A risky misstep: Prioritising near-term goals over retirement savings

Too many loans can diminish your ability to save; spending lavishly on children's weddings can also hurt

While the majority of Indians are financially ill-prepared for retirement, many don’t even realise the seriousness of the issue. Only 20 per cent of respondents in a recent survey by HDFC Pension, which covered 1,801 participants, felt that serious retirement planning should begin before 30. On average, those surveyed also felt that a retirement corpus of Rs 1.3 crore (less than 10 times their current annual household income in many cases) would suffice. 

Current needs often act as barriers to retirement planning. Says Jinal Mehta, certified financial planner, Beyond Learning Finance: “A major part of most people’s income goes towards paying off loans taken to purchase cars or homes, leaving them with less savings for retirement. Many also withdraw money from their Employees’ Provident Fund (EPF) account.”

What’s your R-number? 

Most people do not have a fix on how large a corpus they will require to live comfortably post-retirement. Says Jay Thacker, member, the Association of Registered Investment Advisors (ARIA): “Individuals, especially those with several decades until retirement, should aim to save an amount equivalent to 30 times their annual income.”

For example, if your monthly expense is Rs 1 lakh (which amounts to Rs 12 lakh annually), then you would need Rs 3.6 crore to retire comfortably.

The assumption that expenses decrease with age is flawed. Says Adhil Shetty, chief executive officer, BankBazaar: “Most people visualise a ramp down in lifestyle and consumption needs post-retirement and consequently project lower real cash flow needs.” 

20s: Benefit from early start 

Define your retirement goal and estimate how much you need to save to achieve it. “The earlier you start saving, the more time your money has to grow. Even if you can only save a small amount each month, it will add up over time as the power of compounding works in your favour," says Col. Sanjeev Govila (retired), chief executive officer, Hum Fauji Initiatives, a financial planning firm.

With a long investment horizon, people in their 20s can allocate more to riskier assets, such as equity mutual funds and stocks. Says Govila: “Use tax-advantaged retirement savings plans, such as the EPF and the National Pension System (NPS).”  

Buy health insurance to protect yourself against unexpected medical expenses that could deplete your retirement savings. Also establish an emergency fund.

30s and 40s: Save steadily   

Set a clear goal, with professional assistance if required. Aim for a corpus that will allow you to maintain your current lifestyle. Says Thacker: “Gradually increase your investments to 20-25 per cent of your income. After considering your risk appetite, diversify across assets like equities, equity mutual funds, gold, Infrastructure Investment Trusts (InvIT), and Real Estate Investments Fund (REITs).”

Continue contributions to NPS, and maximise your contributions to EPF and Voluntary Provident Fund (VPF). Implement strategies for repaying debt at the earliest.

Says Shetty: “In the 30s and the 40s, individuals achieve a certain level of stability in both personal and professional life.” They must save steadily for retirement from this stage.

50s: Play catch up   

If you have fallen behind on your retirement goal, this is the decade when you must catch up. Says Govila: “Get a clear estimate of your retirement corpus requirement and make adjustments to the amount you save if necessary.” He suggests exploring pension plans, which offer annuities—the only instrument that can provide a guaranteed income stream for life.

Consider downsizing your home and other assets to boost retirement savings. Says Mehta: “The 50s are a critical period for retirement savings. However, those still contributing to their children’s finances, or taking care of elderly parents, may find it challenging to ramp up savings.” Couples in this age bracket must avoid going overboard on children’s marriage.  

Those who have fallen behind on their retirement target should consider extending their working lives by a few years. Says Thacker: “Allocate approximately 30 per cent of your income to retirement savings and prioritise debt repayment.”

Seek professional advice. Top up your EPF contribution, renew PPF, and explore options like largecap and hybrid mutual funds.

As you approach retirement, shift the bulk of your corpus towards fixed income.

Retirees’ portfolio: 100 minus age rule applies
 

- Don’t have more than 100 minus your age in stocks when retired
 

- An investor aged 60 should have 40 per cent of her portfolio in equities and 60 per cent in debt instruments
 

- Someone who has substantial assets and can live off interest and dividend income can use this rule as a starting point
 

- Some investors, whose portfolios are smaller, may require a higher allocation to equities; they should go for it only if their risk appetite permits

- With the passage of time, your retirement portfolio should tilt more towards debt and turn less risky