Home Money Time is of Essence – Start Young to Build Your Retirement Corpus

Time is of Essence – Start Young to Build Your Retirement Corpus

By Vijay Natesan, Financial Consultant

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Retirement planning is a topic that most youngsters would imagine to be a prerogative of the “Quinquagenerians” (persons in their 50s). Rarely do married couples start planning for retirement in their 30s, as priorities are different and retirement seems long long away.

But I think families would have to re-engineer their thought process mainly on account of two factors:

  1. Increasing Life Expectancy
  2. Rising Costs a.k.a inflation

In this article, I intend to highlight and present a case for families to start planning for their retirement as early in their careers as possible.

Why Retirement Planning?

Retirement Planning i.e., Financial Planning for a Smooth Retired Life, is a method of identifying one’s goals post retirement and planning methodically to achieve those. It starts with recognizing and putting down one’s expected retired lifestyle and then mapping it out to their career aspirations, income generation capacity, saving patterns, and the external realities. As the popular adage goes, “If you fail to plan, you plan to fail”, it certainly benefits couples who start planning for retirement early.

As mentioned earlier, two critical factors play a role in transitioning into and living a smooth retired life:

A) Increasing Life Expectancy:

Global life expectancy levels have been rising since early 20th century and have continued the trend in the 21st century. Quite obviously, India has mirrored the trend and has seen average life expectancy inch a few notches up every decade. Since independence, average life expectancy has more than doubled from 32 years to 69 years at present. Developed countries boast far higher expectancy levels compared to us, with Monaco topping the charts with 89.32 years followed by Japan with 85.77 years.

Very recently, on 20 January 2019, the world’s oldest living man, a Japanese, Masazo Nonaka, died at the age 113 years. In 2013, another Japanese man, Jiroemon Kimura, was the oldest living man at the age of 116.

Better medical facilities, increased health awareness, and lower infant mortality rates are expected to drive this number northwards in India too in the decades to come.

B) Rising Medical Costs:

One tangible inflation that anyone would certainly agree with is the rise in medical bills year on year. Medical inflation in India has been growing at double the overall inflation rate. As per a Mercer Marsh Benefits report, Medical inflation in 2018 was estimated to be 10% vis-à-vis the general inflation rate of 5%. This trend is expected to continue in 2019.

 

For example, treatment for cancer can cost anywhere between Rs.2.5 lakhs and Rs.25 lakhs. A drug called “Avastin”, used to treat colon, kidney, lung, and gallbladder cancer, can cost as high as Rs. 6 to 8 lakhs for multiple sessions, at around Rs.1 lakh per session.

Abhijeet, a 40 year old manager in a Multinational Company shares, “Till a couple of years ago, I had largely lived my life on the motto of ‘spend-as-you-earn; and ‘don’t-worry-about-the-future’. But post the kidney treatment of my father-in-law and the cash that his family had to shell out for the treatment, I got a jolt of my life and decided to sit down with a financial planner to chart out a detailed financial plan.”

Sana, a 25 year old journalist says, “I have always had a special interest in the field of medicine and medical treatments in India and remember having done stories on hospitals during college days. Just last year, my grandmother had to be treated for breast cancer. It cost us close to Rs.15 lakhs totally, including pre and post chemotherapy, surgery costs and medicines. Having done a bit of study on cancer treatments myself, my family had saved and created a corpus for any hospital expenditure in case of any eventuality. We thanked our stars for having planned for this unforeseen eventuality”.

In the coming years, costs would continue the trend of outpacing general inflation rates. The reasons attributed to this trend is an increase in non-communicable diseases like heart attacks, strokes, kidney malfunction. Other factors driving this rise are rising expectations, higher life expectancy, increased workplace stress and changes in government security schemes.

To highlight, planning for medical, education, and travel expenditure will significantly impact the retirement corpus and hence lifestyle that one could afford post retirement. Hence, planning for the same would become an essential part of retirement planning.

Putting it Into Perspective

To know what corpus one would need to be able to retire smoothly, it would be prudent to get a perspective of what impact the above-mentioned factors would have on the calculations. Let us assume, a person aged 35 (in 2019) expects Rs.50,000 per month (as of current prices) as monthly income post retirement from the age of 60 (in 2044). Assuming an average inflation of 6%, this number would read as ~Rs.2,15,000 per month at 2044 prices.

(In this calculation, I have assumed a rate of 6% taking into account a long-term Consumer Price Inflation (CPI) of 4.5% as forecast by OECD along with an additional 1.5 percentage points, assuming medical costs inflation will continue to skyrocket in the coming years before starting to dip, mirroring the trend in the US during the last 50 years.)

Therefore, to generate this monthly income, he would approximately need a corpus of Rs.3 crores, assuming he earns a return of 6% on his investments then.

This monthly income number, in my opinion, has been conservative. For those who wouldn’t wish to cut down on their lifestyle after retirement, the number could be far higher. It is here that a family needs to introspect deeply and identify their life goals for both pre- and post-retirement years.

Conclusion

What we have discussed so far is the first step toward retirement planning. This should serve as a gentle reminder for couples to start recognizing that retirement planning is an extremely important aspect of the overall financial planning. The sooner that one starts planning, the longer the time to create the retirement corpus without impacting the present expenditure pattern and lifestyle.

In the following month, we will be continuing this series on retirement planning by discussing the ways of  achieving the retirement corpus and the investment options that one can consider.

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