Every year many of us make New Year resolutions like going to bed on time, exercising regularly, giving up unhealthy habits, fulfilling career goals, saving more, spending less, etc. Most of us break our resolution within a few days; the more resolute among us, stick to it for a few weeks or months before giving up. However, I have seen that, the very few, who stick to their resolution throughout the year, make their New Year resolution a lifelong habit and are able to transform their lives.
Among the different New Year resolutions, two in my opinion, related to health and family are the most important ones. Health and family are the two most important aspects of our lives, and in the age we live in, also the most neglected ones. The importance of health and family is less obvious when we are young but when you grow older you will realize that, they are the two most important elements of a happy fulfilling life. With the benefit of hindsight, I can also say that, taking care of health and family requires much less effort than what pursuit of some other desires take. In this blog post, we will discuss about one of our most important family goals, a successful and happy retirement.
Our lives can be divided in three stages – student life, working life and retired life. Student life lasts for 20 to 25 years and is essentially a preparation for our working life. Working life is usually the longest stage, lasting for 35 – 40 years, and is the stage where we work to fulfil our personal desires and also the desires of our families. Retirement is the last stage of life which with increased average longevities, can last 30 years or even longer, where we live off the savings made in our working lives. Some readers may think retirement planning is for retired people; retirement planning is for working people. Therefore, during the 35 – 40 years of our working life, apart from taking care of our children’s first stage of life (student’s life) for 20 – 25 years, we also need to save for the last stage of our lives (retired lives) which can last as long as 30 years or even longer.
A friend once asked me, longevity apart (which we all understand), why has retirement planning become so important in the last few years? If our grandparents never had to worry about retirement planning, why do we have to worry about it? It’s plain economics. Our society is moving from a joint family construct to nuclear family construct. The shift from joint family to nuclear families has both social and economic implications.
From purely an economic perspective, a joint family enjoyed economies of scale. Let me explain with the help of an example. When I was young, I saw joint families with 10 members (e.g. parents, two children and their respective families) in Kolkata living in 3 – 4 BHK houses. Now, parents live in one house, while two children with their families live in two other separate houses (possibly in different cities). Arithmetically speaking, therefore, in a joint family setting, 10 family members would have shared 1700 – 2000 square foot, whereas in a nuclear family setting 10 family members occupy 4500 – 5000 square foot. The additional area obviously has costs associated with it which are borne by the nuclear families individually.
This cost is not just limited to the cost of buying the space (properties), but also the interest cost, the cost of maintenance, cost of utilities etc. Just as an example, in the 80s, 10 family members would sit in their living room in the evening and watch programmes on Doordarshan. Now three different families are sitting in three different living rooms in the evening and watching three different programs on cable or satellite TV. So there is the cost of three living rooms (rent/mortgage), higher electricity bills (more lights, fans, ACs etc), three different TVs and three different channels, each with separate costs. This is simply an example. There are numerous other examples of costs which were shared earlier, but now borne individually, in nuclear family settings.
Therefore, unlike a joint family, in a nuclear family, costs per unit (family member is a unit here) are higher. Some senior citizens have told me, almost in a complaining tone that, unlike themselves, their kids are not ready to take as much responsibility towards their parents, despite much higher incomes compared to themselves. I have explained the cost angle in the previous paragraphs. I cannot comment on attitude changes (if any) towards taking care of parents, but senior citizens should also realize that, lifestyle aspirations are changing rapidly with income growth.
Lifestyle changes are social trends and inevitable with economic growth. Also, if you are expecting your children to take care of all your financial needs in your retirement years, by extension you are expecting your grandchildren to care of the financial needs of your children when your kids retire. How do you know, if your grandchildren will take care of their parents, your children, when they retire? Therefore, instead of relying on their children to take care of the parents in old age, senior citizens should aim to be financially independent.
Ours is a society based on the concept of family and not planned benefits (systemic welfare), unlike Western societies. It is a great strength of our society in India, but we cannot be oblivious to social changes and effects of globalization. Our Finance Minister in one of his budget speeches has spoken about India moving from pension less society to a pensioned society. Moving from pension less to pensioned is not the responsibility of the government or your employer, but the awareness in each one of us to save enough for retirement, so that we can take care of our lifestyle expenses in our retired years through our savings and not be a burden on the productive components of our family, i.e. our children.
By being financially independent, when we retire, we will strengthen our families (our children and their families), so that our kids can put their income to the most productive use, which will benefit them in the long term. Is it not what we want? The happiness of our children, at the end of the day, is the purpose of our existence, to a very large extent. That is why we say that, retirement planning is very important to our families, not just for your needs (needs of you and your spouse) but your entire family.
Being financially independent is not enough; you should also be able to maintain your lifestyle, even when you are retired. Think about it; you and your spouse may be used to entertaining guests in your house every week, going on vacations few times a year, used to be driven around in chauffeur driven cars. Can you, after retirement, one fine day, live without all of the things that you are used to?
Some people I have met say that, they will be able to adjust to a new lifestyle after retirement, but it is simply talk; lifestyle is more than talk. Lifestyle is habit forming and therefore, difficult to give up. Lifestyle has a cost associated with it; you can afford the costs when you are working because your income can fund the expenses. But when you retire and have no income from your profession, how will you support your lifestyle expenses? Our lifestyles are also increasingly linked to our self esteem and that of our families.
You can maintain your lifestyle, even after retirement, with the income from your retirement savings, provided you plan carefully. As discussed earlier, you can achieve your retirement planning objectives with little effort, provided you plan well and most importantly, start early. If you start early, you can accumulate a large enough corpus, with relatively small savings in the right investment types, through the power of compounding. The power of compounding is, essentially, returns earned on accrued returns (interest on interest in layman terms). Over a sufficiently long period of time, return on accrued returns, can be much larger than your savings amount and create long term wealth for you.
As with many aspects of personal finance, there are several heuristics or thumb rules for retirement planning. Heuristics are based on statistical evidence, but one must understand these are general guidelines only. Here are some heuristics for retirement planning:-
As discussed earlier, these rules are only general guidelines. However, you should not rely on heuristics alone for your retirement planning, because you may end up, underestimating (in most cases) or overestimating your retirement needs. Each one of us has different personal financial situations, and therefore we should employ a bottom-up approach to determining our retirement needs, depending on our own unique situations.
Since the goal of retirement planning is to maintain our current lifestyle even during retirement years, the first step of retirement planning is to do an expense analysis. In this approach, we will analyze in fair amount of details, our regular expenses and project how much we will have to spend on our regular expenses, in our retirement years. We must be careful when we estimate regular expenses during our retirement years. We simply cannot take our regular expenses as a proxy for our expenses during retirement. We will end up, overestimating or underestimating the expenses during our retirement years. In the following cases, we will underestimate our retirement expenses, if we take our regular expenses as a proxy for our expenses during retirement:-
These are just a few examples; therefore, it is important that, you make a financial plan which is able to meet your retirement needs after considering various factors.
In this blog post, we discussed why retirement planning is one of the most important goals in our life. It is also one of the most challenging life goals, but our effort is considerably reduced if we plan early, because we can benefit from the power of compounding over a long period. Retirement planning is one of most neglected goals, but in reality the most important ones. We tend to give more importance to short term goals and neglect long term ones. Financial planning helps us stay focused on both short term and long term goals. In our next post, we will discuss how to calculate our retirement goals (quantitatively) and plan for it. Please stay tuned.....
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.
An alumnus of IIM Ahmedabad, Dwaipayan is a Finance and Consulting professional, with 13 years of management experience, mostly in MNCs like American Express and Ameriprise Financial, both in India and the US. In his last role, he was the Chief Financial Officer of American Express Global Business Services in India. His key interests are building best in class organizations, corporate governance and talent development
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