No Reason Not To
If there is a financial goal that has the greatest number of unknowns attached to it, it is planning for retirement. This is even more true for the post retirement phase. Even though we make a set of reasonable assumptions, we have no way of knowing how long we will live, how much we would spend, what inflation would look like, the kind of return our portfolios would generate and what our income streams would look like post retirement, for certain. This is just the tip of the iceberg. And yet planning for retirement is the one goal that most of us tend to put off for the future, regardless of whether or not we appreciate the consequences of doing so.
We would understandably have our reasons for wanting to think about retirement planning at a later point of time. And these reasons may look perfectly logical and plausible to us. But as I will attempt to show today, the consequences of putting of retirement planning for a later date quite comprehensively outweigh the consequences of starting at the earliest possible moment. So there really can be no reason for us to not begin planning for retirement, starting now.
The numbers associated with retirement planning are among the foremost reasons why people shy away from planning for retirement right from the beginning. Most people find it hard to save 20-30% of their net monthly and annual post tax salary towards creating a retirement corpus that would sustain them in their post retirement period. And even this much is not enough. Assuming zero real returns post retirement (post tax real portfolio return = rate of inflation) and a 30% tax rate, saving 50% of our monthly post tax salary (equating to 35% of gross salary) would be the bare minimum requirement to have a probable chance of ending up with a retirement corpus that is adequate for 30 years. This is worked out in the graphic that follows.
Assuming zero real returns post retirement is essential because we would have no idea what inflation would look like and do in our post retirement years. Therefore such an assumption would help us remain conservative and lead to the most realistic estimations. A realistic long term post tax return expectation from equity would be 9-10% and a realistic expectation from debt would be 5-6%. So with an initial asset allocation of 60% equity and 40% debt realistic estimates of post tax portfolio returns would range between 7.4% and 8.4%, which is around the assumed inflation figure of 8%.
The magnitude of the challenge is enough to put off most investors. But this is not reason enough for us to not try at all. The most logical solution would be to stop fixating on a specific savings target and just save and invest as much as possible, with gradual increments in our savings rate at least annually. Over a number of years, this would give us a fair chance of ending up with a reasonably sufficient retirement corpus. And even if we were to end up with a retirement corpus that is short of our intended target, we must remember that a reasonably sized retirement corpus is better than none at all.
The typical mindset of the Indian individual has always been to put the needs of their children ahead of their own, even at the cost of compromising on their own needs and retirement. Given that most of us make the conscious choice to have children, it is only fair that we bear the responsibility to ensure their needs and dreams are not compromised in the slightest. Whether it is their education or laying a sound platform for them in the future, both goals would take time to achieve effectively. Moreover when it comes to planning for our children’s education, we must realise that education inflation in India are expected to average around 10% as shown in the graphic below.
And while the average is 10%, it could even go as high as 12%. So it makes sense to start planning for these goals well ahead of time. But the same is true for our retirement plans. And because time is not divisible between each of our goals, both these goals would have to be planned for in parallel. And help us do just that, provided we don't ignore our retirement in favour of focusing on the goals tied to our children. This would ensure that neither parents nor children are a financial liability for the other, thus reducing stress and nurturing better relationships between them.
The major portion of an individual's retirement corpus is consumed to meet their expenses in retirement. This means that the size of the retirement corpus is directly proportional to the expected spending requirements of the individual post retirement. Spending requirements are heavily influenced by our desired lifestyles post retirement. This leads us to believe that we would be able to live off a smaller retirement corpus by following a simpler lifestyle post retirement. And therefore the need to plan for retirement would not seem as urgent as it would be otherwise.
But what we fail to appreciate is that while we may consciously cut down on discretionary spending, we are likely to spend a lot more than before in other areas. This is especially true in the case of healthcare expenses. Spending on healthcare is an ever present need which comes even more into focus in our later years post retirement.
Moreover, medical and healthcare inflation in India averages around 15% historically. So medical costs are likely to double roughly once every 5 years (applying the rule of 72). So over an assumed post retirement period of 30 years, our spending on medicine and healthcare is likely to double 6 times. This shows that even though our spending patterns may change in retirement, overall spending needs are unlikely to change. So it does not make sense to delay planning for retirement on the assumption of requiring a smaller retirement corpus.
Self employed professionals may sometimes assume that they don't need to plan for retirement since they plan to keep working for as long as they are physically and mentally able to. But there are a number of risks associated with such an approach. Firstly, there would always be a significant degree of uncertainty associated with our health, especially in our later years. Our core professional skillsets may lose importance or become irrelevant over time. Finally the level of stress associated with most jobs, especially entrepreneurial ones may take a toll on mental health in the long run.
Any or all of these factors may force us to stop working well before we had actually planned to. The absence of a retirement corpus in such a situation can genuinely be a financial nightmare. And course correction at that point of time would be extremely difficult, if not impossible. Therefore while those who intend to keep working indefinitely can adopt this approach as the primary plan, an adequately sized retirement corpus must be funded to serve as a contingency plan against negative surprises that life may throw our way.
Planning for retirement is a financial goal that takes the longest amount of time to achieve effectively. And yet, it is the one goal which we put off as far as possible. The aspects discussed in the preceeding paragraphs clearly show the goal of having an adequately sized retirement corpus in place should be placed at the forefront with our most important financial goals. Doing so would help us avoid the severe financial and emotional consequences associated with not having enough money in retirement. We must wake up to this fact as soon as possible and begin planning for our retirement right away, if we have not already done so. Because quite clearly, we have no reason not to.