We were lazing around after the evening tea, when my uncle said, “I have been asking Mohit to start saving for his retirement but he thinks he is not old enough. What is your opinion?”
Before I could say something, Mohit interrupted, “See, he has started again. I have been working only for 6 years. I have at least another 30 years of work life. There are so many things to accomplish. I have plenty of time for thinking about retirement.”
Uncle retorted, “I am getting a pension that is substantially more than his monthly salary. He would not have this luxury. Besides, think about the inflation 30-35 years from now. He is staying with us. What if there is a job change that takes him to a different city? What happens to the expenses after marriage, kids? There is never a better day to start than today.”
Now it was my turn – “Mohit, you should thank him for his vision and advice. Parents usually pressurize their kids to put money in real estate or useless insurance plans.” “I know there is a possibility of things not going as per plan, but I do not want to retire ever” said Mohit.
“That is obviously a very good thought. Can you give me a count of people in your office who are above 50 years of age?”
He thought for a while and then said,”Well, I do not recall coming across any person in that age bracket. But, ours is an organization that promotes the power of youth”. He smiled sheepishly.
“You are working with a more than a century old US based brand and I think your answer has given you some food for thought”, I said and left after promising to have a detailed discussion on the subject.
The Cambridge Dictionary defines retirement as:
a) the act of leaving your job and stopping working, usually because you are old
b) the period in someone’s life after they have stopped working because of having reached a particular age
Listed are certain points that I put together after this interaction:
1 How much this should form the foundation for any such decision for maintaining the same standard of life. Basically, you should get an idea about the amount of expenses to be incurred on an annual basis. If you are confused about how to check your expenses – go through your bank account and credit card statement. Add expected annual expenses like vacation, family functions, festivals etc. That’s it. It would give you the current annual expense amount.
You can use the age factor or the expense factor for calculating how much would you need and what should be your savings rate.
It is not very tough to calculate. There are calculators available online-enter the numbers and you are good to go.
Age factor– If you have not started earlier, then at age 30, you should be saving 15-20 %.
At age 40, the rate should be 25-30%.
At 50, it should be 40-50%.
Expense factor – This is a better way to arrive at an amount. Make an assessment of your current expenses. For example, if your annual expense today is INR 6 lakhs at age 30, in thirty years, at age 60, you would need approximately INR 34.5 lakhs annually. Is it unrealistic?
Make use of the Rule of 72 – if we assume an average inflation rate of 6%, divide 72 by 6. Thus, if your monthly spend today is INR 100000, in 12 years, you will be spending INR 200000.
In another 12 years, at the same rate (6%), the amount would be INR 4 lakhs and in another 12 years, it would be INR 8 lakhs a month.
Simply put, INR 100000 in 2019 will be INR 800000 in 2055!
If you want to carry loans into your retirement, the figure might be higher. As the children would have settled by then, that expense would no longer be a part of overall expense structure. However, new heads like medicine bills and vacations would form a part of the total expenses.
2 When and why it does not mean attaining a certain age and then quitting your job. Financial freedom apart, there are other questions to be answered. Some of my friends, in our casual discussions, have made statements like – ‘I will retire when I have 5 crores in the bank’ or ‘When the kids are settled’, or ‘When I have worked as a CEO for 3 years’.
It should be a well thought out decision – how would you like to spend your life after you are out of the so called ‘rat race’? Would you sit at home doing nothing? For how long? Day trading looks like fashionable but does not work for most. Taking guest lecturers in a school or college at leisure, fishing, farming, growing fruits and vegetables at age 45- sounds interesting but do give it a thought. Would it be sustainable, workable, satisfying?
Consult your family members, if not friends- they would be the affected parties.
3 Insurance or pension for a fixed monthly payment you should not depend solely on monthly annuity payments. Most people I know have taken these plans from tax saving perspective and believe that a pension of INR 20000-30000 per month along with other investments would be sufficient. From the example above, you can well understand the implication of depending on such a small amount for a period ranging from 20-30 years.
4 Write your own ‘How to accumulate retirement funds’ plan like all things else, retirement plan is specific to an individual/family. So, even if there are certain rules of thumb which can be followed, a lot depends on your circumstances, family structure, future of kids, job of spouse etc. Writing about the plan will give a definite shape to your thoughts and also create a road map about what you have and what you want to achieve.
5 Health cover at the age of 30 we do not worry about health related expenses. Most of us get coverage under employer’s group policy. However, at age 60, when we would need it the most: 1) the cost would have sky rocketed and 2) No insurer would like to provide a comprehensive coverage owing to the risk. So, a reasonable cover for self and spouse is a must before taking a final call. This would also ensure that you do not eat into your retirement corpus.
6 Liabilities getting into retirement with any kind of loan is scary. Home or personal loan should be closed well before the target retirement date. Education loan for children’s higher education is a call that parents need to take, after considerable thought and also who should pay after the course is completed. Keeping emotions in check will help. Pay off all your liabilities before you take the final decision. The only workable scenario that could be considered would be one where the spouse is working, has a secure job and would continue in the job till the outstanding liabilities are paid off.
7 Different investments – consolidation there is no reason to panic if you have not yet figured out about what, how, when and how much. Take a consolidated view – assess all your savings and investments. For example bank FDs, PF, PPF, NSC, MFs, stocks, a second house and even gold. It will give you a sense of satisfaction that you have some form of corpus. Consolidation would give you a particular amount, meaning, target and direction.
8 Social grouping assessing this has its own importance. Imagine you have retired at age 50. As per target, in the first year, you have taken a domestic and an international holiday and are back now. You want to catch up with friends and cousins staying in the same city. All of them express their inability as they are still working and weekends are also occupied for the coming month. If this happens continuously, you will start calling into question your dream ‘retirement plan’.
9 Semi retirement Would it be a situation where you would be in a state of ‘enjoying the good things in life’ and ‘I will work no longer’ or would it be a situation where you would be: 1) Working once in a while for staying in touch with what is happening around 2) Working as a freelance consultant earning some money or 3) Working for a social cause or in a role of adviser for family, friends or with some NGO. This would give you a sense of freedom and belonging, allowing you to work for causes you have always cherished. Getting paid for such causes would be a conscious call you would need to take.
Even if we would want to work till our last day, there has to be a corpus which makes us financially free. This freedom means we do not have to work to pay our monthly bills and that our assets can generate substantial income for us today and for the coming years.
Financial freedom is earned after a lot of labor and thus the thought of retirement itself is exhilarating. Start early, manage well and it would be a freedom worth achieving.
PS: By the way, Mohit is convinced now and we are meeting this weekend to chalk out a plan for him.