Everybody has their own definition of retirement.
I’ve met people for whom retirement is scary, an end to golden years of income, a life of uncertainty without the cushy corporate job, income, and perks. And I’ve met people for whom retirement is a “can’t wait”, a beginning of a more flexible existence, a chance to experience everything that just passed by in the first 60 odd years. Personally, I like to think that retirement is the freedom to do what you want, not what you have to, and when you want, not when you need to.
“Doing what you want” is easy to say, but freedom of any kind is hard work.
During our prime years, we plan for all kinds of financial goals – children’s education, a home, vacations – but retirement is often the last thing on our mind. However, looking at a few hard facts we realise that retirement planning is not optional anymore. It is a must do, and the sooner the better.
Earlier, an average individual spent about 20-25 years in the retirement phase. This is changing with the millennials who aspire to retire before 50. Combine this with increasing life expectancy, and you have an average retirement phase of 35 to 40 years. Combine inflation, lifestyle changes, and this big retirement phase, and the average retiree has a lot to think about.
To understand perspectives on retirement, we at Edelweiss Asset Management did a survey across age groups, and the responses surprised us. For one, the younger the generation, the sooner they want to retire. Though the older sample set looked at the traditional 50-69 as their estimated retirement age, Gen X was clear that it is under 50.
Interestingly while people are sure about their retirement age, very few have any clue about the cost of retirement, and only 65 percent have started saving towards it.
Subconsciously there is a realisation that life does get tough after regular income stops, and existing lifestyles are difficult to maintain, yet allocating savings for retirement sensibly is yet to happen. The basic traditional investment avenues, which do not even beat inflation, are still the hot bed for retirement for the majority of respondents.
The most underrated thing in investing is asset allocation and this holds true for building retirement corpus too.
61 percent of respondents are confused about whether to choose debt or equity and having done that, how to allocate their investments between the two asset classes.
While it’s difficult to predict or plan life after 50 or 60 or 70 years of age, there are five basics that all of us can do in embarking on a journey towards a more-secured retirement.
5-Point Guide To Build A Retirement Corpus
- Calculate what retirement is: It is a must to know your “retirement phase” or the number of years to be spent in retirement for you to understand when to start planning, how many years to build your wealth for, and the corpus needed. If you want to retire early, the corpus needed will be significantly larger than if you plan to retire at the conventional age of 60 to 65. Miscalculating the retirement phase creates the risk of running out of corpus, which interestingly, as a study in the U.S. showed, is one of the biggest worries retirees face.
- Remember the cost of delay: The best time to start saving for retirement is not when you are about to retire, but when you receive your first paycheck. The biggest free lunch in finance is the power of compounding, and any delay in starting just means you have to save harder to accumulate the same amount.
A 25-year-old who is planning to retire at age of 60 years needs about Rs 5 crore to fund his retirement, assuming a rate of 12 percent return on his investment. This means a monthly investment of Rs 7,697 today. In comparison, if you start investing at the age of 45 years, the same parameters mean a monthly investment of Rs 99,093!
The table below shows how much more you need to invest with every five-year delay. Also the cost of delay in case you do not start investing at the age of the 25 years.
- Make the nest egg comfortable: Retirement years are not the right time to be stressed; life before would have given you enough of that! It is important to accumulate enough to comfortably go through this phase, and it is always better to accumulate a tad more than less. How do you calculate what is an ideal retirement corpus? Think about what the right rate of inflation is, what your expected monthly expense is, and critically, what the right rate of return on your investments is. The calculators are many, but the inputs have to be right.
Assumptions: a) Inflation will be 8 percent in all the calculations. b) Investments will grow at a 12 percent interest rate. c) Retirement will be at 60 and you will live till 85. d) Current investments for retirement is nil. e) Post retirement money will grow at 10 percent.
- Remember expenses rise: The impact of inflation is hard to sink in. It adds to the cost of living each year, and by the time we hit retirement, we have to spend much, much more than we do today to maintain the current lifestyle. Additional costs also creep in with age, including health-related costs.
We also tend to underestimate lifestyle related inflation – the need to seek a more comfortable lifestyle, which is inevitable as we age.
We get used to a certain lifestyle, which is difficult to change, and lifestyle inflation is far costlier than basic inflation. Factor this reality into retirement.
- Don’t forget asset allocation: Asset allocation is often missed out while planning for retirement. What is the right mix for your portfolio? It depends on when you start. For those who have 20 years to retire, equity should be a large part of your portfolio. The power of compounding will help you in wealth creation. For those in their 50s and approaching retirement, debt should be a bulk of the portfolio. At this age, risk-taking abilities are much lower. Asset allocation has to shift gradually from equity to debt, with increasing age and retirement proximity.
Your exposure to portfolio risk needs to reduce with age and hence you can use age-based asset allocation. For this, you can use the thumb rule i.e. your allocation to debt funds must be equal to your age.
Finally, don’t forget that retirement is a journey and this journey is incomplete without the support of a financial adviser. While retirement planning is not complex, it is nuanced, and involves a lot of variables. It requires constant monitoring, which a professional can handle well. Our survey showed that unfortunately, 77 percent of participants had not spoken to a financial adviser about retirement, and this is one thing that must change, and quickly.
When avoided, downsized or postponed, retirement creates stress, but when planned well, retirement truly fits the adage of “sunset years”. Board this train early, keep track of the stations passing by to ensure you are on the right track and enjoy the journey!
Watch this week’s The Mutual Fund Show on retirement planning here:
Radhika Gupta is the Chief Executive Officer of Edelweiss Asset Management Ltd.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.
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