How to plan for your Retirement if you don’t have One Crore Rupees
The other day I was reading a blog post where the author claimed that even 1 Crore in savings is not enough to sustain a good life (assumption being monthly expenses of 50K per month). But how many (I am sure that if you are reading this, you have already reached the 1 Cr mark in savings or sure you will) folks in India can really save that kind of money.
In ways more than one, we live in our own bubbles. Unlike the West, we have very little to speak off when it comes to Social Safety Net. Costs are ballooning even as opportunities for income become weaker by the day.
In the last couple of years, explosion of ecommerce has meant there has resulted in a huge number of low pay jobs. While it was easy to make fun of Pakoda making as being an Industry, being part of the gig economy is worse for you learn no real skills no matter how long you work nor build any brand identity.
Retiring at 60
When we talk about Retirement, most instantly think about their job ending when they come to 60 years of age. But why 60 and what is the history behind Retirement.
Retirement is a very recent phenomenon thanks to 1. Growing population that meant you had more people available for work 2. Longer life expectancy and 3. Changes in technology which meant the older generation had to constantly keep learning new tricks
Frederick Hoffman argued in 1906 that a country’s productive potential could be maximized if people ceased working at age 65. While we are mentally as active at 70 as maybe at 60, the physical abilities deteriorate over time and unless one is in the knowledge based industry, its rare to see active senior workmen on the floor of any factory.
India’s life expectancy has been trending higher and given both the advances in healthcare and quality of lifestyle means that should expect the average to move higher.
Unemployment has always been India’s bane though for few periods of time, we have had the kind of growth that made it seem that maybe finally we were able to come to grips.
Social Security is a major source of retirement income for a large swath of Americans, but in India, one is left to their own. This means that if you stumble during your earning years, it tough if not impossible to build a retirement nest that can last your lifespan.
By 2050, the United Nations estimates that one out of every six people—or 1.6 billion—will be over the age of 65. In Japan, a country which is rapidly ageing, 59% of men ages 65 to 69 are still working.
A year ago, I had an acquaintance ask for my help in figuring out if he was on the right track. This Gentleman had 3 Crore plus in savings but had a pretty hefty monthly requirement. He had gone with a very large wealth management firm a year before that and was seemingly not sure he they were guiding him right.
The portfolio he showed me had the following funds with his funds split across them.
In addition, he had just been switched out of 3 funds and into 3 others. Thanks to the switches, in addition to getting ripped off in Dividend Tax, he was paying Income Tax on top of it as well.
So much for having some-one plan your finances. Of course, he wasn’t alone as data for flows into Balanced Funds showcased. Investors were sold the concept of being able to get monthly dividend even as the overall value of their holdings increased over time, a win-win situation. The only winners were those who sold thanks to the nice commissions.
I have this friend who has worked for a while and been an entrepreneur for another length of time and currently if he goes by the hippie slang, he is between jobs. He recently came to me asking for advice on how to go about investing the money he has while ensuing some kind of security for old age.
While I am not a Certified Advisor, given the bad experiences I have come across plus the fact that his corpus was way too small for most advisors to make it work commercially, decided to create a plan that allowed him to get a monthly income.
But was I on the right track, did I miss anything. Thoughts of these made me tweet to get reactions from those who follow me on Twitter.
140 plus responses were received and I am thankful to each of them for taking some time out to think and respond to a real problem that required a good solution.
Due to the nature of request – monthly income combined with fact that the person had too less money to work around, many responses were similar in nature.
Selected Tweets with my views on the same
An Interesting suggestion this was. IDFC First Bank offers 8% interest on 3 year deposits. At 20 Lakhs, this would generate what he wishes while the investment in Large Cap would enable a bit of compounding at a higher rate (hopefully). Even better would be buying ETF’s of Nifty 50 and Nifty Next 50 since tests have shown that they can generate as much return or sometimes even better than the best large cap fund.
What is a Balanced Advantage Fund?
Balanced Advantage funds are funds that invest 65% into equities and 35% into debt. The advantage here is that since it has 65% into equities, its treated as Equity for tax purposes.
The disadvantage, since 65% is in Equity, 90% of its movements are correlated with Equity. Equity returns being chunky in nature, this is not the best instrument for having monthly returns.
This is a very interesting scheme and while my friend is not eligible since he is not yet 60, locking in 15 Lakhs with return of 9.60% (taxable) is something that is worth looking at for those above the age of 60.
Maximum number of suggestions were to invest everything at Bank and enjoy the fruits. The positive is that the monthly income for now would be more than what he requires enabling him to save and add to the principal
The negative is that there is Re-investment Risk. If interest rates are lower at the time of renewal, he would have to start cutting expenses which would have gone higher thanks to Inflation or start eating into the principal – not an enticing prospect.
This is something I actually discussed with my friend. While he too wants to be active and not just sit at home, the tough part is that very few skill sets have ability to generate an income without having to risk capital for he has none.
Have talked to him about a couple of areas where he could start off and while income may not be visible immediately, who knows what tomorrow holds. Fingers crossed for now.
Another common suggestion was Reverse Mortgage. While I did’t explore this idea with him at current juncture, its something that hopefully shall catch on. SBI eligibility for Reverse Mortgage is 60 years and while his house being in the suburbs may not yield a great amount, its still something that can be accessed if circumstances so demand.
Cost of Healthcare is a real issue especially given that as one gets older, the risks get higher while premiums shoot up making it immensely tough to be insured.
Friend has Health Insurance for now, but bigger question is, how much is enough. Not an easy ask balancing the requirements with the cost of taking that hedge.
One of the interesting observations was that he retired early by choice. I wish not to go into the circumstances on why he is Retired before he has accumulated a Crore other than to say “shit happens”. Life doesn’t go according to one’s plans and wishes.
As much as the suggestion is valid, as one gets older, he wishes to stay close to his near and dear ones. After all, emotional security is as important as financial security.
Overall, diverse suggestions and once again, thanks for chipping in. Was especially moved by this tweet
What I felt was missing was the concept of “Safe Withdrawal Rate”
While this is more applicable in countries where the government ensures that your ailments don’t need you to sell your house, even in India post a certain age, it makes sense to think about withdrawing from the Capital itself.
This especially if low interest rates have made it tough to meet ends. Risk though is that you run through your capital before life runs out.
The whole exercise has been interesting enough for me to wipe the dust off the CFP books I had ordered a while back. As for my friend, I think he will get along okay.
Sir, would be good if you can tell what is the plan you finally decided on.
It would be interesting to have an yearly update on this persons’ retirement journey.
The friend is doing pretty fine for himself. His capital is more or less still there and small risks he has taken by investing in Stocks / Funds have paid off, so that adds to the comfort.