When should you start with Retirement Planning?

Don’t be fooled by all those advertisements featuring retired couples sipping cocktails on a sunny beach. Retirement Planning is serious business; and a mix of social, cultural, and economic factors are making it a more critical element of your financial planning with every passing day. Unfortunately, recent research also shows that only about 50% of us are habitually saving for our retirement planning.

There are three principal factors that are contributing to the need for a more structured, disciplined and better thought-out approach to Retirement Planning : inflation, increased lifespans, and the gradual breakdown of the joint family system.

Inflation

Inflation, for one, needs to be considered during retirement planning. The long-term inflation trend in India has hovered around 6.5 per cent per annum, and this isn't expected to go on hold anytime soon given our country’s growth ambitions. If this trend continues, the uncomfortable truth is that a 30-year-old spending Rs. 80,000 per month today will need to spend Rs. 5.29 Lakhs per month in the first year of his retirement to achieve the same lifestyle.

Increasing Lifespans

Over the past decade, we've witnessed giant leaps forward in medical care, immunization, nutrition, and the prevention of infectious diseases. Data suggests that lifespans in our country are going up by almost 5 years with every decade, and this needs to be incorporated during the financial planning exercise.

Five years of additional Retirement Planning funding isn’t inconsequential: extending upon the previous example of the 30-year-old, this addition of 5 years to one’s lifespan creates the need for an additional corpus of roughly Rs. 1.5 crore!

The breakdown of the Joint Family system

Urbanization, overpopulation, social legislations and widespread changes in attitudes and beliefs are some factors that have contributed to the gradual breakdown of the joint family system in non-rural India. It is estimated that over 70 per cent of households in urban India now house just one couple. This trend could pick up pace over time; the obvious corollary being that one needs to be more retirement planning ready by themselves, without having too much expectation from their children.

Common Mistakes in Retirement Planning

Despite widespread efforts to create awareness about Retirement Planning, a few all too common mistakes are still made by most people. We explore the three most common ones here.

Mistake 1: Delaying until the Penultimate Moment

Despite having undergone a Financial Planning exercise, it’s quite common for people to procrastinate their Retirement Planning goal to the very last moment.  This happens because the retirement planning goal seems light years away, which breeds a false sense of optimism about being able to cover ground later.

The dynamics of long-term savings might alter your thinking. Here’s an exampleJust Rs. 5,000 per month, invested in a Mutual Fund SIP that compounds your money at 12% per annum, will grow to Rs. 5.88 Crore in 40 years (say, from ages 25 to age 65). If, however, you were to delay this saving by ten years until your 35th birthday, you would end up saving just Rs. 1.74 Crore. The cost of delay in this case is a sizeable Rs. 4.14 Crores! Hence, it’s critical to follow through on your financial planning exercise by getting started for your retirement planning goal immediately.

Mistake 2: Saving in Traditional Life Insurance for your Retirement

Despite having undergone a Financial Planning exercise, many investors remain fixated on low yielding products like PF or Life Insurance when it comes to fulfilling their Retirement Planning goals.

Traditional Policies generally provide very low returns (3.5% to 7.5% annualized), their benefits are represented obscurely, and their surrender penalties are designed to keep you locked into the payment cycle for a very long time; throwing good money after bad. When it comes to Retirement Planning, squarely avoid traditional or ‘non-linked’ policies; opting instead for more aggressive, potentially higher return investments such as blue-chip stocks or Mutual Funds.

Mistake 3: Just Ignoring it

The third and most common mistake is to simply “ignore” the Retirement Planning goal in your Financial Planning altogether. Often, the numbers seem impossible to achieve, and this triggers off a reflex reaction of comfortably disregarding facts and remaining blissfully ignorant of the consequences.

There are thousands of investors who are mistakenly provisioning for a post-retirement income equalling their present day spend. However, a simple financial planning exercise reveals that for the 30-year-old spending Rs. 80,000 per month today works out to of Rs. 11 Crore, assuming a life expectancy of 85 years. However, by starting off with a monthly SIP of Rs. 12,500 today, and increasing the savings amount steadily by 10 per cent every year, you’ll be able to achieve this target comfortably.

A Financial Planner can definitely help with your retirement planning; if you find yourself at sea, you may want to consult one immediately. Your retirement planning goal may appear distant today, but you simply cannot afford to ignore its criticality!

A parting thought - we do not start planning early enough for Retirement, and we give it a lower priority than say, children's education, their marriage or just getting them "settled" in life. But remember, they can get a loan for their higher studies; but you won't, for your Retirement! It’s time to prioritize Retirement in your overall Financial Planning.