The Time for Retirement Planning is Now!

Recently I came across a very interesting term called “sandwich generation” in an article. The term refers to those aged between the 30s to 50s i.e. the generation taking care of both their parents and children. An interesting point was being argued in the article that this generation, which included me, could be the last sandwich generation as we are not sure if our children would take care of us after retirement. This thought struck me right away and after some soul-searching, realisation finally dawned upon and I learned the bitter truth. We indeed could be the last sandwich generation!

Retirement is a fact of life, for everyone and not just the salaried class. However, it is also true that most of us avoid talking or planning about retirement, till unfortunately, it’s too late. It is obvious that we all must plan for a dignified retirement where we would not be dependent on our next generation for our well-being. But how many of us do that? There are many facts to be reviewed and questions that need to be answered…

When we talk about post-retirement life, an image comes to our mind – a beautiful home with a garden lawn where we can relax and enjoy. All of us desire a relaxed retirement with no financial or medical worries; to be independent to meet our expenses & be self-dependent. After all, no one would ever like to see themselves as Amitabh Bacchan in the hit film ‘Baghban’ after working hard all our lives. We would also not want to be a burden on our children when they are already under pressure to secure their own future.

1. Societal and Cultural Changes: 

There is a visible evolution in the Indian family system, with joint families getting disintegrated and more nuclear families taking their place. Young adults today are not hesitant to take up careers in foreign lands and cities far away from their home. Often the older generation is left to care for themselves where access to children is harder & infrequent.

Financial freedom can definitely help address the financial concerns in such a situation & would also allow you to indulge in activities of your interest and avoid the so-called ’empty nest syndrome’ when all your children are settled away from you. We must be prepared for the worst when it comes to retirement, even if all seems well at the moment. At the heart of relaxed & happy retirement life is financial freedom which cannot be left at the mercy of fate, culture or the expected love of our children.

2. Increasing life expectancy & medical costs:

Thanks to the advancement in medicines, better living conditions, nutrition, etc., the life expectancy figures are on a rise globally. The life expectancy of an Indian today is expected to be 70.42 years, which is steadily rising from 42 in 1960 to around 62 in 2000. We can safely assume that this will only increase in years to come, and we will perhaps get near to more advanced countries like the US (~79.1), China (~77.5) UK (~82) and Japan (~85). This raises some serious concerns. If we assume a life expectancy of say 80 after retiring at 60, that leaves us with nearly 20 years of our lives in the future without regular income – that’s 25% of our entire life. To make matters more critical, we would not be at the best in terms of health and energy.

3. Lack of adequate social security system:

The yearly study by Mercer Global Pension Index marked India’s retirement system falling into the last category of the 39 prominent countries, along with 7 other countries. The study found Netherlands & Denmark having the best systems while India was ranked at 34. India’s low rank is mainly because it lags in all the three scores for adequacy (benefits, savings, tax support, etc), sustainability (coverage, contributions, etc) and integrity (regulation, costs, protection, etc).

What is also alarming is that there is no pension or support system for the aged poor and the informal sector which consists of a majority of the population. The situation for a majority of the middle class is also not great and most are likely to depend on children for survival and maintenance. Except maybe government servants, all of us will have to depend on our own savings made during our life for our retirement.

Retirement Planning: How much to Save for Retirement

The retirement day can be the happiest or the saddest day of your life, depending upon the retirement savings or retirement kitty that you have accumulated. The real question is how much do you really need? There is no one answer for this as there are many factors that have an impact. There are many calculators available that can help you to estimate the ‘how much, but often people are taken aback by the figures given by these calculators.

Hence, understanding the logic behind these calculations is very important to appreciate the amount needed. For determining any retirement kitty need, you need to follow the following steps…

Determine the post – retirement years:  To do this you will have to first decide the retirement age and then put a number for life expectancy. The difference between the life expectancy and your planned retirement age is your post-retirement years, which you need to plan for.

Determine the monthly income needed: Finding the monthly income need properly is important to ensure that you can fund the household, medical and other expenses after retirement. Generally, you may consider 80% of your existing monthly expenses here.

Assume a rate of inflation: The monthly income need would be growing, at say, the average retail inflation rate for the entire period between today & the end of the post-retirement years. Thus, we can have different pre- & post-retirement inflation rates which can be between 5 to 7%. Assuming a higher figure would be safer.

Assume returns on retirement kitty: Next would be to assume the returns on investments done for the retirement kitty. We will need to assume a lower but safer rate of returns on these investments, which would generally be made in the debt asset class. Considering the assumptions, the numbers can be relatively easy to visualise & calculate. To arrive at the retirement kitty, the returns and the principal component of the retirement kitty should match the cash flows of the growing monthly expenses. The difficult part is about making assumptions that can be easily impacted by several factors over the long term. 

Retirement is perhaps the most profound life event many of us will ever experience. It is also a fact that most of us ignore planning for it till it is too late and/or we prioritise it after other goals in life. It is high time that we open our eyes and start visualising life after retirement to embrace the required sense of urgency for the challenge before us. Only then can we truly and meaningfully dream of relaxed evenings. The time to act is now.

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