Retirement planning from a long-term perspective

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`HOW green was my valley'. This title comes from a movie I had watched many years ago. A little boy's journey into adulthood and the story of a Welsh valley's turn of-the-century descent from pristine paradise to despoiled coal mining.

 

I thought of the title because it is comparatively reflective of a person's life ­ the glorious years when he is earning and the sun down years when he is not having his regular job and, hence, his living standards comes down. The reason is a combination of things. Inflation of food items, transport, increase in health related costs in the later years of life and increase in expenses in almost all basic amenities of life.

In India, the social security system is almost non-existent. In some states, wherever it is available, the scales of benefits are extremely modest, at best. Another reason that is slowly becoming a big cause of concern is increasing longevity.

With better healthcare facilities available, there is a gradual rise in the percentage of the `old'.

It is important to understand that the retirement planning has to start early. It has to begin the moment a person gets his/her first job.

The simple reason being ­ the sooner you begin saving, the more time your money gets to grow. Each year's gain can generate their own gains the next year, that is, the power of compounding. In the US, the `save more tomorrow' plan allows employees to allocate an increasingly larger portion of their future salary toward retirement savings.

For the young Indian population, the accumulation phase, that is, the phase when they earn and save for their retired days, is of prime importance.

They need to understand the instruments available in the market that can be used for disciplined savings for the long-term with a well defined corpus for funding the postretirement years. Normally, for a married couple, the income replacement ratio should be in the range of 70-80 per cent of the last drawn salary.

Retirement planning is always a long term affair and one should look at such investments from that perspective. One can save for retirement through public provident fund (PPF), NPS and post office schemes. In life insurance, there are pension plans and compared with other instruments, life instruments are less prone to surrender and have a longer tenure.

The asset management capabilities of life insurance companies are also better tuned to manage long-term investments and reap better returns over a longer period of time, compared with other investment instruments that have comparatively shorter term perspective.

A World Bank report titled `Old Age Income Support in the 21st Century' had drawn a multi-pillar model that can be assessed effectively across geographies for perspective on reforms in pension system.

The first pillar is mandatory and consists of guaranteed minimum pensions mainly including social security plans by the government. The second pillar talks of mandatory contributions made by employees/individuals. It consists of NPS for government employees (joining after 2004) and employee provident fund (EPF) for non-government employees. However, in EPF, annuitisation is not compulsory and, hence, 100 per cent corpus can be commuted. There is a possibility that this corpus may get consumed for other competing life stage goals. Finally, the third pillar includes voluntary contributions by individuals including personal savings plan and contributory plans.

The key takeaway is that the first and second pillar pro visions on their own are far from sufficient to maintain pre-retirement lifestyles of a majority of Indians whose disposable incomes have in creased substantially due to high economic growth in the past two decades. We have to focus on the third pillar ­ voluntary contributions to make our retired years hassle free.

So I am listing down some `must do' things that will help plan for your retirement from now: The first point is to start early: The day you begin earning, start putting aside a certain sum for yourself (retirement). In fact, every month, the first bill you pay must be towards your own future. It is best to save first and then spend rather than vice versa.

Don't take your working years for granted: Start saving from the day you begin to earn, put aside that bonus and save rather than splurge.

Live your life, enjoy it ­ but sensibly: Given the rise in prices in real estate, there is always a tendency to buy a second home.

Don't stress yourself to leave a legacy in the form of a second house. You could go for reverse mortgage on your residential property use property inflation to pay for unforeseen post-retirement expenses. And better still buy a whole-life policy now to pay back the reverse mortgage amount later.

Instruments are not important, but disciplined savings is: Save regularly and without fail. And since it is long-term savings you may chose to add equity to balance your asset mix.

Happy Investing!!

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