Retirement planning has been made complex by the rising healthcare costs and a consumption economy funded by EMIs, leaving very little for retirement savings
The very idea of retirement is enough to reduce the stress of salaried professionals. Retirement is this land far far away where there is no tension, no targets, no stress, and no work. But retirement also means no income. There will be no SMS at the start of the month, saying “Rs. XXXXX.XX has been credited to your bank account”.
For the vast majority of the population who work outside government, there is no pension. So, can you preserve your lifestyle when you retire? That’s the fundamental question we need to answer if we are to prepare for a peaceful and independent retired life. Let us understand the various things you need to keep in mind as you work towards preserving your lifestyle post-retirement.
There are some people who often claim that they can survive with just food. That’s an erroneous generalisation. In fact, retirement is not just about eating food. The expenses related to healthcare keep on rising as we age. Food is and will be just a small portion of your monthly budget pre-retirement and post-retirement. The real X-factor is healthcare costs. With healthcare costs growing at double digits (20%) every year, any cost worth Rs 1 lakh today will be Rs 6 lakh in 10 years. You can very well understand what that means.
You might think healthcare insurance is an answer. It is a partial solution. High insurance coverage requires a greater amount of money to be paid as premium. As you move from one age band to another, the annual insurance premium rises. Also, the feasibility of paying a big health insurance premium after 60 must be looked at. All this means that healthcare costs, whether paid from the pocket or through insurance, should be adequately covered in your retirement plan. Of course, healthcare costs may not always grow at 20% every year and may stabilise. However, nobody knows when that will happen.
So, when you sit and make a plan for getting to your retirement corpus, give a lot of thought on healthcare costs. Without financial resources to fund proper healthcare, you would have to sell your assets or even adjust your lifestyle. Invest your money meant for retirement funds in avenues that generate more than the price rise. The simple answer is equities. This is the only asset that can grow your money faster than inflation. Do not expect bank fixed deposits to become big enough to take care of rising healthcare expenditure once you turn 60.
The problem with retirement is that it’s a long-term goal. People think they have a lot of time left. This is partially true. Every year that you don’t save and invest for retirement makes it that much more difficult. Let us explain with a nice example. Assume that a 25-year-old person saves Rs 1,000 per month for 35 years. He gets 15% return annually over this period. He would have accumulated Rs 1.5 crore. But if the same person starts this 15 years later or when he is 40, in a span of next 20 years, he will have a corpus of only Rs 16 lakh or 1/10th of the Rs 1.5 crore amount.
It is advisable to save for retirement from your very first job. But, not many of us do it. Consumption is the key motto in those early days. As the other life-stages such as marriage, child etc. arrive, the savings pie gradually reduces. Sure, your income grows with annual raises. But expenses rise too. Expenses often rise faster than savings. The foreign vacation, the car, and the house; the list of aspirations are endless.
It is important to have a good progress by the time you are 35. It seems difficult given the expenses, but if you are unable to complete 25-30% of your retirement goal by 35, it will become even more difficult to reach the goal by 60. Not all your investment assets can be exposed to high risk. As you close in on 60 years, your entire retirement corpus needs to move into fixed income so that stable monthly income is generated.
Hence, it is important to have some milestones. In your entire retirement plan, divide the progress in 5-year slots – like 25, 30, 35, 40, 45, 50, 55 and 60. These milestones will constantly tell you whether you are on track. If you are not on track, adjustments will be required to bring you back on track. Expenses may have to be cut, and more investments may be required so that you reach your retirement goal without any hiccups.
Whether you will be able to save and invest for your retirement depends on your loans. If you have loans that stretch for 15-20 years and also high-cost debt like a credit card or personal loans, you won’t be able to save much. This is the harsh truth. Loans are essentially future income that you have borrowed today. Loans need to be repaid. Hence, you have to spend your current income to repay your borrowings made on future income. Loan repayment eats up a large portion of your monthly budget.
Even small loan repayment amounts when happening regularly make a big difference. Just a difference of Rs 10,000 per month in investments can over 20 years become as wide as Rs 1.5 crore. This is why it is important to keep your recurring loan liabilities to the bare minimum. Avoid personal loans and credit card debt at all costs. These loans are costly; they charge 15-40% interest per year. No investment avenue can give you returns that will match high-cost loan interest rate.
Every rupee going out of your pocket is one rupee less for your retirement corpus building. While normal expenses can be managed, loans are negative wealth compounding. This works backward. If you want to retire peacefully and have financial independence, you have to correct your current lifestyle to a great extent so that after 60 you can maintain the same lifestyle. So, avoid long-term loans. Avoid high-cost credit even for the short-term.
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