When Suman retired from a private-sector, non-pensionable job, a year after the retirement of her husband Pallav Gupta, she did a quick estimate of her average monthly expense over the past ten years. She decided that it was the money she would need every month after her retirement. “I deducted the home loan EMIs we paid for three of those ten years, and the car loan EMIs for the next two, because we were not going to get loans after retirement, and so there will be no EMIs,” she says.
But, less than 18 months after the well-off couple with “settled children” hung up their boots, they are feeling the pinch. The house needed a fresh coat of paint—an expense they had failed to factor in.
Financial adviser Akshaya Budhraja is not surprised, though he is happy with the kind of planning Suman and Pallav have done. “Most people are in denial when it comes to retirement planning,” he says. “Because they receive salaries and contribute to employees’ provident fund, they think that their savings will take care of their later needs. The savings, of course, will, but not if there is no plan to make it work. Most people talk of working for a few more years, or possibly even more, and put off the idea of a clearly penned-down retirement plan.”
According to Akshaya, 98 per cent people do not list retirement planning as a financial goal. The situation has not changed even though the government, banks and financial companies have started incentivising contributions to the National Pension Scheme.
It is not just about planning for retirement. The trickiest part is making a correct estimate of how much does one need, month after month. Without doubt, it depends on the kind of lifestyle people want to lead after their retirement.
“There is no uniform retired life,” says Radhika Krishnan, a former government employee. Thanks to a substantial pension and wise investments, she was certain that her post-retirement life would be more comfortable than her service days, until she came to know that her husband had got hooked to the idea of “travelling the world”. They undertook four foreign trips in the past seven years.
Akshaya, however, says one should not confuse planning for retirement with saving money for foreign trips. What people tend to miss is a nine-letter word: inflation. Most people work out a monthly or annual lump sum they would need after retirement, and plan for that.
A budget or financial planning calculator, which can be downloaded from the internet free of cost, makes it easy to calculate the corpus needed to keep up with inflation. Most such calculators come in the form of a spreadsheet with calculation tools. All one has to do is to key in the number of years one expects to live, and the inflation rate one expects to battle.
It is the increased life expectancy that can play havoc with the best of plans, says financial broker Kumar Sahu. “We live longer these days. In making an estimate, people talk of health insurance policies. But they don’t realise that, while these [policies] will take care of them in case of a major surgery, the daily cost of calcium and diabetes medicines and painkillers add up to quite a tidy outflow,” says Sahu.
He says most people set aside a fixed amount for such costs, say Rs 1,000 per head. Never do they think that the figure will go up to Rs 1,200 the next year, and Rs 2,000 in three or four years. According to Sahu, such oversights can make the budget of a retired couple go haywire.
People leave out other expenses, too, when they calculate the amount they would need after retirement, say planners at ICICI Bank. Take, for instance, the cost of replacing white goods. Appliances such as ceiling fans, air conditioners and refrigerators have lifespans that are shorter than those of humans. While replacing old appliances help reduce energy consumption, it can be costly. An unplanned expenditure of Rs 27,000 for a new fridge can upset one’s retirement budget.
Most retirement plans do not go beyond taking into account expenses such as kitchen bills, maid’s salary, the cost of fuel and water, electricity, cable and cellphone charges. “The plans include petrol and diesel expenses, but rarely the cost of maintaining and insuring a car, and its replacement, if need be,” said the representative of a financial company.
According to financial consultant K.V. Paulson, while there is growing awareness of the need for planning for retirement, most people belonging to the salaried class do not have the liquidity. “They have earned well and invested for the long term. But their goals are invariably centred around their children’s education and marriage. Retirement is just not in their scheme of things,” he says.
According to him, most retirees count on their children to support them financially. Often, the monthly amount they plan for is the sum of their daily expenses, for things such as food and toiletries. “We make them juggle their accounts in such a way that they have reasonable financial independence after their retirement,” says Paulson.
A useful rule of thumb for retirement planning, say experts, is to set aside at least 25 per cent more than one’s own estimate; ideally, it should be 40 per cent or more. “This, too, may not cover that journey to an exotic location,” says Paulson. “But it will take care of that coffee out, or a bit of an unplanned shopping.”
With most countries moving from ‘defined benefits’ to ‘defined contributions’ for pension plans, the key is to build one’s own retirement kitty. In the era of increasing life expectancy, one’s sunset days can be bleak in the absence of a good retirement plan.
Some names have been changed.