Young & Carefree? Plan for the Sunset Years

New, young clients of mine, whom I’ll call the Kumars, visited my office. “With the hectic lifestyles that we lead,” Mr Kumar told me, “we’d like to retire when I’m 55, so that we may pursue our other interests, like travel and photography. And at 55, I’ll still be fit.”

“Good idea,” I said, “I hope you’ll also be financially fit for that.”

They then showed me their file containing a neatly compiled list of stocks, mutual funds, insurance policies, bank FDs and suburban property they’d invested in. “So, what do you think?” asked Mrs Kumar after I had gone through the list. I admired their thinking about retirement even though the Kumars were only in their early 30s.

Meanwhile, other average clients of mine put numbers to every one of their financial goals: house, car, children’s marriage and education, holidays… everything except retirement. I think it’s only because when people are young, even in their 40s, retirement seems too far away. But you’ll be surprised at the speed at which the good years go by.

If you’re working today, retirement is quite a certainty—almost as certain as the bad old death and taxes. That’s why it’s critical to create a detailed plan, both from financial and emotional standpoints, and then go about executing it. And while you do that, there are eight truths you need to consider.

1) Inflation is your enemy

The average annual rate of inflation in India has been about 7.6% during the last 25 years. This means most of the things you buy are at least six times more expensive than they were in 1986. That won’t change when you survive long enough to look back in 2036, after another 25 years. So, if you spend Rs40,000 per month today and plan to retire in 2036, wishing to maintain the same lifestyle, you might then need about Rs250,000 every month.

In fact the future may not even be so bright! Considering all the excess money that has been printed across the world since 2008 to tide over the global financial crisis, don’t be surprised if you’ll need even more spending money in 2036. “Quantitative easing,” the economic euphemism governments use to describe printing excess money, is a known inflation enhancer.

And then there’s what’s called “lifestyle inflation,” which can happen as you earn more. Foreign trips replace your domestic holidays and parking in with relatives back in your native place. One car for the family becomes one car for each family member. You wore the same clothes for years, but you find yourself buying new ones every season. If all this sounds familiar, you’ll need loads of spending money even after you retire.

2) You could live much longer than you think

Human life expectancy has steadily increased. A large number of us will end up spending as many years retired as we were working, maybe more. Some of my clients often disagree. They argue that the killer called stress, too, has increased. But then, medical advancements also increase dramatically, with newer stress, clot, cholesterol and cancer busters that help lengthen our lifetimes.

Thus your retirement plan must address expenses over a much longer period, well into your late 80s, maybe longer. Factoring in inflation, those monthly expenses that could grow to Rs250,000 by 2036 may touch Rs15 lakhs if you survived till 2061, a “normal” 25 years after retirement.

Scared? The “risk” of living very long is now very real. That’s why it’s essential to continue to make investments that will have the ability to beat inflation over long periods.

Equity shares, equity mutual funds and real estate must be part of your investments, and good portions of them should be held even after you retire.