Retirement planning

Why retirement is the hardest goal to plan for

Every other financial goal has a defined cost and a defined date. A child’s undergraduate degree begins in a particular year and costs roughly a knowable amount. A home purchase has a price. Retirement has neither.

You do not know how long it will last. Someone retiring at sixty in reasonable health in urban India should plan on the possibility of needing income for twenty-five or thirty years, and possibly for a spouse beyond that. You do not know what it will cost, because the expense you need to fund is not today’s expense but that expense inflated over decades. And you cannot borrow for it. There is no retirement loan. Whatever has been accumulated by the last working day is what there is.

Three forces work against the planner simultaneously. Inflation quietly multiplies the annual requirement over a long accumulation period. Longevity extends the number of years that requirement must be met. And medical costs, which rise faster than general inflation, arrive disproportionately in exactly the years when there is no earned income to meet them.

None of that is a reason for gloom. It is a reason to start the arithmetic early, because the single largest variable in the outcome is how many years the money has to compound.

Working out the number

A usable estimate needs four inputs, and the discipline is in being honest about each.

• Your annual expense in retirement, in today’s money. Not your current income — your expenses, adjusted for what changes. Some costs fall: commuting, work clothing, children’s education, and possibly a home loan that has ended. Others rise, principally healthcare. Many people find the honest figure is around seventy to eighty percent of current expenses, but it is worth building it from your actual categories rather than applying a rule.
• Years to retirement. The accumulation period.
• Years in retirement. Plan generously. Running out at eighty-two because you planned to eighty is not a recoverable error.
• An inflation assumption. Applied both to grow today’s expense to your first year of retirement, and to keep growing it through the retirement years, since costs do not stop rising the day you stop working.

From those you can estimate the corpus required at retirement, and then the monthly investment needed to reach it. You can run this yourself on our retirement and SIP calculators — and it is worth running more than one scenario, because the result is sensitive to assumptions and a single number presented to three decimal places can create false confidence.

Two cautions about the arithmetic. Rules of thumb about safe withdrawal rates that circulate widely were derived from long-run data in other markets and other inflation environments, and should not be transplanted to Indian conditions without thought. And every projection depends on a return assumption that is an assumption, not a promise — market-linked investments carry risk and no assured return.

The two phases, and why the second is harder

Accumulation is the working years. Contribute regularly, keep costs low, let compounding work, and resist interrupting it. Most of the useful decisions here are behavioural rather than analytical — starting, continuing through a bad market, and increasing the contribution as income rises. A step-up approach, where the monthly amount rises each year with your increment, does a great deal of work over two decades. See SIP and step-up SIP.

Distribution is retirement itself, and it gets far less attention than it deserves. The problem inverts: instead of adding to a growing pot you are drawing from a finite one, while it is still exposed to markets. The specific danger is sequence of returns risk. Two retirees with identical average returns over twenty-five years can end very differently depending on when the bad years fell. A sharp fall in the first two or three years of withdrawal, while the corpus is at its largest and money is being taken out of it, does damage that later good years cannot fully repair.

The conventional responses are to hold the next several years of expenses in stable, low-volatility assets so that withdrawals never have to be funded by selling equity in a downturn, to keep some growth allocation for the later decades rather than moving entirely to fixed income at sixty, and to be willing to moderate withdrawals in a bad year.

The instruments available in India

Most retirements are funded by a combination rather than a single instrument, and the mix shifts as the date approaches. The relevant questions for each are the same: what is the lock-in, is the return assured or market-linked, how is it taxed on the way in and the way out, and how easily can the money be accessed if circumstances change.

On generating income once retired, a systematic withdrawal plan from mutual funds is one common route — a fixed amount drawn at a chosen frequency while the balance stays invested. It offers flexibility and the possibility that the corpus continues growing, against the risk that it depletes faster than expected in poor markets. An annuity offers the opposite trade: a contractual income for life, with no market risk and no flexibility, and generally no inflation indexing unless specifically purchased. Many retirees use both — an annuity or other assured income covering essential expenses, and a market-linked corpus for everything else.

Things that are easy to overlook

• Health cover after employment ends. Corporate group health stops with the job. Arranging a personal policy while you are still healthy and insurable, rather than at sixty, is one of the highest-value decisions in the whole plan. See what group cover does and does not do.
• Your spouse’s timeline. If there is an age gap, the plan must fund the longer of the two lives, not the first.
• Adult children. Education and weddings often land in the decade before retirement, and drawing on retirement savings for them is common and quietly expensive.
• Where you will live. A home loan running into retirement, or a plan to move city, changes the expense figure substantially.
• Nominations and records. Updated nominations across every account, and a single document your family can actually find, prevents a great deal of avoidable difficulty.
• The estate side. A will, and clarity about what happens to which asset, is part of retirement planning rather than something separate.

Taking it further

If you want to think through your own numbers, the retirement calculator will let you test different assumptions, and the risk profiler gives an indicative sense of how much market variability you are likely to tolerate. For a plan constructed around your specific circumstances, obligations and tax position, consider consulting a SEBI-registered Investment Adviser.

Where you decide to implement through mutual funds, Rytvae acts as an AMFI-registered distributor and is paid trail commission by the asset management company — you pay us nothing directly. See SIP investment plans and ELSS and Section 80C.

Frequently asked questions