Brace yourself, Retirement is coming!

How much money is enough money? One of the most typical question that irks us while we are at our working age is, “Am I earning enough?” No matter how high our earnings are, they never seem to be sufficient. There will always be another car to buy, another foreign trip to go on, or another big-fat party to throw. 

With the kind of lifestyle that we are accustomed to, we all want a ‘dream retirement’. But, the reality for most retired people is quite shocking. People struggling to make ends meet, lining up in banks and other financial institutions to raise loans, living in constant stress. Is this what our future will look like too?

How much money do you think you need to make your dreams a reality?

One might think that with their given income and other Government-backed funds, they are set to have a very comfortable and chilled out retirement. Unfortunately, the reality is not so rosy. Let’s start with our home. If we ask our grandparents if they are living the life they wanted post-retirement, what would their answer be? Many people do not retire simply because they cannot afford to retire. Most of them fail to save and invest enough for themselves when they were young due to various reasons like increasing personal obligations, lack of long-term perspective, fear of risks, and an absence of understanding of how finance and markets function. But, health doesn’t stay the same forever. We cannot work at the same pace throughout and someday, we might feel the need to stop. What about then?

Is there a particular time designated for dreaming? The first question that comes into the picture here is When should we retire? Some of us want to work till we are 60, whereas, some of us want to retire by the time we turn 40. People these days either do not have a comfortable retirement life, or straightaway try to ‘cancel’ their retirement. Reasons are plenty, but it all boils down to the fact that what we do during our youth forms a basis of how we spend the later part of our life. Today’s youth believes in a very flawed and misinterpreted version of ‘Carpe Diem.’ It means enjoying today to the fullest without any concern for the future. Well, remember when that future arrives, it will come with the pangs of uncertainty and will have the ability to deliver the most perfect knock-out punch there is. 

So how do we prepare against that knock-out move? The best way to prepare is to start now. The lavish vacations that we see in the movies can be possible only if we actually ‘make our money work for us’. After one retires, the general assumption is that there is no or little source of regular earnings. Having a high and steady income now doesn’t guarantee a comfortable retirement unless that income is put to good use. Thus, we need to build a system which ensures continuous cash inflow for the ‘n’ number of years that we live. Think of this system as a tree. We tend to water it daily, step-by-step, and ultimately, after years of hard work, it gives unlimited shade to us and our family.

Turning the dream into a plan: Now that we know the when and where to reach, the onus lies on how. The focus should be on creating sources of income that work for us even when we are not working. Renting out a flat, for instance. But, all good things require extra efforts. Before making any move, consider these risks associated with retirement:

Life expectancy: With healthcare developments, the life expectancy of individuals has risen. A longer life span means an increase in income requirements during retirement. So factoring in this aspect is crucial while setting up a retirement plan. But worry not! A longer life span also means more time for all the things in the bucket list that had to be put off for work all these years.

Interest rate expectations– Interest rates have a direct relationship with the growth in our money. If interest rates go down, one might have to move their investments to comparatively more profitable options. When we talk about bank deposits and FD interests at the present day, it stands at 7% p.a. for senior citizens with the Government mostly slashing down rates on small saving schemes. 

Personal events– Even emotional events in one’s life can derail their retirement plans. A spouse’s death, terminal illness, or separation not only affects our mental health but also creates a dent in our financial health. It can add on to our financial burden by way of reduced pension benefits or lingering medical bills. It gets even worse if one is unable or unwilling to manage their finances which were usually handled by their partner. A painful thought it is, but keeping this into consideration is vital as well.

Inflation– So, which of our planned sources can withstand the bite of inflation? Relying on annuity income, senior citizen’s savings scheme and bank deposits however safe they are, they do not hold much value since they do not consider inflation. Inflation, as we have already established, is truly the ‘The Yamraj of our savings.’ Plan well to ensure that you avoid running into it. 

Asset Allocation– Proper asset allocation across equity and debt can help in deriving growth through equity investments and income through debt instruments. Dividend income can be a good source during retirement where different companies pay their dividends across the year. This ensures a continuous flow of income that is vital during retirement. Make it very clear that the focus should be on creating sources of positive cash flow for the future, and making it consistent enough to live a comfortable life that you envision. 

Self-help is the best help. Nobody will help us out, it is we who are our own saviours. Gone are the days when we could turn to our employers and the Government to tend to us during our retirement. It’s time to let go off all the misconceptions because nobody else has got your back. Now it’s all about what and how smartly we plan our future. Our retirement pension structure is mostly based on employer-employee contributions. But when it comes to unorganized or informal employment, there is practically no system in place for their future requirements. Our employment scene is currently filled with gig opportunities and freelancing positions. This set of working staff is under tremendous pressure to not only provide for their current needs but also create a sustainable plan for the future. Even the pension fund scheme available earlier is no longer available for new recruits with a basic salary exceeding ₹15,000. Other Government-backed schemes too, rely mostly on own contributions. So ultimately, it’s all that we do that counts. 

The question is how to make our savings last a lifetime. It’s a tricky one. Despite careful planning and conscious assumptions, our money might still take a hit if things go awry. We can always run out of our balance and there is a possibility of not being able to sustain the earnings long-term. We are a generation with longer life spans, early retirement plans, and falling interest rates. But then again, the key is to plan well, start early, and be consistent with whatever we have planned. It’s a life-long journey and as it is said- To reach somewhere, it is necessary to start from somewhere. Take the start today and live the dream that you have.

Team Investoday