Life can be a beach at 60. All you need is a plan

The sooner you start building your retirement fund, the more you’ll end up with

Madhu T TNN

When do you plan to retire? If someone were to ask you this question, you would reply with a shy smile or an evasive shrug. What is there to say, right? You retire at a particular age, something you have no control over. Some people may—if they are qualified—work as consultants for a few more years. Simply put, retirement is inevitable, something you cannot avoid. But the question, when posed by a financial advisor, assumes a new meaning. It hides more than it reveals. “When I tell some of my clients that they will not be able to retire as they haven’t planned for it, some of them just can’t believe it. I tell them they would probably be working all their life because they don’t have enough money. They are shocked,” says Mukesh Dedhia, a certified financial planner. “It is sad but when you are in your late 40s and 50s and haven’t thought about planning for retirement, you should be prepared to face the consequences,” he adds. Gaurav Mashruwala, another certified financial planner concurs: “Most people are not at all prepared to retire comfortably. They don’t take it seriously. Only when I run them through some numbers, do they understand the seriousness of the matter.” Want to check how prepared (or unprepared) you are to face retirement? Times are changing That may sound like a casual observation, but not quite true. Financially speaking, break down of joint families, emergence of nuclear family spread across the globe, absence of pension from employer, among other things, place great importance on meticulously planning for retirement. “What these changes in the social and family set up mean is that you don’t have a fallback option anymore. Basically, you are on your own and you can’t turn to anyone for help,” says a financial advisor. You will live longer Yes, it’s true. In 1900, people used to live barely a year after retirement. By 2012, a person is likely to live a good 25 years after retirement. That’s good news, right? Wrong, say advisors. To live longer, you need a larger corpus. “Many people would be forced to dip into their capital to meet the shortfall in income against the backdrop of rising expenses,” says Dedhia. Your bills will inflate You would retire with a corpus and invest it in a safe avenue to earn a steady income. Your income would remain steady, but your expenses may be rising due to inflation. Mashruwala offers the example of a Zodiac shirt which used to cost Rs 225 in 1987. By 1997, a shirt from the same brand cost Rs 510. At this rate, it would cost Rs 2,620 by 2017. That should give you a rough idea of how inflation is going to inflate your expenses. The only solution to stave off its impact is to have a huge corpus. Losing power of compounding The tendency to postpone the process of retirement planning is likely to hurt most people. “If you are starting late in life, even with a large amount you won’t be able to catch up with people who started the process early, even if it was with a modest amount. This is because of the power of compounding rate of returns,” says a financial advisor. Look at these numbers: Let us assume that you start investing Rs 500 per month when you are 20, and you invest for the next 40 years. Assuming that you would get 8% return annually, you would have a corpus of Rs 17.45 lakh at the end of the period. If you started at 30, even with Rs 1,000 per month you would only have Rs 14.90 lakh when you are 60. Now, let us see what will happen if you waited till you reach 40. Even if you invest Rs 2,500 per month for the next 20 years, you will have only Rs 14.72 lakh. If you started the process merely five years before, you turn 60 with Rs 20,000 per month. Safety means earning less Another factor that could spoil the retirement plans of many individuals is their obsession with safety. Parked in safe avenues like fixed deposit and provident fund accounts, these investments will give you little over the inflation rate and rob you of the chance to build a large corpus. “Most people don’t realise that it is an almost accepted fact that you have to take the help of equity to build your long-term goals. It is proved beyond doubt that equity outperforms all other asset classes in the long term,” says a senior mutual fund manager.