It’s Never too Early!! Many people particularly those in the early stages of their career think that retirement is too far. True, they have decades of work, before they retire, but it is still important to start planning for retirement. In India, although the family systems and life style are changing from joint family systems to nuclear family, some family values and attachments remain intact.
For example most young adults still have a close connection and ties with family and live in the same household. This means although a person in his/her 20’s staying with parents in a shared accommodation would be able to save more because most of his or her daily requirements are taken care at home.
Assume an average middle class person Suresh, who is single in his mid 20’s with no dependants. He would just be able to comfortably manage his standard of living with about Rs.20,000 to 22,000 per month. But if we just move the time machine ahead by another or 30 years this will go up to Rs.50,000 per month (or Rs.6 lakhs per annum).
If Suresh survives for 20 years post retirement, assuming inflation of 7% per annum, his total retirement budget would work out to a whopping Rs.2.46 crores.
Early Mistakes, Late Start & Future Hurdles
Young folks who are just starting their careers – have no big financial responsibilities and there is a temptation to spend on partying, shopping, gifts, gadgets and other small and big indulgences. One has to limit these expenses and include savings and investments also as part of their monthly budget.
Most people think about savings and investments during the late 30’s. At this stage they can hardly save enough. Their credit cards and loans are dragging their savings, and this becomes a cyclical catch 22 situation. This never ends because responsibilities add up with marriage, children, care for parents, etc. So the message is to start early and to be a regular and disciplined saver and investor to enjoy the Power of Compounding (explained later).
Myth vs. Reality
I’m not that old: This point is addressed partially above. Here one needs to understand that we are talking about retirement planning, which happens decades before you actually retire. It’s not about hanging your boots next year, but saving for your own old days (a few decades away) when you cannot work full time like you do now.
I’ll wait for a lump sum: Some people wait to save at least a lakh of rupees (or lump sum), and then decide what to do. This is a flawed assumption. We are not taking about big or small amounts, but its about a regular and disciplined savings. Although the target retirement corpus (amount planned) may be huge you will reach this figure through small savings over the years. Some people say that they will start when they get a bonus, or get some lump sum, lottery, sale proceeds, gifts, etc. These are just excuses to postpone your planning or procrastinate. If you have not though about retirement so far at least start now before it gets too late.
Family Support/External Support: Most people think that their children will support them in their old age. This is true in some Indian families, but times are changing. Although it is important to have family ties and trust, one needs to have financial independence so that you are not necessarily burdening your future generation, who may have new responsibilities to attend to. Some people think that they can get external support if they join old age homes, elderly care centers or a charitable organization. We never know if these options will work so it’s better to be prepared for eventualities and have contingent funds in hand.
Financial Requirements Decrease: This is simply wishful thinking. Some of your responsibilities will get reduced because you don’t have to work or worry about your children. But what about your own living expenses and health. Try speaking to a retired elderly people in your family circles to know the real truth. They will tell you that you need lot of medical costs – preventive medicine plus medicine for cure and ailments. In addition your living expenses will increase in tandem with inflation.
Don’t be surprised if a kilo of rice which currently costs Rs.25 per kg (for example), will cost Rs.60 per kg when you retire. An auto rickshaw from your home to the nearest railway station which currently costs Rs.100 may cost Rs.250 after 25 years. A litre of petrol costing Rs.60 now may cost Rs.150 then.
Even though some of your discretionary expenses can be controlled, there are many other basic expenses which cannot be avoided or controlled.
I will not live that long or I won’t retire: This is one of the most irrational myths that some people use to justify that retirement is not important or necessary for them. The typical life span of an average individual is increasing based on solid statistics and people tend to live longer, but they will suffer from medical ailments and issues. This is a Double Whammy because you live longer and in poor health and increasing your normal livings expense plus higher medical costs. So the first assumption is proven wrong. The second assumption is also wrong, because today most people retire early, compared to olden days when a person served till the mandatory retirement age and received all retirement benefits. For people working in private sector, there is not much social security except for the Employees Provident Fund. Retirement from a regular job is certain whether it happens by chance or by choice.
Now we have seen how planning is important and why it is necessary. The important goal or aim of retirement planning is to have a secure and financially independent retired life during your golden years.
This goal can be further broken in to objectives such as:-
- Regular post retirement income (Pension, interest/earnings from investments, etc.)
- Corpus of savings/investments that you can dip in to for additional expenses and emergency needs
- A safe shelter or home where you can live on your own terms.
Achieving all of these may not be feasible for everyone, but if you have different sources of income and investments already in place, you are on the right track.
Use Power of Compounding to Enhance your Retirement corpus and Achieve Retirement Goals
In order to achieve your retirement goals and objectives – you need to have the right amount of corpus to take care of your regular needs post retirement. The corpus should be good enough to take care of your regular expenses and needs after retirement.
Let’s assume you retire at the age of 55 and you expect to live till the age of 75 based on your anticipated life span. Based on your current expenses and inflation rates you work out a figure that represents your future monthly income (let’s say Rs.50000 per month). This means you will need 6 lakhs per annum for a 20-year period, which means you need Rs.1.20 crores for your retirement. Now this is not sufficient. We have not taken in inflation in to account here.
If we assume inflation rate to be 7% p.a. the total corpus requirement works out to a whopping Rs.2.46 crores. This is the power of compounding which I like to call ‘the 8th wonder of the world’.
So if you need to accumulate this kind of money – you need the following: -
Time/Tenure: Save and invest early so you have more time to allow your money to grow
Being Systematic/Disciplined: Save and invest regularly to ensure your investments grow at a steady rate
Growth: Invest in assets or investments that create value and beats inflation
Aamir vs. John: Who has a better Retired Life?
Take a simple case of two friends Aamir and John. Aamir was working in a Bank and earned a decent salary, but John who worked for a Software firm had handsome earnings. Hence Aamir managed to save only half as much as John saved (i.e.Rs.5,000 against Rs.10,000).
Aamir had a normal lifestyle and started saving at the age of 24, while John thought that investing is not important and postponed it until he reached the age of 34. Both of them plan to retire at the age of 54. John did not have any financial difficulty or lack of savings, but rather wanted to enjoy his earnings and life by spending on fancy motor bikes, branded apparel, expensive shoes, parties, etc. A higher bank balance and salary enabled him to afford such a lifestyle.
When both of them decide to retire at the age of 54, Aamir ended up with a corpus of Rs.2.75 crores while, John ended up with a total corpus of just Rs.1.30 crores. How was Aamir able to accumulate more than double the sum accumulated by John? This is due to the power of compounding over a large tenure and a regular and disciplined savings.
If John had followed the philosophy that Aamir imbibed he would have ended up with Rs.5.49 crores. This is one of the biggest mistakes that young professionals do. Retirement is thought of as an old age phenomenon or things like pension, planning for future, etc are look at as boring or old age philosophies. Although times have changes, some of the good virtues of saving early and consistently never change.
Why Aamir is better off and John is worse off?
Aamir will have a comfortable retirement and have the resources to manage the same or equivalent lifestyle post retirement. John will have a lot of hiccups post retirement, because he may have to sacrifice his lifestyle or curtail expenses. Even if one argues that John can make up in other ways it does not work well because he is left with a corpus that is half as big as Aamir’s corpus. So in rational terms John’s cost of living will have to be curtailed to half as much as Aamir’s to help him sustain assuming both have an equivalent life span. Keeping all other factors common or constant Aamir wins the race. The above case study is not very different from the story of ‘The Hare and the Turtle’.
We have established the importance and need for retirement planning, and we also know how regular consistent and long term savings can help you build a corpus for a comfortable retirement. Just to clarify my stance, let me assure you that I am not trying to tell you to live a frugal life and save and invest as much as you can to reach your retirement goal. There are other goals, responsibilities and commitments that are equally important too. These can include your child’s current education needs, your vacation/holiday once a year, buying a home, etc.
While some of the discretionary expenses such as shopping, cosmetics, furniture, apparel, etc should be controlled, I am not advocating a life of a sanyasi (or abstinence from worldly pleasures). So you need to prioritize different aspects of life and plan properly and reach your goals. Even if you have not started yet, feel free to get started so that you can start growing your corpus to a level that can get you closer to your retirement goals.