Reasons Why people Don't Plan for Retirement
In financial terms, that inflection point in life when an individual’s active income falls drastically – sometimes even to zero – but the expenses continue as-is is known as retirement. Retirement is inevitable. However, what can make things worse is rising medical expenses and very poor passive income to support such expenses. Any individual requires a good amount of corpus at retirement, in order to be able to carry his current lifestyle in the future. Therefore, it is essential to focus on retirement planning from a very early stage.
Retirement planning is the process of determining one’s financial goals for retirement and outing in place a process to meet those goals. The process involves being able to estimate your expenses in the retirement years, identifying the potential sources of income, and managing an investment program until retirement and beyond. This also means managing and rebalancing assets and risks as you get closer to retirement.
· Expenses – The most important thing to keep in mind while estimating expenses is the role of inflation. One must remember that prices do not remain where they are currently. If your household monthly expenses are Rs. 50,000 today, they are expected to be multiple times in 20 years, even if we assume no increase in the standard of living. For example, an average inflation rate of 5% annually can increase your monthly expense to Rs. 1,32,000 in 20 years.
· Sources of Income – An investor must look at the various options available for retirement planning investment that can give them a regular source of income in the future. Such investments could include:
o National Pension Scheme – Launched in 2004, this government programme allows investors to withdraw a portion of their investment as lumpsum at the time of retirement and the balance can be converted into annuities for regular income.
o Atal Pension Yojana – This is a government backed pension scheme focussed on the unorganised sector. This scheme was launched in 2015.
o Public Provident Fund – PPF has historically been one of the most popular investment programs in India. It has offered the best interest rates with a high level of safety. PPF does not provide a regular income but can provide a good lumpsum at maturity.
o Government Bonds – The government of India issues various bonds some of which have the option of regular interest payouts. One such example is the RBI 7.75% Bond which pays out interest on a half yearly basis
o Debt Mutual Funds – One can chose to move assets to dividend paying AAA debt funds for regular dividend payments.
Also Read: Best Low-Risk Investment Options
Why do Indians Shy Away from Retirement Planning?
In India, it has been seen that most people either avoid planning for their retirement, or don’t give it as much thought as may be required. There are several reasons for this. We have listed down some of the more important reasons why they may have been avoiding the important concepts of Retirement Planning.
1. It’s too soon: A very common excuse people give for not planning their retirement is it’s too early to start for, they still have a lot of time to do that. And this is not right at all, as the late you start, the lesser corpus you will have at retirement. So, it is advisable that you should start early so that you can have the desired corpus at the end which would be able to meet your financial needs.
2. It’s too late: Some people give the argument that they have been late already for planning their retirement, so it doesn’t make sense right now to start.
It’s better to start late rather than not starting at all, because habits of disciplined savings & investments for some years can create a decent corpus for one together with beating inflation.
3. Not understand Retirement Planning: People are not fully aware of how they can start the planning and what options they have for parking their savings. They don’t know how much they need to save, how much corpus they require after retirement. One simple solution to that is to reach out to an expert for help, i.e a retirement planner or an advisor who understands the concepts of financial planning and guides you in terms of savings and investments according to your risk profile & goals.
There are many options available to individuals for parking their savings including Bank Fixed deposits, Annuity plans, NPS, EPF, Mutual fund SIPs, LIC Pension plans, Atal pension yojana for unorganized sector, etc. One should research the returns these schemes offer before putting their money into them.
4. Not able to save much: An argument most people have for not planning their retirement is that they don’t save much. It is advisable to first take out the money for savings from your monthly income then plan your expenses with the rest, that way developing a disciplined approach of savings can even help you plan your expenses well.
One should try to increase the amount he saves as and when his income rises and also increase his investments so as to reach his goals on time.
5. They don’t need to: Some people believe that they do not need to plan for their retirement as they are well off financially or their children will take care of them.
Being financially healthy now alone cannot prepare you well for your retirement as with passing years inflation is also rising, one should plan for the investments that can offer him inflation-adjusted returns on his savings.
The future is full of uncertainties, and it would not be right to assume that your children would be able to manage your expenses along with theirs. So, one should be fully prepared to manage his expenses with the corpus he created for retirement.
These are some of the arguments that people give for not planning their retirement. Understanding the importance of building a retirement corpus will help an individual plan and prepare well to avoid facing financial problems after retirement. Starting early helps to save the desired corpus that one may require after retirement to meet his needs.
Q1. Is it better to invest in equity for retirement planning or in debt?
A1. The choice of asset class depends on your risk return profile and your life stage. If you are young and independent, and retirement is still some distance away, probably a higher portion to equity is justified. However, the closer you get to retirement, the more the allocation should shift to fixed income products.
Q2. Is the National Pension Scheme a good option for retirement?
A2. The basic idea of the National Pension Scheme or the NPS is to encourage investors to save for their retirement. It allows the investor to invest on a regular basis during his working years. At the time of retirement, you can withdraw a portion in lumpsum. This can be used for any obligations, or the same could be reinvested in regular income paying products. The balance is converted into an annuity which serves as great tool for regular income. What’s even better with regards to NPS is the income tax deduction available under section 80C for investments made in NPS.
Q3. What are the points I must consider for retirement planning?
A3. One of the most important points to consider while preparing for retirement planning is to start early. The earlier one starts, the easier it is to build a good corpus. One must also remember to diversify according to his risk-return portfolio. Thirdly, you cannot ignore inflation when planning for retirement expenses. These are some of the major things to keep in mind, though there are a few more.