Why a comfortable retirement requires many layers of planning – Moneycontrol.com

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Most of us don’t start planning for our retirement early enough. By the time we realise the need for a kitty to take care of our retirement, we’d already be nearing the end of our working life. Often, it is too late. More importantly, changing times and increasing costs are causing tectonic shifts in retirement planning. Ignore these risks at your own peril – you would not want to end up with an insufficient corpus for your sunset years.

Shift from defined benefit to contribution plans

A large fraction of today’s retired in India is enjoying the fruits of defined benefit plans (such as the Employees’ Provident Fund or EPF). Those investing in it do not have to worry about unexpected changes in inflation or decline in yields of their post-retirement corpus, as the EPF pays a guaranteed interest rate.

But that world is melting away rapidly, with a huge majority of today’s employed coming under defined contribution plans such as the National Pension System or the NPS. Agreed that the defined benefit plan offers a worry-free pension income until end of life, even if one outlived general life expectancy. But in defined contribution plans, you take the investment decisions and you could choose your own asset allocation. The NPS will grow in popularity and be widely accepted in times to come.

Rise in longevity and healthcare costs

It is expected that the current as well as the future generation of employed will enjoy a longer lifespan as compared to the current cohort of the retired. This brings challenges. A longer lifespan calls for greater savings during work life.

It is also likely to encompass greater medical costs. The near double-digit inflation in healthcare costs would make even large savings evaporate while accessing medical care. Third, a greater longevity could also make us incapable of taking key decisions. In this context, it becomes increasingly difficult for individuals to track markets actively and comprehend the changes around them. This situation makes the retired vulnerable to the reliability of immediate or extended family members and friends, particularly when such parties have no formal training or skills to aid such decisions.

Discretionary spending and debt traps

Opportunities for discretionary spending are multiplying at an unprecedented rate. And unlike in the past, where securing a personal loan for consumption would be rock hard, today, there are many financial entities who actively sell such loans to the salaried.

Payday loans, credit cards and buy-now-pay-later schemes are increasingly becoming more widespread. Predatory lending always has its victims.  Given the present bias of individuals and salivating discretionary spending opportunities, it is likely that a larger fraction of individuals would end up in debt.

Declining fixed income yields

The earlier generation enjoyed its post-retirement life, supported by high yields from bank deposits and other fixed-income sources. Except for the two short episodes in 1979 and in 2010, real interest rates in India have remained positive. But that happy lifestyle, built on fixed income is being uprooted right now. A recent study shows that we are inching towards a negative real interest rate. This is likely to make things worse for the retired, who are without an inflation-adjusted income source. It may force the elderly to take riskier bets on their retirement corpus, exposing them to greater volatility in incomes.

Also read: How you can invest in debt funds to gain even from rising interest rates

Job switches, relocations and changing references

Unlike the earlier generation of the employed that worked most of its life with a single employer, the current crop switches jobs quite often. Although the employment switches are often accompanied by increases in salaries, it is riddled with several subtle relocation costs.

Importantly, these shifts could create significant changes in lifestyles, including higher spending habits. Individuals decide their spending pattern based on where and how their peers spend. Many take short breaks in between and fully withdraw their provident fund accumulations.

For instance, it is known that those who relocate from a costly city to a less expensive one often end up overpaying for their new residence as they were used to higher prices. Worse, such switches could be interspersed with periods of no earning. Relying on group healthcare insurance provided by the employer and avoiding a personal health insurance policy (both for self and family) is another major issue. These disruptions have the potential to upset the entire financial planning process, leaving the households vulnerable.

What can you do to improve your retirement corpus?

While there is no silver bullet to deal with all the underlying shifts, adhering to the core tenets of prudent financial planning would be of immense help.

Target a larger corpus: A higher savings and investing target would partly absorb the unexpected inflation spikes and sharp unexpected declines in investment yields and would naturally sustain for a longer life span. It would also build a cushion against the uncertainties associated with salaries and job switches.

Take adeuate insurance: Take comprehensive health, disability, and life insurance coverage, such that the uncertainties don’t eat into the hard-earned corpus fund.

Hire a financial advisor: You need to constantly enhance own understanding of the retirement landscape and seek advice from regulated and competent investment professionals. That would call for increased dissemination of easy-to-digest analysis of asset classes conducted by independent-minded professionals or third parties without conflicts of interest.

Diversify across geographies: Even large savings or the most brilliant advice would not fully protect the individual from the risk of own behavioural biases. Therefore, it is key to diversify – across geographies (domestic and international), across value, growth and dividend yielding stocks, precious metals, and bonds. Picking up mutual funds or exchange traded funds that provide such diversification would significantly reduce monitoring and operational costs. Such diversification would avoid the deleterious impact of trying to judge winners and losers, and that of attempts to time the market.