Retirement is an often-misunderstood word. The legal understanding is linked to age – you retire when you turn 60. The practical understanding, however, is a choice – to leave active work. Age is no factor for the latter definition. As long as there’s no compulsion, you can always work for passion, cause or to just avoid boredom. That is the kind of freedom, many of us aspire for.
You reach this stage when you have a fully paid-up home to live, enough savings or passive income to maintain your lifestyle, have no outstanding debt but adequate insurance coverage for black-swan events.
Retirement planning in this case is simply a race to achieve the freedom from work, before you are forced to withdraw from work by labor laws. The sooner you reach this stage the happier you are in life.
Hence, you should start planning as soon as possible – ideally with your first salary. As they say, a disciplined plan of socking away even a small portion of savings every month can easily add up over time and give promising returns.
As a first step, build an emergency fund of six months to one year. Keep this in Fixed Deposits (FD). Then maximise your tax deductions from National Pension Scheme (NPS) and Equity Linked Savings Scheme (ELSS). These investments come with a dollop of tax benefits. Never leave them idle on the table.
Next, invest the surplus capital in an equity mutual fund - ideally in an index fund; and also in a debt mutual fund - ideally in a liquid or an ultra-short debt fund. Keep around 10-15 per cent of your portfolio in gold as hedge against volatility in equity markets.
If you are more than 10-15 years away from retirement, you should have nearly all your investments in equity funds and gold with a small portion in debt allocation.
However, most people do not understand this. The practical construct that one retires at 60, gives most people the impression that they can start later. Given a choice between an instant gratification through spending versus a delayed fulfilment through saving and retirement planning, most young people choose the former.
We, as humans, are wired to choose instant gratification – a trait that a lot of new age apps exploit for stupendous gains. When you are in your 20s, it is easy to believe that you have a long time to go for retirement planning. It is only when you get older, you realise that time is the most important ingredient of compounding, and once gone it doesn’t return.
This is true, especially, if you are past 50 and are starting to invest for retirement. You cannot cover for lost time by being aggressive in your investments. Always have an asset allocation between debt and equity, which are both appropriate for your age and goal.
We can use a simple example to illustrate this. Let’s say, Anjali starts investing Rs 5,000 per month towards retirement when she is 25. Shyam, on the other hand is in no hurry. He waits and when he is 35, he starts investing Rs 15,000 per month towards retirement. Now let us assume they both earn a 12 per cent return per year on their investments. What we find is that at 60, Anjali has invested Rs 21 lakh and has a retirement kitty of Rs 2.5 crore. Shyam, although, has invested Rs 45 lakh has managed a retirement kitty of only Rs 2 crore. Hence, Anjali is way better off in her plan.
This, in a nutshell, is the power of compounding and it has the biggest impact in ensuring that your are adequately prepared to be able to choose whether you wish to work or not before you hit the retirement age.
While this math is simple, it is still unclear if Indians actually save enough for their retirement. Surveys point towards a gap, with less than 50 per cent respondents having a retirement plan. Some of it can be attributed to the joint family system, which creates a safety net for old age. This trend, however, is changing with nuclear families, especially in urban India.
With lack of social safety net and forced saving mechanism, things can get tricky for most urban population. There are some green shoots, however. There is indeed a new awareness and emerging demand for retirement planning.
Over 20 per cent of all goals planned on our system are for retirement. In fact, it is the most popular financial goal - even ahead of lifestyle goals like buying a car or travel. Further, in our dataset the propensity for a user to plan for retirement is constant regardless of age. This means, a continued push on the benefits of retirement planning actually works.
There is of course the added question of adequacy – are the retirement plans adequate in accounting for inflation and changing individual needs? Adequacy is not an easy question to answer and may not even be the right question to focus on, given we are still a low to middle income society. What we need to focus on is healthy, first order habits, such as starting a retirement plan early and increasing retirement contribution regularly. Adequacy can soon follow.
The author is the Founder and CEO of Kuvera.in