Posted On Friday, Nov 28, 2014
For most us in India, retirement planning has never been an important financial priority thanks to the traditional family structure. Elders depended on their children to provide for them in retirement. But things are changing now. The nuclear family is preferred over joint family, longevity is increasing and inflation is rising. Add to it that more and more areas of the country are being urbanized.
As a result most of us would have to build our own retirement corpus that would last our retirement period. We would have to skillfully plan and invest, and make good use of tax-advantaged investments to achieve this.
Our retirement needs are more real than we thought
Over the past five decades the lifespan of Indians has been increasing by 5 years on average, in every ten years1. The projected life expectancy by the year 2020 is 70 years2. What this means is that we would have more number of years to sustain on a retirement income.
There are only two ways how we can sail through the retirement income reality comfortably –saving and investing smart or pushing retirement ahead. A look at the financial preparedness for retirement globally and in India would present some startling insights.
Based on HSBC’s Global Survey on The Future of Retirement3, which covered people from 15 countries including India, 29% of the working population in India thinks they are financially not preparing for a comfortable retirement. There is however an amount of positivity to this data when one considers that Indians are way better than the global average of 56% non-retirees believing they are not adequately preparing.
Now let’s look at what people thought about the adequacy of their retirement income for their retirement period.
|Years into retirement
|Employees confident of their savings’ adequacy for retirement
Global Benefit Attitudes by Towers Watson, which fields responses from employees in 12 countries including India, concludes that in India about three quarters of employees were confident of having a financially comfortable retirement for the first 15 years. But slightly lesser number of people had confidence that their retirement savings would be sufficient after 25 years of retiring. Here too we are better off than our counterparts in developed economies like Japan, UK, US where employees were less confident4.
Another important fact the survey sheds light on is that the average retirement age in the future could climb higher.
|Retirement age plan
From the table above, in 2013 22% employees said they planned to later than they originally planned. Some of them believed they might never be able to afford total retirement from employment!
All these numbers highlight the importance of individuals to increase their focus on working towards a financially healthy retired life. Without this focus, if a large number of people are unable to meet their retirement needs there would be great macroeconomic implications as well.
Plan, save as early, as much as you can
There is power in planning. HSBC survey’s findings reinforce the benefits of having a financial plan. 44% of respondents had saved more for retirement as a result of having a financial plan in place. What’s more, people with a financial plan tend to have greater retirement (and other) savings and investments compared to those without one.
Another important output of the survey is the value professional financial advice adds to one’s investment life. On an average, globally people who took professional financial advice had almost double the retirement savings of those who did not!
And globally how are employees planning to meet their retirement income? HSBC’s survey again throws some interesting figures.
Table: Source of retirement income
Source: The future of retirement – A new reality, Global Survey; HSBC3
World over, about a fourth of their retirement income – the single largest contribution – is expected from government benefits. However we know that to live well in retirement, we cannot rely on government pension or a company pension plan. We must have the backing of our own resources.
The survey respondents from India said they require 98% gross annual household income in retirement to be comfortable. So while planning financially for take into account various needs like medical care, annual trips to visit family etc. that would make your retirement “comfortable” by your standard. Apart from this you`d have to account for inflation. You can make use of our Retirement Calculator for a start.
The earlier you start to make allocations for your retirement the lighter the load would be towards the end of your working phase. Along the way one might be encountered with other goals like buying a house, children’s education, marriage etc. so it is crucial to begin early.
Focus on asset allocation & tax efficiency
Our traditional values encourage us to be good savers compared to our western counterparts, yet we have a major drawback. Our savings are often invested in low return giving avenues. This exposes us to the risk of our savings being eroded of their real value, by the time we reach retirement age.
A good way to address this is to have an asset allocation strategy. Asset allocation means diversifying investments across the various asset classes – equities, debt (or fixed income), gold and real estate.
Fortunately for investors, they can choose mutual funds to get exposure to each of these asset classes, except real estate which may also be a reality soon. The advantage of going the mutual fund way is that they are managed by professionals who are experts in the respective asset class. Also the economies of scale in a mutual fund lower the cost of investment as compared to making the investment directly and individually. Still another advantage is that risk is diversified because a fund’s portfolio is made up of several securities belonging to the asset class.
Tax-efficiency is an important parameter to check. Equity funds do not attract capital gains taxes in the long term. This makes them a very attractive product for long duration goals like retirement. Similarly NPS as a structured retirement planning product is beneficial from the tax perspective. EPS, PPF have tax benefits too.
Retirement planning is still at a very nascent stage in India but clearly, Mutual Funds can co-exist with other retirement products. Work with a professional financial adviser to help you identify all your retirement needs and put together a comprehensive plan to meet them.
1 Source: World Bank
2 Source: Ministry of Health and Family Welfare; Table A12
3 HSBC Future of Retirement; Reproduced with permission from The Future of Retirement, published in 2013 by HSBC Insurance Holdings Limited, London.
4 Source: Towers Watson Insider Global Uncertainty Fuels Workers
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