This is an extract from a post that appeared in the India Markets Observer 2018, an online publication that brings together experts who discuss these challenges in the fund industry and investing insights and various perspectives.
Life expectancy, standard of living and inflation have been inching higher in India but retirement planning has been an outlier. Despite low social security in India as compared to other developed countries, retirement savings has still not received its due importance. As per the Household Finance Committee report on Indian Household Finance published by the Reserve Bank of India last year, an average Indian household has mere 5% savings in financial assets and retirement savings will be an even smaller part of it. This reflects how unprepared we are for our 2nd innings of life!
“In India, major section of the society has an “Do It Yourself” attitude towards financial planning. Thus, there is a need for increasing awareness about the benefits of financial advice and importance of planning for long-term goals.”
As per statistics of the World Health Organisation, life expectancy in India has risen by 6 years from 2000 to 2015 and with the increasing medical assistance it’s expected to rise further. This is just one factor highlighting the importance of retirement planning. Other factors are inflation and improving standard of living. Considering an average annual inflation of 6% and monthly expenses of Rs 30,000, after 30 years an individual would need around Rs 1.8 lakh per month to maintain the current standard of living. This amount would vary for individuals based on factors such as current expenses, time to retirement and future standard of living.
Retirement planning has been advised to investors for a long period now. A delayed start in retirement planning would require an individual to save significantly higher amount on a periodic basis. One of widely advised method for retirement planning is to break it down into three phases– Accumulation, Preservation and Distribution. Accumulation phase is the wealth building period which can be navigated by opting for a Systematic Investment Plan (SIP) in equity mutual funds. Preservation phase is the period near to the retirement age. Ideally one should consider reducing the portfolio risk through Systematic Transfer Plan (STP) from equity mutual funds to debt mutual funds in this phase. Lastly, in distribution phase, an individual should opt for systematic withdrawal plan (SWP) for regular monthly income.
“Inspite of rise in GDP per capita by over 60% from 2008 to 2016 and the emphasis put on retirement planning for a long period now, the allocation to retirement planning hasn’t increased much. This highlights the need for a behavioural shift toward retirement planning in India”
To initiate the behavioural shift, one needs to first understand the reason behind the lack of interest towards retirement planning among the youth.
Today retirement planning is presented as a long-term goal, the benefits of which will be reaped after 30 years. However, the need of the hour is to present it as solution for life. A solution which will provide periodic gratification by meeting short-term goals and pave the way for a better post-retirement life.
Immediate gratification in the form of tax saving in case of Equity Linked Savings Schemes (ELSS) make these schemes more acceptable as compared to retirement planning. Further, after three years the investment in ELSS can be used to meet a short-term goal such as buying a car or a dream vacation.
Such a laddered approach of achieving your near-term goals on an ongoing basis will eventually lead in meeting long-term aspirations.
Further, this not only inculcates the habit of investing but also encourages individuals to allocate more money towards savings on a periodical basis as their income levels rise. Thus, meeting short-term goals through disciplined investing will provide the much-needed nudge to save for long-term goals such as retirement planning.
The periodic gratifications in the form of fulfilment of short-term goals would inculcate the habit of investing and motivate individuals to stay invested. This would also enable a change in perspective that long-term planning will not come in the way of fulfilment of short-term goals rather make way for it.
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