Retirement planning: Start early and save corpus for a 90-plus lifespan

Equity and debt mutual funds, NPS, EPF and PPF are some of the key instruments you should use to build your retirement corpus

Human life expectancy has been increasing rapidly because of better health care facilities, hygiene, ample food, and increased access to life-saving drugs. The number of persons aged above 80 nearly tripled globally over the past 30 years and stood at 143 million in 2019. It is expected to triple to 426 million by 2050 and then double again to 881 million by 2100 (Source: UN World Population Prospects 2019). By the end of the century, one out of every 12 persons in the world is expected to be above 80 years of age. While planning for retirement, most people usually assume a life span of 70-75 years. The average life expectancy at birth is 69 in India. While this assumption may appear reasonable, the devil lies in the detail. Life expectancy rises to 76 years for urban dwellers in the top quintile based on income (BMJ Global Health 2019). Also, if a person belongs to this group and is already 60 years old, his life expectancy rises to 81 years. About 30 per cent people from this socio-economic group are expected to cross the age of 85. Based on these numbers, it seems reasonable to plan for expenses till at least the age of 90.
 
Start early to win financial independence
 
To live the lifestyle that you desire during retirement, earning financial freedom is of utmost importance. This goal will only be achieved when one begins to plan for it early because income growth tends to plateau in the mid-forties for most people. One needs to save and invest aggressively during the working years. Sources that will generate steady income during retirement also need to be created.
 
During the 20s and early 30s, aim to save at least 40-60 per cent of your income. Responsibilities are usually low at this age, allowing a person the opportunity to save more. From the mid-30s, dependants come into the picture, be it aging parents or children. Expenses increase, and the scope for saving reduces. Nonetheless, plan in a way that you are able to save at least 40 per cent of your salary. As you get older, responsibilities will increase further, as kids start going to college, get married, and your own retirement looms around the corner. Only through regular, goal-based investing will you be able to fulfil all your obligations. The key investment products you can use to build a retirement corpus are equity and debt mutual funds, National Pension System (NPS), Public Provident Fund (PPF) and Employee Provident Fund (EPF).

Aim to increase your investment by 10 per cent every year. To cite an example, Rs 15,000 invested each month in Mirae Asset Emerging Bluechip Fund for 15 years with an annual step up of 10 per cent would have earned you Rs 2.70 crore. The same investment made without an annual step up would have earned you Rs 1.8 crore (see table). Stepping up investments annually in tandem with rising income will help you achieve your goals more comfortably.
 
How much corpus will you need?
 
A person who is currently 30 years old and has a monthly expense of Rs 1 lakh will spend Rs 6.7 lakh each month to maintain a similar lifestyle when he retires at 60. He will need a corpus of Rs 18 crore to meet his expenses over a 30-year retirement span. If he is investing through mutual funds, he will need to run a monthly SIP of Rs 36,800 to generate this corpus, assuming an annualised SIP return of 13.3 per cent.
 
Plan for large capital expenses
 
Housing is one of the biggest capital expenses. If one plans to stay in the same city that one is residing in and already owns a house, then there is not much planning to do. But if one plans to move to another place away from the city, one needs to plan in advance for purchasing a house there. A roof of your own does provide peace of mind after retirement. Include this in the list of financial goals and start investing for it.
 
If you plan to mostly travel in your post-retirement years, or you are not sure about the place you will retire to, then renting would be a more suitable option. Incurring a huge expense on buying a house at the age of 60 can be wasteful if one plans to move a lot. Rental inflation in India is around 7 per cent. If the rent is Rs 20,000 now, even after taking current inflation into account, it will not be too high compared to the cost of buying a house. The flip side of buying a house is that it comes with maintenance charges, taxes, and EMI (if a loan is taken). A house is also an illiquid asset that is difficult to dispose of if you need cash in a hurry.
 
Buy adequate insurance
 
Buy a pure term plan rather than unit-linked insurance plans (Ulips) as the former can help you get adequate life cover. Those in the 40s should buy a plan that will cover their family for the next 20-30 years. With age the need for life insurance cover reduces. By then the children would have grown up and become financially independent. You would also have built up an adequate corpus. Once you feel confident that no dependant will be affected financially if you are not around, stop paying the premium.
 
With rising cost of medical care, adequate health insurance has become essential. More than 50 per cent of a person’s lifetime health care costs arise in the last year of his life, and more than 75 per cent in the last five years.
 
Liquidate fixed assets if children live outside India
 
If your children are settled outside India, they will not have the time to come, manage and maintain properties in this country. Liquidate your fixed assets gradually. Invest in a dollar-denominated or hedged corpus so that the children are eventually able to use the money. Travelling to visit the children and grandchildren is common during retirement. Many people also want to go on a vacation with their spouse. Expenses like these have to be planned for and managed through investments made in advance.
 
Gifting on special occasions and seeing the happiness on the faces of your loved ones is priceless. Have some money invested for the express purpose of gifting to your loved ones.
 
Pay off liabilities before 60
 
Aim to be debt free by the time you retire. Income tends to be lower during retirement. Having to pay interest will act as a drag on that diminished flow. Senior citizens who own a house and need a regular income flow may explore the option of reverse mortgage. Many banks, including the State Bank of India and Bank of Baroda, offer this facility.
 
Write a Will
 
Diseases like dementia, Alzheimer’s, and transient global amnesia are common mental disorders that come with age. Though they are not fatal, they impair one’s faculties. Hence, prepare a Will well in advance. The courts should not be the ones that decide how your assets should be distributed. If you have kept regular track of your assets and liabilities, writing a Will becomes easy. After writing it and appointing an executor, the dependants and other beneficiaries should be informed of its existence.
 
Longer life spans are becoming a reality. The sooner you accept it and plan for it, the more tranquil your sunset years will be.
 The writer is CEO and co-founder, Upwardly.in