Early. The group FIRE – is a set of people who have this philosophy and mindset to retire early and persue their passions. There is a four pronged approach to achieve early retirement – start saving early to let compounding work for you; say no to debt like credit cards, home loans, personal loans; save at least 50 per cent of your income towards early retirement and invest in inflation-beating instruments.

No wonder, the concept of retirement has undergone a paradigm shift. Kolkata-based couple, Ayan Roy and Smitashree Chaudhuri, both of 34 years, feel retirement means spending time exclusively with family and friends and pursuing some specific goals (business or otherwise).

Retirement planning is not a short-term plan and the process of wealth creation usually lasts throughout the lifetime. It is always advisable to start as early as one can. There are two distinctive advantage of early retirement saving.

“First, your savings get more time to grow on a compounded basis. The second advantage is that early savers can opt to invest in riskier assets and maximise their returns as compared to a person who starts late and can’t therefore take the risk of capital loss,” said Rahul Agarwal, Director, Wealth Discovery/EZ Wealth.

Both fixed-income and market-linked investments play an important role in the process of generating wealth. While market-linked investments help to generate high real return in the long-term, the fixed income investments help in capital preservation to meet the desired goal. For long-term goal, it is important to make the best use of both by judiciously mixing them keeping the risk, taxation and time horizon in mind.

Also the age factor, that is, the time to retire plays a critical role in deciding the investment allocation. The more time one has to retire, the higher exposure one can have to market-related risky products such as equity.

A pension scheme is a good option as it enforces the discipline of regular savings on an individual.

This is a very critical aspect, as many times, individuals tend to get influenced by temporary market conditions and also by any short-term and not-so-important goal, which disturbs the process of disciplined savings, said Ankur Maheshwari, CEO, Equirus Wealth Management.

The Aegon study said another reason for the increasing feeling of retirement readiness among Indian workers might be the rising popularity of the National Pension Scheme for civil service workers introduced in 2004 and its 2009 extension for all Indian workers on a voluntary basis.

Habitual savers are defined as those who say they always make sure they are saving for retirement. According to the survey, only two per cent of Indians surveyed identify themselves as non-savers – those who have never saved for retirement and do not intend to.

At superannuation a person has lots of money – entire life’s savings – but that is not all for sustenance. It is important to understand how it needs to be invested to reap maximum benefit.

“One should invest the lump sum immediately post-retirement. Post that, there are multiple ways in which one can set a mechanism of regular cash flow such as systematic withdrawal plan or annuity instruments, which can help maintain regular household expenses or lifestyle,” said Maheshwari.

How much should one keep in equity, mutual funds or debt to yield maximum benefit? Dilshad Billimoria, Director and Certified Financial Planner, Dilzer, said during the accumulation phase, the asset allocation plays a crucial role in meeting a good retirement corpus. It is important that the risk profile and tolerance of an individual is undertaken and an asset allocation that matches the risk profile which is considered as part of the investment process. A regular review of the risk profile and asset  allocation is where a prudent financial advisor provides expertise.

Life insurance plays an important part while planning for retirement. These savings come handy when one is in need post retirement.

“With market instability being engraved in the economy, these income options offer individuals a bankable option to hold well in times of need. Besides protecting one’s income, such retirement plans keeps the retirement savings on track and develops a sound financial habit. It improves one’s investment asset allocation and helps in managing taxes as well,” said Anil Kumar Singh, Chief Actuarial Officer, Aditya Birla Sun Life Insurance.

Apart from being a source of protection, life insurance is also the ideal retirement planning tool considering that the average life expectancy in India is on the rise. A typical retirement plan comprises of three distinct phases that is accumulation phase, growth phase and drawdown or annuity phase.

One must have a term policy cover until she is financially productive and/or until her primary financial obligations such as loans and children education are over.

“Since the only benefit available in a term plan is one of the death benefits, it is recommended that premium paying term and policy term should be the same. While insurers may offer discounts on advance premiums, such discount may not be commensurate with the term of the interest earned during the policy,” said Ashish Vohra, ED and CEO, Reliance Nippon Life Insurance.

Talking about choosing between traditional and unit linked pension plans, Sanjeev Pujari, President- Actuarial & Risk Management, SBI Life Insurance, said that it is dependent on the customer’s risk appetite, profile, insurance objective and awareness about equity markets.

In a traditional pension plan, the insurance company manages the investment funds relieving the customer of the same. Since the customer may not be aware of investment portfolio managed by the insurer, traditional pension plan is less transparent compared to ULIP.

Along with life insurance, proper cover of medical insurance is very important. Predominantly a floating medical policy to cover both the spouses is needed. In the event, if they have any family history, they can look at an independent policy like “cancer care” or “critical illness cover”.

Is it advisable to buy a house, if one does not have one, post retirement? Agarwal said it is not advisable. “If you are nearing retirement and have been renting most of your life, rushing into buying a house post retirement is not necessarily advisable. There are several factors that need to be considered before the decision on continued renting or ownership can be put to rest.”

As life takes its course, it is very important to stay wisely invested. After all need varies from family to family and it is crucial to take charge of it at the very outset of one’s career.

(With inputs from Anagh Pal)

aparajita@outlookindia.com , sampurna@outlookindia.com