Retirement planning risksWhen you retire, it’s nice to get out of the rat race, but you have to learn to get along with less cheese.  Money for the elderly is more precious than for anyone else and small financial changes have big impacts on their lives. The dramatic increase in life expectancy, people deferring retirement and inadequate retirement benefits mean that you may have to work harder for a comfortable life in the coming years. Here are the reasons why you may need more money and what you should do.

The risks

1) Living longer

Thanks to better healthcare and higher quality of life, India’s life expectancy has gone up in the last decade. As of last year, the life expectancy has increased from 49.7 years in 1970-75 to 68.3 years in 2011-15. The increase in life expectancy for females was 70 years and 66.9 years for males.

This year, as per National Health Profile 2019, life expectancy in India has increased from 49.7 years in 1970-75 to 68.7 years in 2012-16. For the latter period, the life expectancy for females went up to 70.2 years and 67.4 years for males. The infant mortality rate (IMR) has declined considerably to 33 per 1,000 live births in 2016 from 57 per 1,000 live births in 2006.

A report by United Nations estimates that the average life expectancy will go upto 74 by 2030 and fertility rate is projected to be as low as 2 per cent by 2025. All this means that, the ratio of the elderly to those who actively work will increase to over 40 per cent because of higher life expectancy. Even a Help Age India report says that while 8 percent of India’s population was recorded 60 years and above in 2011 Census, it is expected to increase to 12.5 percent and 20 percent by 2026 and 2050 respectively.

2) Outliving your assets

Higher life expectancy leads to uncertainty about the length of one’s life. This gives rise to the risk that individuals may outlive their resources. This might push you to substantially reduce your living standards at a very old age.

The risk that you will live longer than your money can last is known as longevity risk. Your lifestyle, retirement assets, growth of investments along with life expectancy, determines your longevity risk. This risk increases manifold when you go through a critical illness or you keep increasing your standard of living during your retirement period. Having just one investment or income stream increases the risk.

It is extremely difficult to conquer longevity risk, given the uncertainty about the future. But one should factor in this risk when planning for retirement.

3) Inflation eating your savings

Inflation is one big risk that is not apparent but eats away at your savings. A retirement corpus of Rs 1 crore will be worth just Rs 31 lakh in 20 years at an inflation rate of 6% per annum. Think inflation will remain low? Here’s how the recession might push inflation.

When there is a recession, the government pumps in tons of money into the economy. The industries and financial institutions will have enough to produce goods and services, improve trade and provide employment. This means that the economy will start moving again.

But the biggest truth is that excess money does not always mean a better economy because it is impossible to balance the amount of money in circulation with the total number of goods and services produced and available for sale. So, if everybody has money, we may be chasing fewer goods and services, putting pressure on prices in the process. Therefore, more and more money will be needed for purchasing fewer and fewer goods and services.

The increase in income and employment may possibly not be able to keep up with the increase in prices. This is inflation. This rising inflation trend is set to continue till the economy recovers. This means that, in the coming years, inflation would eat into your savings and as a result, your retirement corpus may not be adequate.

4) Lack of family support

A decade ago, over 70% of Indians lived in the joint family system. Today, the number is less than 40%. With the breakdown of the family support system, housing the elderly is a big issue today. Help Age India report shows that at the national level, 85% of the elderly are living with family, 8% are living with spouse only, 6% are living alone and 2% are living with relatives.

5) Rising healthcare costs

The rise in lifestyle diseases and costs has made it difficult for the senior citizens to afford good healthcare and this can wipe out retirement savings. If you start investing at 24 with an amount of Rs 30,000 annually, and assume a rate of 10% return, you will have Rs 1 crore at 60. If we break this Rs 30,000 p.a. even once at age 34 to meet any emergency expense, the total amount saved at age 60 reduces to Rs 42 lakh.

Surveys reveal that, on an average, a single episode of hospitalisation could cost a family close to 60% of the annual income. Why is healthcare expensive? In India, there has been a shift from communicable to life-style diseases such as hyper-tension, diabetes etc. These diseases are more expensive to treat and difficult to bring under control, unlike communicable diseases. Healthcare is income elastic, that is, as incomes increase, demand for healthcare services increase. Those with high purchasing power, having low sensitivity to price, may secure disproportionate share of health facilities. Another point is that better healthcare technologies mean expensive equipment and drugs leading to higher healthcare costs.

So, the lack of infrastructure and financial security might pose a big issue for the retired.

What should you do

You need to save more for your retirement. Given the increasing life expectancy and healthcare costs and also rising inflation, you would need more retirement corpus than you might have required a couple of years back. Let’s take an example. Suppose an investor is 30 years, planning to retire at 58 and hopes to live till 65. He would require a retirement corpus of Rs 79.8 lakh (assuming monthly expenses at Rs 25,000, an inflation rate of 6% and return on investments at 8%). Suppose he hopes to live till 80 and other factors remain the same, he would need a corpus of Rs 1.56 crore, an increase of 95% in the amount.

This means that either he has to save more or has to have a higher rate of return on investments or both. It is also important to start saving early

Given the rising healthcare costs and inflation, it is prudent to invest in instruments that provide higher returns. Equities are one such avenue. An equity biased portfolio would generate higher returns. Taking the same example above, if the return on investments were at 12% instead of 8%, the investor would require a corpus of Rs 1.1 crore, which is 30% lesser than the Rs 1.56 crore.

The need for a higher retirement corpus would mean that you might have to start saving early. Distributing savings over a larger number of years reduces liabilities to a great extent.

Want to pay off your loans before you retire and planning to use your provident fund? Then, you need to read this article: 4 Things To Remember When You Repay Home Loan With Provident Fund Money

Author
Kavya Balaji

Kavya Balaji is a senior writer with RupeeIQ.