Afew days short of her 67th birthday, Sudha Kapoor was a worried lady. She had just been diagnosed with an advanced form of lung ailment that required monthly hospital visits. A retired private sector employee and a married woman without children, she had reasons to be worried. She had invested in a number of equities and parked the rest in bank deposits and a PF account. Yet, she was not sure if she would have enough money left after clearing her monthly hospital bills.
Cut to Rakesh Sharma, a 30-year-old successful copy editor in an advertising agency with income well above his immediate needs. He has not given a thought on the need to allocate a part of his income to see him through the twilight years. It is clear that if Rakesh does not invest in a retirement plan now, he might end up in the same predicament as Mrs Kapoor.
Face the reality. You’ll be living a quarter of a century after you retire. Your children may not be around to take care of you. You need to save now to be self reliant in your retirement years. Ever wondered how can you do this? The answer is — Retirement Planning.
DEFINITION
Retirement planning is an “honest attempt” at figuring the amount of money you would need to save every month in order to lead a comfortable retired life. The reason we say it’s an honest attempt is because retirement planning requires you to predict the future, which is almost impossible. For example, what sort of returns will your savings get over the next 20 or 30 or 40 years? How will the rate of inflation change over this time period? It is difficult to answer these questions with certainty.
However, it is possible to take a careful look at the past and make some educated guesses about the future.
CULTURAL INFLUENCE
Traditionally, retirement signifies a release from the drudgery of work. Retirement has always meant freedom and, with luck, an 
active, carefree leisure. It has meant relaxation and the chance to pursue long-postponed dreams and ambitions.
But most people procrastinate on the thought of planning for their retirement years. This is mostly due to our culture and general mindset of the investors. Ancient Indian philosophy assigns four distinct life-stages for every man: brahmacharya (celibate scholar), grihasthya (householder), vanaprastha (retreat from worldly affairs) and sanyas (complete renunciation). By age 50, the individual was to have discharged all his worldly duties, given up life as a householder and proceeded to the forest to meditate and prepare for the after-life. The joint family looked after the forsaken family. This renunciatory attitude — of not needing much for the last part of life and depending upon sons for old-age security — lingers to this day; consequently, people fail to plan their finances. This fatalistic dekha jayega (we’ll see) attitude is one of the biggest reasons why the investor does not plan for his “after life” i.e. life after retirement.
People see retirement planning as something that could be postponed till tomorrow. The fact is that the earlier you start, the more you save.
CHANGED OUTLOOK
But the investor is changing his mindset. The first signs of change in people’s attitude are evident by the increasing number of 60-plus people who lead active lives and want their lifestyle to match pre-retirement standards. They want to travel and buy consumer goods that were earlier sacrificed for the education or marriage of a child.
There are many reasons for the middle-aged individuals to insure the future with foolproof and attractive returns: emergence of nuclear families and its attendant insecurity, increasing uncertainties in personal and professional life, the growing trend of seeking early retirement and rising health risks. Falling interest rates and the increase in cost of living are also making many take steps that will protect their future.
HOW MANY EGGS IN YOUR NEST?
Saving for retirement involves long-term efforts to accumulate a nest egg large enough to support you during your retirement years. The goal of retirement planning is to determine how big the nest egg ought to be to support you comfortably. The size of the nest egg largely dependents on various factors like when are you likely to retire, your life expectancy and the standard of living that you are aspiring for, post-retirement.
Considering all this, there are four important questions that you need to ask yourself.
When do I want to retire?
This is mostly your decision, but keep in mind that it pays to work longer. Don’t kid yourself about an early retirement. It is not very easy. If you work longer, you only add to your nest egg, and increase your comfort level. Those who retire early with insufficient funds would not be able to lead a comfortable retired life.
How long would I live?
This may be a difficult question, but a crucial one, which needs to be addressed in order to plan a proper retirement plan. Assess your health condition and that of your spouse. Obviously, poor health can alter life expectations and expenses. Still, there is no harm in being optimistic. Adding 10-15 years to your current life expectancy levels is reasonable.
Post-retirement, how much money would I need to meet all my expenses?
Make a list of your existing expenses. Then, try and decide which expenses are going to decline (probably commuting and office lunches) and which will increase (health care, leisure and travel expenses), and arrive at a figure. A warning: don’t under budget. It has been observed that most retirees do not draw up a realistic budget. Experts recommend 80 per cent of current expenditure as a benchmark figure to meet post-retirement expenses.
How will inflation impact my expense figure?
To determine the future value of your expenditure figure, you have to factor in the effect of inflation. For instance, a person might be earning Rs 1.8 lakh per annum, at present. After 25 years, assuming an inflation rate of 8 per cent, this value of Rs 1.8 lakh would work out to Rs 20.5 lakh per annum, or around Rs 1.7 lakh per month. Also, once you retire, there is a tendency to become increasingly risk-averse with investments. While less risk is recommended, a no-risk scenario would usually mean that post-tax returns would be continually offset by inflation. Your nest egg, therefore, should be invested in a manner that returns from it not only match the withdrawal rate, but surpass it.
DEFLATE INFLATION
It’s easy to be influenced by sepia-tinted ad images of athletic grandfathers or nostalgic sexagenarians and make the error of believing that the only worrisome aspects of old age are arthritic limbs. There are other, far more serious concerns that will haunt your post-retirement years if you don’t give enough thought in your earning years to ensure a steady income to service your living expenses after retirement. Consider this: if you’re in your mid-30s, your current income may perhaps more than comfortably meet your family’s living expenses, and even leave you with enough to chase an odd hot stock. But factor in inflation, and you’ll have some mind-numbing numbers to deal with: the same basket of goods that today costs you, say,
Rs 10,000 a month will, in 30 years, cost over Rs 40,000 a month (assuming an inflation of 5 per cent per annum). In other words, you’ll need to build up a corpus of at least Rs 1 crore by the time you retire-merely to meet your living expenses for the 20 years or more that you and your spouse will likely live. And that’s without even counting the cost of healthcare, which is often the biggest expense in your old age.
WHY PENSION PLANS
Sure, you (and your employer) contribute to your Employees’ Provident Fund account, and your accumulations now grow at 9.5 per cent a year, but even that interest rate, down from the peak level of 12 per cent, is drifting further down. In any case, given that the average employee in India’s organised sector retires with a balance of Rs 50,000 in his EPF account — the rest having been withdrawn for assorted big spends — the unvarnished truth is that you’re at risk of seeing your post-retirement income streams dry up long before your time. Pension products are not to be confused with insurance products. Pension products are separate instruments in themselves. (See: Pension Plan Attributes)
Take a brief look at why pension plans should necessarily form a part of every person’s portfolio:
Decreasing mortality rates mean you can expect to live longer than the previous generation.
Add to this, voluntary retirement schemes and job insecurity in the increasingly private sector environment, and you end up with longer years in retirement.
Increasing costs of medication mean you will spend more on treatment as the years pass.
India, unlike other countries, does not have state-sponsored social security.
Inflation will spike your costs of living in the future. This implies that the chances of the money you put aside now — real returns — also are little, because of the dent inflation will cause to your savings.
Saving a little early will mean that you end up with a higher sum of money than saving more later — due to the power of compounding.
IMPORTANCE OF PLANNING EARLY
When should you start to plan for your retirement? The answer is now, and the younger you are the better. When we are young and working we think we shall remain in the same state forever and we conveniently ignore the uncertainties of future. Nobody takes retirement seriously. But the fact is that even a small sum of money saved and invested regularly makes a big amount, which comes in handy after retirement. One should not be under the false impression that investing all their savings into an income generating investment after retirement would ensure a regular and good pension. Without early planning, there could be situations where you would need to dip into your principle savings to supplement your monthly income. In such cases, the savings may even get exhausted. The key to comfortable retirement is — the sooner the better. Most intelligent investors believe in this principle and plan accordingly. They not only save, they save early and regularly. The catch is to make the power of compounding work to your benefit.
HOW MUCH TO INVEST?
But there is one problem. You can’t actually know how much you will need when you retire or what state the economy would be at that time. Though you can make an estimate keeping in view your salary increments, the rate of inflation and tax liabilities, but these macro projections involve a strong element of guesswork. So you should maintain a balance between a conservative and a liberal attitude so you’re your computation do not go haywire. For expenses take a liberal attitude, and for income take a conservative attitude.
While deciding to earmark a sum for saving and investment, out of your annual budget, a percentage amount of your salary may be kept aside. For instance, if you think that your annual income would grow from Rs 2,00,000 to Rs 3,00,000 over the next four years, you could plan to save an installment of 10% i.e.
Rs 20,000 per year and increase it gradually to Rs 30,000.
Another golden rule for accurate retirement planning is to refrain from withdrawing the income earned in investment. We have a tendency to spend the interest or dividend income generated upon our investment at its maturity. But if reinvested, along with the principle, it could generate a sizeable amount at retirement. While this may not put any additional pressure on the individual, his cash comfort may significantly improve as a result of income generated on the income earned and reinvested.
INSURANCE PLUS PENSION
Rahul Agarwal was 40 when he opted for the pension plan of an insurance company. “I wanted to feel comfortable about my future,” says Agarwal. “A good insurance-linked pension plan will give me a life cover, reasonable tax savings and a good pension for retired life.”
He’s the latest to join the growing league of employees in their 30s and 40s who cover future expenses, mainly children’s education and medicare, through pension-linked insurance plans. Agarwal’s Personal Pension Plan at HDFC Standard Life, for which he pays Rs 10,000 a year, would fetch him a pension of Rs 1,030 a month once he turns 55, for his entire life.
Sensing the growing demand, all major insurance players have introduced pension plans. While LIC has Jeevan Suraksha, Jeevan Dhara and Jeevan Akshay, ICICI Prudential Life offers LifeTime Pension and LifeLink Pension and ForeverLife. (See: Best Pension Plans )
“Early 30s are ideal. By 40 you must start,” says Pankaj, a financial advisor. Many opt for it at an early stage, eyeing the compounding effect of money over a long term. Starting a disciplined savings early in the career proves to be judicious later.
Pension policies are basically savings contracts, which provide an income for life from the time of retirement, which one can decide.
On the appointed date, the insured gets a lump sum that is the sum assured plus bonus. Part of this can be taken in cash and rest can be converted into an annuity at a rate offered by the company. (Annuities are contracts that convert money into a series of payments to the contract-holders during their lifetime, usually during the post-retirement period.) The open market option available with these policies allows one to buy the annuity of another company if it offers a better rate.
One can opt for either a single-premium policy or a regular premium policy. In the first category, one joins the scheme investing, say, Rs 25,000. At the end of the maturity period, say 20 years, one gets Rs 25,000 along with annual bonuses and a terminal bonus at a minimum rate of 8 per cent. One can then convert this money into annuity and start drawing pension. In the regular scheme, one can pay the premium annually.
What is important is, at the time of retirement, one will have an amount that will bring steady income for the rest of one’s life. The additional benefit is the insurance cover one gets.
Payments are determined by the size of the sum assured and the age of the annuitant (the person receiving the payments), the mortality rate for the age group and the interest rate, decided by the company.
One can choose a plan with or without death cover, while factors such as critical illness, major surgical assistance and accident and disability benefits can be added at an additional but nominal cost.
For those with an appetite for risk, there are market-linked pension plans like LifeTime Pension and LifeLink Pension offered by ICICI Prudential Insurance. In such plans, companies invest part of the premium in capital market instruments. They work like mutual funds and, at a given time, the value of the units determines the appreciation (or depreciation) in one’s investment.
Companies offer, on an average, four annuity options — life annuity, life annuity with return of purchase price, life annuity guaranteed for 5 or 10 or 15 years or joint life and last survivor with return of purchase price. Some companies offer a variable payout, which protects the income from inflation although there is an investment risk involved. Some of the pension schemes extend the pension to spouses in the event of death of the assured person.
Most pension plans allow the investors to exit after three years. In case of death before the retirement age, the spouse has the option to get the value of units or the death benefit, whichever is higher, or an option to buy an annuity from the existing unit balance.
While buying a pension plan, one should look at the track record of the company, its flexibility and customisation of schemes and the way it manages returns through investments.
IN A NUTSHELL
“As you sow, so shall you reap.” This phrase holds deeper meaning when it comes to planning for your post-working years.
If you merely do the obvious, you will get only the obvious results. But to a select few, those who plan correctly, retirement can be one of the greatest periods of your life. (See below: Retire Comfortably) Retirement, it turns out, is like everything else.
What you get from it will depend on the knowledge you have as well as the energy you put into doing things right.
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