Be ready for a long retirement

Good news for all of us. Life expectancy at birth in India is on the rise. From 53 years in 1997, it has gone up to 71 years. Life expectancy rises with age.
At 60, the age at which most Indians retire, the average male can expect to live up to 77.2 years while the average female will live up to 78.6 years. Advances in medical science mean that over the next 20-30 years, one can easily expect to live till 90, if not till 100.The big worry is: can you afford to live so long? If you plan your retirement till 75, but live longer, be ready to spend your sunset years in penury.
Shorter working life
The risk of living longer is made worse by shorter working lives. Earlier generations started working after graduation at the age 20-21 years. Now, the demand for higher education means one starts working at 24-25. We also dream of retiring early or other reasons like health issues, inability to cope with work pressure and redundancy force one to quitbefore 60. “The working life is shrinking due to early retirements, both aspirational and forced,“ warns Manoj Nagpal, CEO, Outlook Asia Capital. So, careful financial planning becomes critical.
The family safety net has also shrunk.“Children may not take care of their parents in future,“ says Jiju Vidyadharan, Senior Director, Funds and Fixed Income Research, CRISIL. Even if the next generation is willing to care for parents, the burden on them will be high--one nuclear family could end up supporting four parents and eight grandparents.
Not enough pension cover
At the same time, the assurance of pension is vanishing. Even government employees who joined after March 2004 will get a pension that is linked to their contribution to the NPS. Others too need to rethink their retirement plans as their retiral benefits may not see them through more than 20 years. Worse off will be those outside the formal retirement planning structure, like contract workers, self-employed professionals and employees in smaller units.
Many people live with the misconception that their expenses will come down drastically after they retire. While expenses like transport will reduce, others like medical costs will surge. “Retired individuals have to manage their health.At 70, no insurer will give you cover. Even if they do through co-pay products, premiums will be very high,“ says Santosh Agarwal, Head, Life Insurance, Policybazaar. All other expenses will also balloon due to inflation. If we assume an inflation of 7%, a modest annual expense of `3 lakh now for a 30-year-old will mean `96 lakh when he is 80. As Nagpal points out, “Retirement planning is most critical because all other goals can be met through loans.“ To accumulate an adequate corpus, one needs to take the following steps.
Start early
Start planning for retirement early in life to make the most of the power of compounding. However, planning early has its own limitations as the calculations may throw up a very large requirement. “Don't be overwhelmed by large numbers and give up. Allocate whatever you can as your income will increase in future,“ says financial planner Gaurav Mashruwala.
Avoid dedicated products
Dedicated pension plans, mostly from insurance companies, cost a lot and come with myriad restrictions like compulsory buying of annuities using 67% of corpus, etc. “Since investors have to buy annuities from the same companies, pension plans don't make sense for accumulation,“ says Agarwal. One does not really need annuities and can manage the corpus through other products as well. “I encourage people to go for mutual funds. The flexibility allows them to manage the new options that may come in future,“ says Mashruwala.
Don't divert corpus
Diverting retirement corpus is a cardinal mistake. Instead of withdrawing your EPF when changing jobs, shift it to the new company. There are tax implications for early withdrawals. The tax benefits get reversed if you withdraw from the EPF before completing five years. Partial withdrawals should also be restricted. “Premature withdrawals allowed in NPS, EPF, etc provide some flexibility and investors should use it only in extreme cases,“ says Vidyadharan. The probability of this kind of diversion is highest among mutual fund investors. “I have seen in vestors starting SIPs in mutual funds for retirement and then withdrawing before retirement,“ says Lobo.
Enhance return profile
One way to make sure that your investment grows faster than inflation is by investing more in equities. This is critical for government workers, because the equity exposure of NPS is only 15%. There is another reason why government employees should increase equity exposure. “Since government jobs are more secure, these employees can take higher risks and invest in equity,“ says Mashruwala. EPF subscribers should also focus on equity funds to compensate the lack of such exposure in the fund.
The distribution stage
Though all of us want to enjoy a retired life, to stop working at 60 may be a costly proposition. That is because life expectancy is increasing and your retirement corpus will deplete all too soon.
Protect the corpus
Right after retirement, go easy on spending. Withdrawing heavily from your corpus in the initial years can be suicidal. “I am not against people splurging on foreign holidays in the initial years, but they should do that only if they have a larger kitty,“ says Mashruwala.
Continue investing in equity to generate high returns. “At the age of 60, you can keep 20-30% in equity. The unwinding from equity can be done slowly. However, opt for less risky equity components like index funds,“ says Roongta. On the debt side, delaying withdrawal from instruments like EPF and PPF is another option. You also need to park investments in high yielding investments. “Investing in products like senior citizen savings scheme is a must for newly retired people,“ says Nagpal. Another option is to invest in tax efficient debt mutual funds and withdraw through SWPs.
Delay annuity buying
Whether you should buy annuities at the time of retirement or continue with a SWP kind of structure is a perennial question because the risk of managing one's own portfolio increases with age.“Managing one's portfolio at a later age becomes difficult because the investment landscape changes totally in 30-40 years. Senior citizens also fall prey to scams. But the main problem is the annuity market is not developed,“ says Nagpal. Annuities are taxed at marginal rates in India. There are also problems with the SWP structure--the money may get used for something else like starting a new business for kids or a grandchild's marriage. So a hybrid solution works best. Manage your portfolio till you can and then shift to the annuity structure. By delaying annuity purchase, you can also get better rates.