Retirement Planning is a necessary part of every person’s financial plan. You get only one chance to do it and you cannot go wrong. But many of us do not understand this till it is too late. See how.
You are say 35 years old. You’ve done well so far to reach where you are. You are settled career-wise and family-wise, both. You are earning well, saving well and even have a broad plan to cover future expenses such as children’s education and marriage. Overall, it looks like you are future-proof financially.
Until you ask yourself these questions …
- How will your expenses be managed after 25 years when your income stops and you (and your spouse) will have another 25 years to live?
- Have you planned for your “Pot of Gold” so that you can live your retired life happily? Have you done Retirement Planning?
In your words, here are some possible reasons you may not have planned for retirement yet. Do you find them familiar?
1. I am too young now to think about Retirement Planning. I have other financial priorities.
Hey, we are talking about Planning for retirement and not retirement itself. The planning has to start much early in your life. The earlier it starts, the lesser you need to invest. Look at the numbers below.
To get your “pot of gold” of Rs. 1 crore at age 60 (at an interest rate of 8% compounded annually)
- Starting at age 45, invest Rs. 25,445 every month for 15 years, a total of Rs. 48,85,463
- Starting at age 35, invest Rs. 9.651 every month for 25 years, a total of Rs. 30,10,975.
- Starting at age 25, invest just Rs. 4,124 every month for 35 years, or a total of just Rs. 17,81,558.
So it is clear now – when you do retirement planning, the earlier you start, lesser you need to invest in total. Option 3 above is a clear winner! So today while you will have other financial priorities (believe me you always will), squeeze yourself to put in that extra rupee into your retirement fund, even if you have to reduce some unnecessary expenses today. That’s the best way to start Retirement Planning.
2. My PF will take care of my retirement expenses.
Check out this fact below.
- PF is typically 5% of gross salary (sometimes lesser) and expenses are 30% of gross salary
- Starting from age 25, assume salary growing @12% every year, and PF earning your 8% over the entire period (which may not really happen given that interest rates generally decline with GDP growth)
- After retirement, your living costs could come down to about 60% of your pre-retirement expenses.
With the above assumptions and the PF fund that you will accumulate when you retire at 60 will be enough to last you for just 6 years and 2 months! What after that??? PF alone cannot complete your Retirement Planning needs.
3. I will have enough assets, I can sell them if required.
It is really good if you have enough assets. But such assets (including what you and your spouse may inherit from your parents) are never sold to take care of living expenses, especially the house/apartment that you intend to stay in after you retire. Any other asset that you might create, especially immovable assets like property, building, house, etc. are also typically passed on as legacy to your children. So it will be wise to keep that away from your retirement planning fund calculations.
4. My expenses will come down after retirement so I will not need so much money after all.
Well you are partially right here. We generally need about 60%-70% of pre-retirement expenses after retirement.
But that is not the whole story. One of the biggest expenses you could incur after retirement is medical costs (which are rising rapidly today). With increasing age, and typically after 60, you and your spouse will enter that stage of life when you are highly prone to bodily malfunctions and deterioration in health. Just one such illness, say diabetes, or heart ailment, or arthritis, could put you back monetarily through expenses incurred on surgeries, medicines, treatment, etc. Even if you do have some health insurance left, it is not likely to cover everything. So this expense is better planned as part of your retirement planning expenses.
5. If required, I can work and earn for some more time.
I wish and I hope you could. But that can happen only when (a) you are competent enough at that age and (b) you have the physical strength to work. After retirement, getting a job is not so easy – remember you will be competing with youngsters, and you will not be in great physical shape either.
So while you may want to keep working, it may not be possible in reality. You need to keep this in mind when you do your retirement planning.
6. I will not have so many years to live, so why do retirement planning?
If you are saying this, you are probably assuming that like your grandparents, you and your spouse will probably live till you are 70 or 75 years old. This means that you will need money to last you only for about 10-15 years after retirement.
That is changing. With changing medical technologies, life expectancy has gone up to 85 years and higher. And that means you need to ensure your “pot of gold” lasts you for at least 20-25 years after retirement. That’s a really long time and expenses can be really high if you include the effect of inflation.
Can you imagine what would happen if you were to live till 100? Now Retirement Planning will start to look really important.
7. If required, my children will take care of me.
Look around you and you will not find too many retirees staying with their children. While 30 years ago that was okay, with increasing number of nuclear families, children once grown up prefer to live separately with their own family. Sometimes work, especially international posting take children away to the US, Europe and Australia and very few ever return. Even if children want to take care of you, they might practically not be able to do so.
So today even if it looks like you will still stay with your children and they will take care of you, should you not be financially ready if the reality were be different? That make retirement planning something you just cannot avoid doing.
I hope I was able to make you at least start thinking about retirement planning.
If you still have any doubts on how to do retirement planning, please send me your views, whatever they are. If not, go ahead and start building your “Pot of Gold”!