Jagdeep hails from a small town in Madhya Pradesh. He moved to Hyderabad in the late 90s to find an IT job and quickly moved the ranks. Today at the age of 45, he is a Chief Technology Officer (CTO) in a leading software company. A good salary package is helping him lead a good lifestyle. He happily lives in one of the swankiest suburbs of Hyderabad along with his family and numerous pet dogs.
Jagdeep is the ‘emerging affluent’ in the city. Like many of his peers, he hasn’t strictly started planning for his retirement yet. He blindly parks all his savings into fixed deposits and residential properties.
A 2021 Standard Chartered Wealth Expectancy report highlighted this growing trend among the well-off. About 33 per cent of the affluent haven’t yet started saving for retirement. Yet, about 40 per cent of these affluent consumers anticipate depending on investment income in retirement, suggesting a significant gap between current actions and future expectations.
Do well-to-do families like that of Jagdeep need to worry about running out of money and plan for retirement?
The Need to plan early
Take the case of ‘Ajay’ and ‘Barun’, who are 45 years old. Ajay earned his first monthly salary of Rs 25,000 at the age of 25 years. Ever since he started planning early for retirement, with the bulk of his portfolio invested in equities (as suggested by his financial planner).
He got an annual income increment of 8% and managed to save 15% of his monthly salary, which was invested in an equity-oriented portfolio earning 12% annually.
Barun had a relatively higher initial salary of Rs 40,000 and like Ajay, managed to improve it by 8% every year while saving 15% of his monthly income. However, Barun is yet to plan for retirement and has invested all his savings in debt products earning 6% every year. He was confident his improving income levels would cover his financial needs while in retirement.
Who is likely to have more wealth today? Ajay or Barun?
Interestingly, even though Ajay earns a lower salary than Barun, he has managed to garner a retirement nest of about Rs 64 lakh so far – slightly more than that of Barun (Rs 55 lakh).
However, Barun can still do the ‘catching up’ by planning for retirement. After all, the age between 45-55 years is usually the ‘high earning’ decade for most individuals working at the peak of their careers. By saving more and with a growth-oriented investment portfolio, one can still reach their retirement target.
While Ajay would hit a retirement nest of about Rs 9.5 crore by the time he turns 60 years, Barun could garner even more (Rs 12.6 crore) if he resorts to midway course correction and growth orients his portfolio. However, if he doesn’t – Barun is likely to end with lesser wealth than Ajay of Rs 8.3 crore.
The lesson is that you need not earn all your retirement nest. Starting early means most of it could be earned by way of returns and by growth-orienting one’s investment portfolio. Investors need to think beyond residential properties, which is not only illiquid but also gives poor yields.
It’s not corpus, but it’s about income in your retirement
Many fix a common retirement goal of, say, Rs 5 crore. Once they achieve it, they think their retirement goal is done and dusted. It’s not just the retirement nest but the income you earn from it that matters.
An earlier pre-covid study by Standard Chartered found that the ‘rich’ have an average wealth expectancy (on retirement) of Rs 3.67 crore, which would give them about Rs 94, 800 per month after retirement – much less than their current average income and wealth aspiration. Given their current lifestyle, such a corpus would sustain them for less than nine years.
For the ‘HNIs’ and the ‘emerging affluent’, with an average wealth expectancy of about Rs 7 crore and Rs 1.4 crore, respectively, it’s even lesser at five and six years respectively.
Also, one cannot ignore the market dynamics. Interest rates across the economies have been falling over the years. As the nation develops, typically, the interest rates tend to fall (albeit it is higher now due to high inflation) and are in line with inflation. Therefore, one must adopt a growth-oriented portfolio to reach their retirement goal.
Similarly, as the stock market matures, one could expect equity returns to settle at 9-11% over the long term. A good financial plan provides for such contingencies so that investors are better off under most circumstances.
Thanks to rapid medical advances and technological improvement, many live past the 90s. And it is important to plan for at least 25-30 years in retirement. If you are planning early retirement, you might have to gauge if your retirement nest is robust enough to last more years.
Uncertainty around jobs
Lastly, it’s crucial to acknowledge the uncertainties that the future holds. In a globalized economy, jobs and industries can be created and lost overnight, leading to unpredictable income scenarios. Therefore, it is wise to plan for contingencies and mitigate the risks associated with retirement goals.
Someone might be at the peak of his career. However, he or she might be forced to make a shift in his career or compromise income to attend to personal challenges. Providing for such contingencies and mitigating the risk from retirement goals is important.
Even the affluent can run out of money if they don’t plan for retirement. They will miss the bus if they don’t start to save and invest now.