A New York Times article spells out the rather fascinating story of Andre-Francois Raffray . Raffray made a deal with a 90-year-old French lady, Jeanne Calment, agreeing to pay her 2,500 francs per month till the day she died in exchange for getting her apartment on her death. Raffray thought he was getting a good deal. How long would a 90-year-old woman live after all? However, Calment survived to an astonishing 120 years, entering the Guinness Book of World Records and outliving Raffray himself, who died at the age of 77. The latter also had to shell out about 900,000 francs, far more than he could have possibly imagined.
The life expectancy of Indians has increased from 49.7 years in 1970-75 to 68.7 years in 2012-16, according to the National Health Profile 2019 released on 30 October by the ministry of health and family welfare. This is a slight improvement from the previous survey—from 49.7 years in 1970-75 to 68.3 years in 2011-15. However, many people are likely to live a lot longer, well into their eighties and nineties, which opens up the question of how to fund such a long retirement.
Money you will need
The first question to answer before planning how much you’ll need is to factor in how long you are going to leave. Financial planners usually take a higher expectancy into account. “I usually take 84 years as the life expectancy of the elder spouse and 80 years as the life expectancy of the younger spouse while formulating our financial plans," said Suresh Sadgopan, founder, Ladder7 Financial Advisories. “But I do leave some amount for another 10-15 years even after these ages. If the client’s finances don’t allow this, I encourage them to consider selling their primary home to raise money," he added.
Calculating a retirement corpus is complicated. You have to make assumptions about the returns that your savings will get, the rate at which inflation will eat into them and how your expenses will grow after retirement. Let’s assume that you are 30 years old and you will need the equivalent of ₹50,000 per month when you retire at the age of 65. Further, your savings earn a return of 9% and inflation is 7%. In this scenario, you will have to set aside ₹36,000 per month to reach your objective. But what if you put your savings in equity and they earn a higher return of 12%? Well, this will bring down the monthly savings required to a more reasonable ₹12,600.
There are many ways in which you can make these numbers work for yourself. First, you can retire later. This may not be possible in salaried employment, which has a fixed retirement age. You may then have to start planning for a second career after retirement. Second, you can save try and more. This is always a welcome step but it might also put enormous pressure on your current standard of living. Third, you can invest better. This is perhaps the least demanding in terms of changes in your lifestyle or standard of living. However, it requires you to be able to invest in equities for the long term (a multi-decade period) and accept the risks that come with equity investing. Note that although equities are extremely volatile in the short term, over longer time periods, they tend to mirror the growth in the economy. “A portfolio composed solely of fixed income products like fixed deposits (FDs) and public provident fund (PPF) will not build a large enough retirement corpus for most people," said Mrin Agarwal, founder, Finsafe India Pvt. Ltd. “Some equity exposure is essential, especially for people in their 30s and 40s who have a long time till retirement," she added.
Pick right products
Asset allocation is the starting point. Once you have decided your debt-equity split, look at the products that fit the bill. For debt allocation, consider low-risk retirement-oriented products like employees’ provident fund (EPF), PPF or other small savings schemes like National Savings Certificates (NSCs). Do not look at insurance plans as such policies tend to mix insurance with investment and offer a bad deal in both areas. For equity or hybrid approach, diversified mutual funds and National Pension System (NPS) are among the best. If you have not used up the ₹1.5 lakh tax deduction under Section 80C, you can also consider equity-linked savings scheme (ELSS).
“In terms of products, I consider EPF, gratuity and other retirement benefits for employees. In addition, I ask clients to view their PPF account as a pure retirement account," said Sadgopan. But note that some products are more closely aligned for retirement savings than others. For instance, a bank FD maturing in five years or a short-term debt mutual fund may not be suitable for a multi-decade retirement goal. Among the basket of options available, NPS is one of the best. It allows savers below 50 years under the NPS’ ‘All Citizen Model’ to invest up to 75% of their corpus in equities. NPS investment up to ₹50,000 per annum is tax deductible under Section 80 CCD (1B) and on maturity, 60% of your corpus can be withdrawn tax free.
“NPS is a great option as well, except for the taxation of the annuity you get from NPS," said Sadgopan. Investors have to mandatorily use 40% of their NPS corpus to buy an annuity (regular pension), which is fully taxable.
What to do
Don’t postpone your retirement planning. The benefits to starting early and saving in the right products are huge. If you cannot calculate the correct amount of savings needed to suit your lifestyle, consult a financial adviser. If you are already close to retirement, it is not too late to start. Consider a second job or career in the initial retirement years to make up for any shortfall.