It was a typical Saturday morning in 2012, I sat on my computer going through my finance numbers, a ritual I have been following for the last couple of years now. Yes, I know I should be spending my weekend doing other interesting things, but this is what I enjoy doing.
Anyways, back to the story, I was looking at my current financial assets and a question came in to my head. How much would I require at the age of retirement to sustain the household? Like the majority of us, the first thing I did was I googled “Retirement Calculator” and a dozen of options came up. I tried a couple of calculators and quickly came to realize that they were too simplistic to be real i.e. most of the calculators did not cover majority of the variables and/or the assumptions were flawed.
So, I decided to build a calculator of my own using excel. I entered the numbers and was getting excited in anticipation of the results. What followed was a shock, I found that based on my current savings and lifestyle, I will run out of all my money in 6 years. I played around with the assumptions but the best case scenario was 9 years, before I ran out of all money. That was enough to get me in to action to build a plan and I am happy to report, that I am back on track now.
By now you would have realized is that the biggest financial risk facing individuals in their 40’s is running out of your retirement savings while they are alive. The sad reality however, is that most of us start planning for retirement just a couple of years before the event, which can be devastating. Before going in to the reasons, let’s check some statistics. In an online survey conducted by economictimes.com recently, more than 24% of the 2,578 respondents said they were saving less than 5% of their income for retirement. Another 25% are putting away 5-10% of their income for their sunset years. It is unlikely this will be enough to sustain their current lifestyles when they stop working.
A delay in planning your retirement may well be the most costly decision at this stage of your life for the following reasons:
1. Time is against you i.e. even if you decide to start saving for retirement 7-10 years before the event, you would have lost the returns of compounding a concept in which when money is left to earn interest can grow exponentially over the long term because interest earns interest. A quick calculation shows that if you plan to invest Rs 30,000 per month in SIP’s for next 15 years and delay the investment by even 5 years, the delay will set you back by approximately Rs 1 Crore.
2. Your fixed income proportion will be high as you approach retirement as a result of which, your overall returns will just about keep up with inflation after taxes. This is a difficult situation, because ideally if you do not have a large corpus to begin with, higher returns on your investments would have helped but since, at this stage, safety of capital is more important you cannot invest in high return instruments as they tend to be risky.
3. Your choices are limited i.e. you can either extend your retirement age or you can cut down on your standard of living, the latter is very difficult to do. Moreover banks are not willing to lend you money as you approach your retirement.
4. You will be approaching an age where you can expect big cash outflows to cater for your children’s higher education, marriage and your medical expenses.
5. With each passing decade our lifespan is increasing. In fact there is a very high probability that you will touch 90’s. This should be good news, however, not for financial reasons as your retirement savings will have to fund your requirements for a longer time.
If the picture is indeed as grim as it is painted out to be the question is, why do we fail to plan for retirement in our younger years? There could be a range of answers including the innate human need for instant gratification however, I feel it is the lack of awareness and lack of focus on goals that require long term commitment.
So what does one do? The least you can do is to be clear on the following at the earliest:
1. Your planned retirement age.
2. The amount of money you need when you retire.
The above is a good place to start, but ideally you should be taking help of experts to come up with a detailed retirement plan. And yes, parents and relatives do not qualify to help, even though they have the best of intentions in mind. It is for your future so do not take it lightly.
So go ahead and take the first step towards planning for your retirement, time does not wait for anyone so better late than never!
By Arjun Sarkar, Chief Evangelist of Finanswer