Retirement Planning Guide
On the surface, retirement planning hasn’t changed much over the years. You work, you save & build your wealth and then you retire. But while the mechanics may be the same, today’s savers are facing some challenges that previous generations didn’t have to worry about.
Factors to be considered
Ø India does not offer a social security system to its elderly like what the developed countries offer. Hence every one of us, whether Employee, Businessmen (whether small or big) should plan for our retirement. At what point of time you wish to retire is up to you and the circumstances. The number of pink slips being handed out in various industries (particularly during Pandemic or technological disruptions) is increasing too, meaning frequent unemployment would be a way of life in future.
Ø Life expectancy is longer, which means you’ll need more money to last longer – potentially into your 90s. Mortality rate has improved and a lot more people are living well beyond their retirement age, and in some cases working years is less than the number of years lived after retirement. As quality of life becomes better and with advances in medical technology, there is a high chance that you may outlive your retirement savings. Medical costs are also rising. With age, this is an important component of your expenses. As per latest reports, life expectancy in Urban India is Men 71.2 years, Women 73.7 Avg. 72.5 years (In USA it is 79 years) and this is likely improve with better health care.
Ø Bond yields are also much lower than they used to be since 2008 financial crisis and in many developed countries it has turned negative, which means you can’t buy a few fixed income instruments and earn decent return. In many countries including India, many times Bond yields are lower than retail inflation resulting in erosion of capital. This means that you would need much bigger Corpus for retirement.
Ø India inflation rate for 2020 was 6.2%, 2019 was 7.66%, for 2018 was 4.86%, for 2017 was 2.49%, and for 2016 was 4.94%. Thus, inflation is rising and interest rates are decreasing.
Ø In good old times, when a person retired, there was a large family and he/she was never short of conversations, companions and support system. Today most families are nuclear households and children go away to pursue their dreams, whether within India in other cities or abroad. You should give a thought to what you would do the entire day in post retirement period.
Ø Retirement is a process for which one has to have a proper approach and plan from all aspects. If you are a person who has opportunities for self-growth even at the retirement age and feel complete only if you are earning money or are occupied doing something substantial, do not hang up your boots.
Ø If you want even a vague idea on why retirement planning is important, try speaking to your father or a senior citizen from your family/acquaintances and ask him about his 'financial' regrets. Our bet is that the first one will be -- 'I wish I had saved more.'
Ø Health Care Cost: There have been increased Medicare exigencies. Medical cost is rising year on year basis at more than 10% for several years. Majority of health expenditure in India is privately funded by patients, their families or charities. Around half of hospital admission in rural India and some in urban India were financed by loans and sale of assets. On top of this, we have a once in a century Pandemic (corona Virus) which has totally redefined the importance of health care cost.
Ø Demographic Time Bomb, India is ageing: The % of elderly in the total population of India, keeps on increasing. By 2050, it would reach 20% of the total population. Due to the lower fertility rate and extension of human life span, population in Indian Wealthy & Working class is aging faster than rest of country. This will result in increase in Dependency Ratio, which will put the pressure on working population to bear the economic support to non-working population, particularly due to many educated and rich adopting 1 child policy. One child policy has many important consequences like it reduces fertility rate, it skews gender ratio because many people still prefers male child and there is going to be shortage of labour in market. This would also result in more seniors have to rely on their children to take care of them. For example, one couple may have to take care of 1 child, 2 grand-parents and in some cases 4 great grandparents. This is currently happening in China due to 1 child policy enforced by CCP, which has since been revoked but Couples are not willing to change and still continue to have only 1 child and this may happen in urban & educated India.
Short coming of Indian Social Security system
· Inflation (Volatile, sometimes very high)
· Falling Bond Yields and negative interest in many developed countries after financial crisis of 2008
· Expensive Medicare (Corona has taught us this) facility with new complicated diseases and no Medical Insurance after 65
· Increasing Life Expectancy means living longer than what you had planned while working out your retirement plan and thus staring at shortfall in corpus
· Absence of Social Security systems. Even Government & PSU retired employees are finding their pension insufficient to meet post retirement needs
· Retirement funds are invested in fixed income securities with locked in Interest rate and Inflation is spiraling and you may face situation of negative interest rate
After the retirement:
1) You will have no rent payment liability, mortgage EMI or other housing expenses as you would be staying in your own house or with your children, whether in city or at native place. Many of the jobs currently require person to move from one city to another city as part of career and thus he may not have bought house in any city and once he decides the city or town to settle, then only he buy a house.
2) You will not have work-related expenses such as commuting, business attire or eating out for lunch.
3) Your children will be financially independent and you are not expected to support them or incur any expenses other than occasional gifts
4) Will you be having some income from your old job, profession or business (besides usual pension) like rent, retainer fees, royalty, no compete fees etc.?
5) Hopefully, you will be retiring with no debt and hence no EMI
6) Do you want to travel to places (like pilgrimage, Himalayas etc.) where you wished to visit all your life? Then include it in your Financial Goal.
7) Are you willing to relocate? Where? From current high cost city to low cost town? To native place either in town or in rural area, Farm House? Will you and your spouse be able to adjust to that area, facilities, culture?
8) You have to be ready for significant medical expenses due to age related ailments and significant increase in healthcare related cost with no Mediclaim protection available as many insurance companies do not provide Medical Insurance post 65
9) Will you still be earning when you're retired?
10) Are you ready for 30-30 challenge? 30 years of working life (30-60) and 30 years of retired life (60-90)
11) Be careful about Old age poverty as Poverty and social exclusion represent two of the most significant barriers for older people and this could happen if you have not prepared yourself for Retirement as at some stage you may run out of resources (corpus). This may happen if you have not financially planned your retirement
THE KEY TO RIGHT ASSET ALLOCATION
· Asset allocation is a risk diversification strategy
· Different life stage require different asset allocation
· Share of equity = 100 – Your Age*
· Share of Debt = Your Age*
· Right asset allocation is one which adapts to your life stage and risk profile
*Thumb rule for asset allocation
Post Retirement blues
Old age is a pleasure and should be enjoyed without the fear of finances, disease and death.
Confucius said: “Life is really simple, but we insist on making it complicated”. Let me add that we make it complicated by our own actions and inactions of not planning for retirement in a structured manner.
So let us act now, before it is too late, to put our finances in order, because, as the saying goes, stitch in time saves nine. It's better to spend a little time and effort to deal with a problem right now than to wait until later, when it may get worse and take longer to deal with.
“It is better to live rich than to die rich”
Post Retirement is the most important phase of every person as it gives freedom to lead your life in a relaxed atmosphere, follow passion and explore life. Everybody wants to enjoy his life after retirement and doesn’t want to compromise his lifestyle even if the earnings drop. Due to increasing life expectancy this phase is getting much longer and thus requires large funds to live the life without depending on others (including children, which in many cases are married daughters) or becoming financially insecure. Inflation also plays a major role. So it becomes very important that everybody should plan for his/her retirement as early as possible. Hectic schedules, long work hours and a mythical work-life balance make many long for a life where they have more control over their lives and time, and are able to fulfill unrealised ambitions. While thoughts of early retirement cross the minds of many, only a few manage to make the move successfully as there are formidable challenges to an early retirement.
Financial aspects of Retirement Planning
Retirement plan calculates the amount you will require to live the life after retirement the way you dream and prepare a detailed action plan about how to reach that amount.
Experts will help you to create your personalized detailed retirement plan by knowing your expectations and needs during the retirement, keeping in mind your risk profile to reach the expected returns (after taking in to account emerging low yield fixed income age) and volatile inflation. You should also regularly review your retirement plan as we live in dynamic world where our expectations, needs and situations keep changing over time and it becomes very important to do the necessary changes in your retirement plan accordingly.
The most crucial aspects of post-retirement investing depend on the:
1. Size of the accumulated nest egg, what is popularly known as “Corpus” required
2. Desired standard of living and associated expenses,
3. Life expectancy, how long you and your wife will live considering your state of health and family history
4. Desire to leave some inheritance for your loved ones,
5. Real rate of inflation as inflation declared by government doesn’t take in to account needs of only retiree but covers entire spectrum of society
6. Returns from your investments and their tax implications as Bond yields are falling and taxation is increasing
7. Risk-return profile: You may be conservative person and hence bound to invest in safe fixed income low yielding instruments whereas your need could be higher returns which could be risky.
8. Retirement is generally associated with safety. However, given the present levels of high inflation, investing in most fixed income instruments would give you a negative real rate of return. Further, rising inflation might upset retirement calculations quite badly. In such a scenario, creating a judicious asset allocation mix that includes fixed income instruments for safety and regular cash flows and high return investments like equities and real estate will help matters to a great extent.
9. Another important issue to consider is getting adequate insurance. While life insurance is not required for a retired person, since the basic premise of life insurance is protection of loss of income, buy medical insurance for yourself and spouse. Look for covers that offer guaranteed renewability at not a very high cost.
Considering this everyone has to plan their retirement savings.
How much money (Corpus) do you need to retire?
Once you have responsibility to support a family that is the stage at which you build your retirement and estate planning strategies. Let us delve further into this, and understand the dynamics of 'income support mathematics'.
Your strategies depend on 2 important factors:
1. The age at which you can retire out of work
2. Is your savings enough to let you retire today?
These factors are in turn dictated by the following parameters:
· The income support you seek
· The savings that you have
· The investment budget that you currently have
· The time frame that you have to retire
· The rate of inflation
· The risk you wish to take during retirement
· The risk you wish to take before retirement
The rate of returns you need to earn post-retirement is key to deciding the strategy you implement. Building further on the idea of 'income support mathematics,' one has to factor in the dynamics of how much more wealth you need to create given the amount of savings you have accumulated.
Financial Goals for knowing Corpus required
Setting short-term, midterm, and long-term financial goals is an important step toward becoming financially secure. If you have never set personal goals in a structured way in life so far, take the opportunity to formulate them so that you can make yourself aware about the cost of your goals. It is advisable to involve your wife in this process as she is most important person in retired life and she has to own up the retirement plan in terms of finances. This is more important as she should be aware of this in case you die early. After lot of discussions, debate, arguments and counter arguments the couple should list down their Financial goals with stipulated time frame in a structured manner as follows:-
Sr. Goals Target Date Amount (Rs. Lakhs) Additional
No Month/Year At Today`s Cost Information
1 Primary (1st)House
3 Higher Education of Daughter
4 Higher Education of Son
5 Marriage of Daughter
6 2nd/ Vacation Home
7 Medical Emergency Fund (Self & Spouse)
8 Foreign Studies of Son
9 Foreign Studies of Daughter
10 Medical Emergency Fund for Family
11 Foreign Tours, Pilgrimage
You also need to prepare your current statement of all Assets (Properties excluding the home where you would be staying and Investment Assets) & Liabilities (such as Mortgages and loans if any).
Current Asset List
Details Current Value (Rs. Lakhs) Information
Interest in Parent`s Home
Retirement Funds-PF, PPF, SA, LIC
FDs, MFs, Postal Savings
For arriving at Retirement Plan following details would be required (for yourself & your spouse):
Current Age: Yourself: ________, Spouse: _________
Retirement Age: At what age you wish to retire__________
Retirement Corpus that you need is based on retirement expenses required plus total “current cost” of your Financial Goals. In other words, Funds (income) required to meet retirement expenses at current bond yields would give you Invested Funds and add “current cost” of your Financial Goals. This would be your Corpus. Any shortfall should be met out of future savings and until the, cover this gap with Term Insurance Policy.
Update this plan regularly every 3 or 5 years or if any major event has happened in your life requiring re-look at the plan.
Annual Retirement Exp. (at today`s Cost):
House Hold Exp. Utilities Health Travel Others
Provisions. Electricity Mediclaim Premium Car Running & Rep Entertainment
Vegetables Gas (Kitchen) Health Check ups Local Conveyance Social gatherings
Fruits Telecom Medicines Tours & Travels Repairs & Maint.
Maids Society Medical Exigencies Short Vacations Replace. of Asset
Clothes Mun. Taxes Parents’ Medical Exp. Pilgrimage Major Repairs
Dairy & Cold Drinks AMC of all assets Gifts-Occasional
Parties & Liquor Annual Travel Plans
Retirement Corpus required for providing funds for a decent lifestyle and for health related expenses. This is also called “Size of the accumulated nest egg “. There would be gap between what you need and what you have (Current Asset Value) and that`s what your aim is to bridge that gap. This can be bridged by taking Life Insurance Policy and preferable and cheap option is Term Life Insurance.
Term Life Insurance provides coverage for a certain period of time or a specified "term" of years. If the insured dies during the time period specified in the policy and the policy is active, or in force, a death benefit will be paid. Term plans are specifically designed to secure your family needs in case of death or uncertainty. Since this is a pure risk cover and no money is kept aside for investment component, term insurance policies provide a high amount of cover at very low premiums. Hence this should be used to bridge the gap in your Corpus for the time being. Premium for Term Insurance is quite negligible. Please visit Insurance Aggregator or Life Insurance companies to get the quote. Currently for Rs. 1 cr Term Insurance the premium for 40 year person is Rs. 15,000/-P.a.
What to do after retirement?
You need to know what you will do with the time on your hands.
ü Spend prudently: Once you have taken the big step, you need to remind yourself that your money has to outlast you. You need to understand that income is now fixed and lifestyle should not be upgraded. Live within your means
ü Set your post retirement life with Travel the world, Teach & pass on your expertise to those who needs it by mentoring, Volunteering, Public Service, Spend time with friends & family members, Babysit, Read, write a book if you have skill, Start a blog to share your knowledge, experiences & expertise, Start a new hobby, Join a fitness group but don’t sit ideal
ü Fight inflation: There can be no lull or pause in your war against inflation. You need to be invested in growth. However, post retirement; you will need to balance three seemingly conflicting objectives of liquidity, income and growth.
ü An imbalanced portfolio can be risky: More liquidity or income from retirement assets means a losing battle against inflation, while a portfolio that tends towards growth means losing out on regular income and liquidity.
ü Review life cover: Unless you are working and have dependents, you can do away with your life cover if it is a term plan. For other kinds of plans, see them through till the end of the term, but don't buy any fresh policy since your assets will provide income to your dependents. Of course, you need to keep continuing to meet the premium obligations for your health cover.
Lender of last Resort- Reverse Mortgage
What happens if you live longer than you had budgeted for? You have run out of Corpus, isn’t it scary?
Use Reverse Mortgage.
A reverse mortgage is a mortgage loan, usually secured over a residential property that enables the borrower to access the unencumbered value of the property. The loans are typically promoted to older homeowners and typically do not require monthly mortgage payments. Reverse mortgages allow elders to access the home equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower (or the borrower's estate) is generally not required to repay any additional loan balance in excess of the value of the home. The Reverse Mortgage Loan (RML) was Introduced in India 12 years back (2007) to improve the life of house-owning senior citizens.
The Reverse Mortgage Loan is a great financial tool for senior citizens who want to live independently even in the old age.
There are mainly two types of RML available in the Indian market:
Regular RML and the other one is RMLeA (Reverse Mortgage Loan-enabled Annuity). One should be very careful while assessing one's future needs, as these two are entirely different and purpose specific.
Usually, banks in India offer 40 to 50 % of the market value of a residential property. In case, if a lender is making promises to offer beyond it then think thrice and take the help of a reputed financial consultant to unearth the truth.
Quite often banks claim that they charge a one-time processing fee (0.5% of the loan amount), but in reality, like any other loan, there are many hidden charges that a borrower comes to know in the latter stages. Therefore, you should be well-informed about the potential costs in advance.
There is no compulsion regarding the repayment time; a borrower can redeem it even before the agreed time duration. Also, one need not repay the mortgage as long as one lives in his/her house. Payment is due only when the person passes away, sells or moves out of his/her residential property. In the case of borrower's death, the bank holds all rights to sell the property and recover the loan. And, if the proceeds exceed the due amount, then the bank is obliged to return the same to the legal heirs.
However, without letting the property get sold by the bank, legal heirs can still get the mortgage released by repayment of loan amount along with accumulated interest. The no prepayment- penalty feature is also there easing out the burden of borrowers and letting them make the advance payment of the loan as and when possible.
Under the Finance Act 2008, the government has exempted the RML. According to this act, no tax shall be levied if the borrower or the legal heirs return the full amount from other sources, without selling the property. This is only one side of the story because ironical to this there are still some taxes that can haunt the borrowers. In case, the property is disposed of by the lender; then the borrower is liable to pay income tax on capital gains. Other than this, even the annuity income in the hands of recipients is also taxable.
Eligibility for a reverse mortgage requires a person to prove that he/she can make their homeowner's insurance, tax, and upkeep payments. If failed in keeping the taxes current and paying the insurance premium on time will result in foreclosure and loss of home. So, think before you leap into it. Remember, you have the right to cancel the deal within 3 days of finalizing it. So, don't hesitate to cancel the deal if you think something went wrong. However, this money can't be invested in shares and real estate.