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RETIREMENT PLANNING

➤ Most of us like to live in the present, so much so that often, we end up ignoring the future. We splurge on present needs and retirement planning to most of us is something esoteric that is best relegated to financial planning magazines.

➤ To be sure, saving and planning for retirement is a real and urgent need; it’s a lot more urgent than the latest mobile or car or the grand vacation to Europe. Retirement planning is too pressing and long-drawn to be taken up when you are a just a few years away from retirement; by then it’s probably a little too late in the day to wake up to the rigors of retirement planning. At EquitEdge Investments, our recommendation to clients is to save for retirement at an earlier stage of their lives.

THIS HELPS IN TWO WAYS:

  1. IT REDUCES PRESSURE ON FINANCES AT A LATER STAGE
  2. IT ENABLES ONE TO AIM FOR AN IDEAL RETIREMENT SCENARIO AND NOT A COMPROMISE.

HERE WE OUTLINE SOME MYTHS ABOUT RETIREMENT PLANNING :

MYTH 1:

  • Retirement planning needs to start when I turn 40. The power of compounding may be a cliched concept but it is true and relevant. The younger you are, the better are the prospects of building a large corpus for sunset years since you can reap the most out of the power of compounding. Your money starts earning interest and the interest earned also starts earning interest, translating to a decent size wealth. For example, let’s assume that you are 25, and save Rs 24,000 a year (Rs 2,000 a month) for 10 years, that is till you are 35. After that age, you stop saving and just let the kitty grow. When you turn 60, at 8 per cent compounded return, your retirement corpus will be a cool Rs 30 lakh (Rs 3 million). If on the other hand, you are 35 and want to amass a Rs 30 lakh kitty when you turn 60, you will have to save Rs 48,000 a year (Rs 4,000 pm) for 15 years, at 8 percent.
  • Inference: If you start saving at an older age, not only you have to save much more every month but also for a much longer duration to collect a similar corpus.

MYTH 2:

  • Stress levels of urban life make retirement planning pointless. Who’s going to live till then? Advances in medical science are expected to go from 78 to 85 in the next decade. Drug innovations in the last two decades have been found to increase life expectancy by an average of 4.7 months. Chances are that there is going to be a cure for most major old age ailments. Hence retirement planning in India is not pointless. But treatments, as well as medicines, are going to be expensive too, given the universal relaxation in drug price control. You are most likely to live much longer than expected, but you would also spend a fortune on health care. How do you plan to save for that?

MYTH 3:

  • Inflation will not make a significant dent in my retirement kitty , Inflation erodes the purchasing power of a rupee. If you have bought something for Rs 100 today, it will cost Rs 105 in 2007, if the rate of inflation is at 5 percent. Hence retirement planning is a must.Should you be bothered? Yes. If you are 35 and your expenses are Rs 16,000 a month, and if the inflation is a steady 5 percent, then, when you retire at 60, just to maintain your current standard of living, your expenses will be about Rs 56,000 a month. Do you need more evidence?

MYTH 4:

  • My lifestyle will remain the same. Technology is becoming cheaper. So I will spend less in retirement. Televisions are cheaper than they were a decade ago. So are CD players, laptops, cars, telephone and mobile phone calls, etc. But this doesn’t mean that you are spending less on them. Would you be caught dead with a heavy black and white LCD mobile handset? Or driving a 10-years old car? The least you can have is a blue tooth enabled mobile phone with a camera and a radio, right? In a few years, there will not be any CRT monitors for computers; the only LCD monitors MP4 players and flat television screens will be the norm. This constant and increasingly frequent up gradation will gobble up a lot of your funds. Hence retirement planning is a must. Remember, this has nothing to do with inflation and hence you cannot even provide for this need. One option is to go for only such brands that have everlasting value. That means spending a lot more now but you would save on replacement costs in the future.

MYTH 5:

  • I have considerable skills. I will find work in retirement. The changing world demands new skills. As we age, except for a few, most of us will have diminishing value at the workplace. People much younger will demonstrate more usefulness making our skills, and therefore us, redundant. Hence retirement planning is a must. You can say that you will keep learning but as you age, you will face serious limitations in learning new skills to compete with the more robust younger lot for work and money. You might find that your experience is no longer relevant in the new world.