Retirement planning must start from first salary

Invest talk

Retirement is a cruel thing. At some stage in your life, you stop earning a regular income. And reality stares you in the face. How long am I going to live? Who will take care of me? Will my son/s provide for me? Will my savings last? What will be my health?

In the days of the joint family and life was modest on one looked at a salary as a way to live a good life. Retirement was never a worry. And you did not live too long after retirement. And if there was a major illness, you took it in your stride as ‘fate’. And your daily needs were taken care of by the joint family.

Today, the wheel has turned a full cycle. Nucl-ear families. (the word nuclear is an anagram of ‘unclear’). Insecure jobs unless you are in a ‘government job’. Better medical facilities will make you, probably, live for very long. If you break 80 years of living: 25 years to get first salary; 35 years in a job and 20 years at least without a salary cheque. And in numerical terms, the expenditure in the last year will be the highest. If you are lucky to be in a job that gives you pension-linked to inflation and unlimited medical cover, you have no worries.

If you think that you are on your own, in this big bad world, start thinking.  And this thinking should start from your first salary and not after you put together your family and find that the EMIs leave nothing except a hole in your pocket. Let me put some numbers in to your head.

Let us assume that at the time of retirement, you estimate your monthly needs. And then you simply double this number after 10 years. So, if you estimate that you will need '50,000 per month, then think that after the first 10 years, you will need '1 lakh per month. And after the first 20 years, you will need '2 lakh per month. Is this scary? Check the table. This gives a scary total of '9 crores! Now, you have to also decide whether you want to leave behind anything for anyone. Given that families are going nuclear, it is wise to think first about yourselves.

I am not scaring you. Just telling you that you have to start savings as early in life as possible. If you buy a house in your lifetime, think of it as a source. If you can get a ‘reverse’ mortgage on the house, or sell it once you are in your retirement, there could be answers.

And yes, health can only deteriorate. It is best to take a family health insurance policy by the time you are 35 or so and lock-in to a policy. The later it becomes, the more difficult it is to get medical insurance and the premium rates also shoot up. Do not neglect your own policy simply because your employer has given you cover. You may change your job and go in to one with no such cover. And this cover may not be available after you retire from the job.

Inflation. Something that keeps pushing the price bands higher and higher. Last few years have been fantastic for savers: Even a five per cent savings bank interest beat inflation! This means, that if you kept money in savings bank, the purchasing power increased. This is unusual. In most economies that I know of, “real” interest rate is zero to negative. Which means that you have to go outside of fixed income to retain purchasing power of money.

The ideal thing is to ladder up investments. Have a PPF account from day one: Save for the maximum number of years with full amount. On final maturity, put it in to a liquid fund. Do not be tempted. This can be your core savings.

Next is to start an SIP on an ETF. That can be the wealth builder that takes care of inflation. And after that your house or whatever makes you happy. Many people I know prefer two houses: One to live and one to give rental income.

Cashing out on equity savings has to be a process. After retirement, do it in doses when there is excitement and everyone is buying. When there is no pessimism, shift from equity to Liquid Funds. Of course this is only if you do not have your pension or other regular income to meet your living expenses. We cannot plan retirement to two decimal places.

I am not a financial planner. However, I think peace in financial affairs is the most important thing. I want each one of us to take time out, sit down with our partners or family and plan things. Everyone keeps putting it off for tomorrow. Make sure you share all the numbers with your family.

(The writer is a veteran investment advisor. He can be reached at balakrishnanr@gmail.com)