Retirement is arguably the most important financial goal you are going to plan for, and is also the most complex. But with adequate time and effort, a comfortable retirement is well within your reach.
With rising life expectancy, someone retiring at the age of 65 can reasonably expect a retirement lasting 25 years, or more.
Chronic ailments, often requiring lifelong medication, make adequate health insurance and a dedicated healthcare corpus essential.
Inflation will erode the value of your retirement corpus. It is important to stay invested post retirement, but in a more conservative portfolio.
Retirement is a financial goal that spouses need to plan for together, so that they have a shared understanding of their retirement finances.
Thinking about post-retirement finances can often be confusing and fraught with anxiety; it requires confronting the unpleasant fact that one day we will grow old, or worse, that we won’t. Retirement planning requires a reasonable understanding of investments and finance, clarity on various aspects of your post retirement life, active involvement of your spouse, and time and patience to work through these details to put together a realistic retirement plan.
No wonder then, that we tend to procrastinate on retirement planning until it has become a searing urgency. At Clarified, we see this pattern play out all the time during our customer consultations. In this post we will highlight some aspects of retirement planning that are easily misunderstood, and suggest tips to help you make more informed decisions.
Estimating the duration of your retirement
The first complexity you confront when getting started with retirement planning is the expected duration of your retirement.
There is, of course, the question of when you plan to retire, which requires you to factor in a range of issues including your financial goals, lifestyle preferences, and the plans of your spouse. However, factors like health episodes, obsolescence of professional skills, macroeconomic turmoil, etc. can unexpectedly conspire to hasten you retirement.
You also need to consider your life expectancy. Let’s assume that you plan to retire at 65. The average life expectancy of a 65 year old in India is 79.6 years. But that is just the average; a 65 year old in India has a 23.34% chance of living to the age of 90 or beyond. This implies a period of 25, or possibly even 30 years that your retirement corpus would need to provide for.
Impact of healthcare expenses
Retirement in India is accompanied by a trifecta of healthcare challenges - rising incidence of chronic ailments requiring lifelong medication, high proportion of out-of-pocket expenses owing to under penetration of health insurance and inadequate government spending on healthcare, and a high rate of healthcare inflation (11.3% for 2017 as per Willis Towers Watson) as compared to general inflation rate. To make matters worse, most general insurers do not issue new policies of their regular health insurance plans to customers over 65 years of age; instead they sell ‘senior citizen health insurance plans’ which are more expensive and have fairly restrictive terms and conditions.
This necessitates the creation of a relatively large retirement corpus to account for high healthcare costs and higher than average rate of inflation. Besides, it is also important to buy a health insurance cover early in your life when the premiums are low, and continue renewing it through your retirement.
You could read a more detailed discussion on healthcare costs post-retirement here.
Impact of inflation
Accounting for inflation is essential while planning for almost any financial goal; you work out the present cost of the financial goal, estimate the applicable rate of inflation, adjust the corpus size depending on how far in the future your goal lies. However, factoring for inflation in retirement planning is slightly more complex. Here’s why:
Firstly, retirement is truly a long term goal; in fact, for most of us retirement is chronologically the last financial goal of our lives. If you are a 40 year old, planning a retirement at 65, you need to budget for the impact of inflation on your retirement corpus 25 years out.
Secondly, as we have discussed above, there is a reasonable likelihood of your retirement lasting upto 30 years. If you have decided to buy a fixed annuity as of the beginning of your retirement, then, assuming a moderate rate of inflation of 6%, more than 80% of the value of your monthly pension would be lost by the end of 30 years. Therefore, it is imperative that you stay invested, albeit in a more conservative portfolio, even after retirement.
Thirdly, the impact of inflation is not the same for all of us. It varies depending on the goods and services we consume. As we previously pointed out, healthcare expenses form are large part of your household budget during your senior years. With the rate of healthcare inflation (11.3% for 2017 as per Willis Towers Watson) almost double the rate of general inflation, your retirement corpus can erode in value much sooner than planned if there isn’t a buffer for healthcare costs and if investments are not continued post-retirement.
You are not in it alone
Take a moment to consider the following questions:
Will my spouse and I retire at the same time?
Does my spouse have the same expectations and plans for retirement an I?
Would we have the same approach to managing our finances during retirement?
One of the biggest mistakes couples make as they approach retirement is a lack of communication about their expectations from post-retirement life. While one of you may want to travel extensively, the other may be too exhausted from a lifetime of professional travel; one spouse my long for a quiet retirement in a small town, the other may have grown used to the life in a metro; or one spouse may want to live it up during the retirement years, but the other may want to save up for leaving a bequest.
As you discuss retirement with your spouse, it is also essential to make sure that both of you have a common understanding of your financial status, so that the retirement you plan is compatible not just with your shared aspirations but also with your accumulated financial resources.
Retirement today is different from what it used to be a generation ago. With the rise of private sector employment and the formalisation of gig economy, for many, retirement is now less of a single transition, and more of a gradual evolution. The era of a fixed retirement age and defined benefit pension plans is long over; yet somehow we continue to harbour notions of an instant transition from all work to all play. It is now for each one of us to deeply consider what these twenty-five to thirty years of our lives would look like, and provision not just for money, but also for time and health, to build a retirement befitting a long and successful career.
Published on: September 5, 2018