You’ve started saving for your retirement, but you need to look out for several threats that could deplete your retirement savings. We tell you all about them.
Someone rightly said that after retirement, “it’s nice to get out of the rat race, but you have to learn to get along with less cheese”. Money for the elderly is more precious than for anyone else and small changes have big impacts on their lives. We try to look at how life would change in the coming years and what the possible threats to one’s retirement savings could be.
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The Looming Threats
With the dramatic increase in life expectancy, people deferring retirement and inadequate retirement benefits means that they may have to work harder to lead a comfortable life once they hang up their boots. Essentially, this could be seen as a threat to their life savings.
Thanks to lower fertility rates, better health care, and longer life, India’s life expectancy has gone up over the last decade. Currently, more than 60% of the population is between 15 and 64 years. The average life expectancy is at 68.3 years (according to the World Health Organization). The number of Indian citizens over 60 hit an all-time high in 2016. Data from the Ministry of Statistics in India reveals that 8.6% of the population in India is over 60 years. States with the highest share of ageing population include Kerala, Goa and Punjab.
According to a report by Help Age India, 20% of the population will be elderly by 2050. This is mainly on the back of an increase in life expectancy, says the report. Other such reports state that life expectancy is expected to increase to 75 years in the next 20 years. However, the lack of infrastructure and financial security could pose a big issue for such a large number of senior citizens.
Outliving your assets
Thanks to remarkable advances in life expectancy over the last decade, a 60-year-old man/woman today can expect, on an average, to live till the age of 80 or perhaps even more. This means that there is a high probability that many may outlive their resources. This might push them to substantially reduce their living standards at a very old age.
The risk that you will live longer than your resources or money can last, is known as longevity risk. Your lifestyle, retirement assets and growth of investments along with life expectancy, determines your longevity risk. This risk increases manifold when you go through a critical illness or you keep increasing your standard of living during your retirement period. Having just one investment or income stream increases this risk.
It is extremely difficult to conquer longevity risks, given the uncertainty about the future. Regardless, one should factor in this risk when planning for retirement.
Inflation eating into your savings
The global recession has pushed major economies like USA, China and Europe to pump tons of money into their economies. The industries and financial institutions in their respective economies will have enough to produce goods and services, improve trade and provide employment. This means that the economy will start moving again.
Unfortunately, excess money does not always mean a better economy because it is impossible to balance the amount of money in circulation with the total number of goods and services produced and available for sale. So, if everybody has money, we would be chasing fewer goods and services, putting pressure on prices in the process.
Therefore, more and more money would be needed for purchasing fewer and fewer goods and services. The increase in income and employment would probably not be able to keep up with the increase in prices. This is inflation. This rising inflation trend is set to continue till the global economy recovers. This means that, in the coming years, inflation would eat into your savings and as a result, your retirement corpus may not be adequate.
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Impact of inflation
Inflation is a big risk that isn’t particularly apparent but eats away at your savings nevertheless. A retirement corpus of Rs.1 crore will be worth just Rs. 31 lakhs in 20 years at an inflation rate of 6% per annum. Health care costs also have an impact on your retirement corpus.
Health Costs, Literally
The National Sample Survey Office (NSSO) says that average hospitalisation costs in India are at 10.1% Compounded Annual Growth Rate (CAGR). The states with the highest hospitalisation costs include Delhi, Punjab, Maharashtra and Uttar Pradesh.
The rise in lifestyle diseases has been particularly high. These costs have made it difficult for senior citizens to afford good healthcare and poses a threat to their retirement savings. If you start investing at 24 with an amount of Rs. 30,000/- annually, and assume a rate of 10% return, you will have Rs. 1 crore at 60.
If you break this annual investment of Rs. 30,000 even once at age 34 to meet any emergency expense, your total savings at age 60 reduces to Rs. 42 lakhs. So, just one break in investment can reduce the overall corpus at retirement by more than half.
Surveys reveal that, on an average, a single hospitalisation situation could cost a family close to 60% of their annual income. This high out-of-pocket expenditure is applicable to both public and private hospitals. This is due to the fact that even in public hospitals, costs have to be incurred for transport, board for the patient, attendant fees, diagnostic tests and drugs unavailable in government hospitals. So, it is possible that the single most prominent reason for a household falling into poverty could be a major bout of ill-health, particularly if it befalls the main income earner.
There are several other reasons for rising healthcare costs.
- In India, there has been a shift from communicable to lifestyle diseases such as hypertension, diabetes, and cancer. These diseases are more expensive to treat and difficult to bring under control, unlike communicable diseases.
- Health care is income elastic, that is, as incomes increase, demand for healthcare services increase. Those with high purchasing power or having low sensitivity to price fluctuations may secure a disproportionate share of health facilities.
- Better healthcare technology means expensive equipment and drugs leading to higher healthcare costs.
- As more people live until their 80s, they will require greater health care resources. But supply is lagging considerably behind, putting pressure on costs and prices.
- India is in the premature stages of developing Health Insurance products. Robust databases on mortality and other related facts are essential for efficient price discovery. Unfortunately, there is a shortage of these databases in India. The insurance regulator, IRDA, is developing the required skills to create efficient and affordable Health Insurance markets, which even in the best circumstances, is a challenging task.
- And health covers don’t come cheap. In fact, over the last decade, health cover premiums have gone up by 10%. Premiums have been rising due to new medical technologies and the malpractice of over recommendation of services.
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Lack of family support
During our grandparents’ time, more than 70% of Indians lived in a joint family. But, in present times, we are down to less than 40%. With the breakdown of the family support system, housing the elderly is a big issue today.
India’s rapid economic progress has resulted in children often earning much more in their first jobs than their fathers did in a lifetime. This is one of the reasons for the diminishing respect for the elderly. It is expected that this deteriorating respect would result in a further disintegration of the support system.
Lack of Government support
According to the Willis Towers Watson survey 2016, In India, pension assets form only 4.3% of the Gross Domestic Product (GDP) and over 85% of India’s workforce is not covered by any formal pension scheme. There are several countries whose pension funds form more than 60% of GDP, including Australia and Brazil. In India, the National Pension Scheme is the only product available for the unorganised sector.
Even if one receives a pension, no single scheme can provide adequate income through one’s retirement period. Given the increased number of elderly, longer life expectancy, and need for higher post-retirement income, the government’s ability or any other employer’s ability to provide a pension amount which fully meets requirements is severely constrained. Also, investors withdraw from their Provident Fund account, resulting in a reduction in their retirement savings.
What will you need to do?
Given the increasing life expectancy and healthcare costs coupled with rising inflation, you would need a larger retirement corpus than you might have required a couple of years ago.
Let’s use an example to understand this better. Suppose an investor is 30 years old and is planning to retire at 58, and hopes to live till 65. He would require a retirement corpus of Rs. 79.8 lakhs (assuming monthly expenses at Rs.25,000, an inflation rate of 6% and return on investments at 8%).
Suppose he lives till 80 and other factors remain the same, he would need a corpus of Rs. 1.56 crores, which is an increase of 95% in his corpus. This means that he has to either save more or has to have a higher rate of return on investments or both. It is also important to start saving early
Given the rising healthcare costs and inflation, it is prudent to invest in instruments that provide higher returns. Equities are one such avenue. An equity biased portfolio would generate higher returns. Taking the same example above, if the return on investments were at 12% instead of 8%, the investor would require a corpus of Rs. 1.1 crores, which is 30% lesser than the Rs.1.56 crores.
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The need for a higher retirement corpus would mean that you might have to start saving early. Distributing savings over a larger number of years reduces liabilities to a great extent.