Already 50 and don't have a retirement corpus? Build equity-heavy portfolio

Saving and investing more aggressively, extending work life are other strategies you may adopt

A recent survey done by Max Life Insurance, in partnership with KANTAR, has focused the spotlight on Indians' lack of retirement preparedness. The survey, which covered 3,220 respondents in 28 cities, found that nine out of 10 people aged above 50 regret not having begun to save and invest sooner for retirement. About 59 per cent of those surveyed believe their savings will get exhausted within 10 years of retirement. And 23 per cent admitted to not knowing how to begin planning for retirement.

Says Prashant Tripathy, managing director and chief executive officer, Max Life Insurance: “While Indians are realising the need to plan for early retirement, this awareness is yet to translate into action in terms of saving and investing proactively.”

WTW’s Global Benefits Attitudes Survey 2022 (the India section) also came up with similar findings. Around 68 per cent of employees recognised they aren’t saving enough for retirement. Those aged between 40 and 49 showed the biggest gap between their ideal saving rate and what they actually save.

The issue

India’s elderly population is set to rise. In 2021, India’s ageing population (those above 60) was 138 million. According to the National Statistical Office’s (NSO) “Elderly in India 2021” report, India's elderly population will rise to 194 million in 2030, an increase of 40.6 per cent over a decade.

A 60-year-old in India, especially one belonging to the middle class or above, can easily expect to live for 20 years or more. “Most people tend to underestimate the extent to which inflation will erode the purchasing power of their accumulated corpus over a couple of decades or more,” says Avinash Luthria, a Sebi-registered investment advisor and founder, Fiduciaries.

Salaried people at times tend to be complacent about their retirement savings. Says Ritobrata Sarkar, head of retirement–India, WTW: “Mandatory retirement plans like Employees Pension Fund (EPF) may not generate an adequate retirement corpus and must be supplemented with the National Pension System (NPS) and other personal retirement savings instruments.”

The elderly also tend to have higher health care expenses. “Increasing medical costs post 60 would be an additional burden on one’s retirement savings,” says Preeti Chandrashekhar, business leader, retirement, health and benefits, Mercer India. Financial planners generally use 6-7 per cent inflation rate for normal expenses, but a 12-15 per cent rate for healthcare expenses.  

Another big issue in India, as Chandrashekhar points out, is that over 90 per cent of the working population is in the unorganised sector and is not covered by a plan such as EPF.

Not only do many people begin to save for retirement at a very late stage, they also tend to withdraw from their retirement corpus for other purposes. That depletes whatever savings they have even further.

Many people, especially those in the private sector, could be forced to retire earlier than their expected retirement age of 58 or 60 because their skills have become obsolete. They may be forced to take up lower-paying consultancy and gig work.

“In the absence of an extended family, one of the spouses could be forced to take a break to take care of an elderly parent,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers.

How much will you need in retirement?

Many retirement calculators are available online which you can use to arrive at an estimate of the corpus you will need during retirement. But do understand the premises (lifespan, inflation rate, etc) used by the calculator.

Luthria suggests a simple rule of thumb. “A 60-year-old, who expects to live for another 30 years, will require a net worth equivalent to 30 times his current annual household expense,” he says. This applies to someone who lives on rent. So, if that person’s annual expense at 60 is Rs 7 lakh, he will require Rs 2.1 crore to maintain his lifestyle for the next 30 years.

For someone living in his own house, his financial investments (in other words, net worth minus value of house) should be 30x his annual expenses.

Suppose a 50-year-old has a retirement corpus of Rs 2 crore and an annual expense of Rs 10 lakh. “If this person retires today, he should have enough to survive for 20 years,” says Luthria.

If you are falling short

Most people don’t save specifically for retirement because it is a distant goal. Many awaken to the need to save for this goal in their mid-40s or early 50s. If you belong to the ranks of such people, don’t despair. There are several things you can do to salvage the situation.

Chandrashekhar suggests that people in the 48-60 age bracket begin to save and invest more aggressively: around 35-40 per cent of their earnings.

Normally, a person in his 50s would begin to reduce allocation to equities. “To make up for lost time, you would need to build an aggressive portfolio with equity allocation of 55-65 per cent,” says Hrishikesh Palve, head-financial data, Anand Rathi Wealth.

A higher allocation to equities is likely to be accompanied with greater volatility. “You must be prepared for the higher volatility of an equity-heavy portfolio, and not get swayed by the ups and downs of the equity market,” says Sandeep Jethwani, co-founder, dezerv.in. If you feel you may not be able to handle high volatility, take a financial planner’s help. Besides building an appropriate portfolio, he will handhold during times of high volatility.

Jethwani emphasises the need to have an adequate fixed-income allocation as well. “This will reduce portfolio volatility. And when the market falls, you can withdraw money from the fixed-income portion and allocate more to equities,” he says.

Another option is to extend one’s work life beyond 60. “If you can’t get a full-time job, you could try to work as a consultant or as a teacher in your area of expertise,” says Dhawan. He also suggests roping in the spouse to augment the family income.

Why you should use NPS as a retirement saving tool

• It’s an extremely cost-effective product with very low fund management cost, so more money goes into the investor’s pocket and less in the pension fund management company’s pocket

• In the active choice option, you can take equity exposure of up to 75 per cent (equity returns tend to be higher over the long term)

• Rules for withdrawal are stringent, hence there is a greater probability of this money not being used for other purposes

• Minimum 40 per cent of the total accumulated corpus at retirement must be annuitised, which will ensure a life-long pension  

• A tax deduction of up to Rs 50,000 is earmarked exclusively for money invested in NPS tier-1 account under Section 80CCD (1B)