Category Archive : Retirement Planning

What Retirees Worry About the Most?

Retiree’s Top Financial Concerns

What Retirees Worry About The Most?

Introduction

In this article, we are going to discuss retiree’s top financial concerns. Though retirement is an exciting milestone to look forward to, the idea of it can be nerve-wracking.

Personal Financial Planning by Invest Yadnya
Personal Financial Planning by Invest Yadnya

Retiree’s Top Financial Concerns

Though retirement is an exciting milestone to look forward to, the idea of it can be nerve-wracking. After all, there is a host of financial unknowns associated with retirement. And living on a fixed income leaves many seniors struggling to make ends meet. 

Formal retirement has been identified as the tenth most stressful life event. The retirement life stage, whichever way you choose to structure it, can be an incredibly stressful time for those experiencing it.

Out of the most stressful events could happen in one’s lifetime, about one-half of these events are likely to happen during a person’s retirement years. These include events such as the death of a spouse or close friend, severe illness, retrenchment, formal retirement, change in financial state, change in living conditions, change in social activities and moving residence.

What Retirees Worry About Most?

Compounding the above mentioned stress is the fact that many of these life events take place simultaneously in retirement. In addition to these life events, there are many other things retirees worry about the most.

Here are the retiree’s top 7 financial concerns explained in detail.

Retiree's Top Financial Concerns
Retiree’s Top Financial Concerns

1. Outliving the Retirement Corpus

  • Inability to anticipate future financial needs is the main roadblock to planning
    • A Retirement Study found that 76% of working age people in India expect a comfortable retired life, but only 33% are actually putting aside money to fund that their retirement phase of life.
    • 45% people feel it’s better to spend money on enjoying life now than saving for retirement, while 53% save for short-term goals rather than longer term.
  • Increased Human Longevity Due to Advanced Medical Technology
    • Running out of money is one of the primary concerns of most retirees. Longevity risk is an even larger concern today, as life expectancy has risen.
    • As medical technology continues to advance, this trend will continue to extend human life expectancy. Increased human longevity means that more retiree are outliving their retirement corpus.

2. Beating Inflation

  • When you are earning a fixed income, inflation can have a profound impact on the quality of your life. Beating inflation is often cited as the most essential function of long-term saving because of the risk it poses in retirement.
  • Example: If the current yearly expenses of an individual is Rs.6 Lakh, then assuming the rate of inflation to be 7% per annum, the value of yearly expenses after 20 years would be Rs.23.21 Lakh.
  • Decreasing Interest Rates on traditional investment products like Fixed Deposits, Post Office Schemes like Kisan Vikas Patra, LIC are not even matching the inflation and therefore savings are not growing. Lower interest rates reduce retirement income by lowering growth rates for savings accounts and assets.

3. Rising Healthcare Costs

  • Ageing and increased levels of chronic disease are the main drivers of medical inflation. The Medical or Healthcare inflation in India is rising at double the rate of overall retail inflation, almost at 10-12% currently in 2019.
  • For retirees, the major concern is whether they will be able to pay for good quality healthcare when they need it.
  • Paying for private nursing home care can quickly wipe out a lifetime of savings. A retiree’s ability to pay for the cost of in-home healthcare, adult day-care and nursing home expenses may determine the quality of healthcare the retiree can receive.

4. The Onset of Major Life-threatening Disease

  • A number of major life-threatening disease, including Cancer, Stroke, Heart disease and Diabetes are common worries amongst the retirees.
  • In India, more than 4 million people are estimated to be suffering from Alzheimer’s and other forms of dementia. India’s dementia and Alzheimer’s burden is forecasted to reach almost 7.5 million by the end of 2030. The disease primarily occurs in patients over the age of 60. The legal and estate planning complications, and adjustments to living arrangements need to be considered in such cases.
  • The lifetime risk of cancer for people born since 1960 is greater than 50% now. The cost of cancer treatment has also gone up many-fold in recent years. In fact, treatment costs now have the potential to wipe out a retiree’s entire life savings.

5. Becoming a Financial Burden on Adult Children

  • According to one survey, 7 out of 10 Indians expect their children to support them in their retirement and relying on their adult children for financial support.
  • The retiree’s adult children struggle to educate their teenage children and care for their ageing parents at the same time.
  • Many adult children end up delaying their own retirement funding in order to support their retired parents, which in turn perpetuates the cycle of dependency.

6. Being a Victim of Fraud

  • The risk of losing money to scams, fake schemes and investment fraud is a very real fear for many retirees.
  • Recent PMC Bank Fraud (Punjab and Maharashtra Bank) is one of the example of this kind of frauds, where many retiree’s life-time savings and deposits are still engaged in the scam. These retiree are not able to even withdraw their entire corpus from the bank and struggling for the same.

7. Losing a Spouse or Partner

  • The death of a spouse ranks as the most stressful life event in the retirement phase. The fear of losing one’s life partner in retirement is a major stressor for retirees.
  • Also, there is the financial impact : A spouse’s death (who was financially independent) can lead to a reduction in pension benefits or bring additional financial burdens, including lingering medical bills and debts.
  • Besides for remaining socially connected in retirement, retirees are advised to ensure full transparency with regard to their finances and estate planning to reduce the burden on the surviving spouse.

5 Factors to Decide Retirement Corpus

There are some factors that affect the retirement corpus and help make decisions to have the corpus required at the time of retirement. These are as follows:-

1] Current Monthly Expenses –

Think about what you will be spending money on during retirement. Consider what you want to do with your money during retirement. Estimate the costs related to travel, housing, food, transportation and more. You can use your expenses now as a guide for what you will pay later. If you plan to have your debt paid off, your expenses might be smaller than what you pay now. Downsizing your home and your lifestyle can also limit your expenses.

2] Inflation –

Rise in prices has to be factored in while planning for retirement. There are many unavoidable factors that can threaten your retirement corpus, and inflation is a primary concern. As the prices of services and goods increase, salaries also increase to stay level with inflation. For this reason, most people don’t notice the normal effects of inflation on their income and budget.

The big issue comes when you start to live off of your savings, and you don’t have an inflated income to keep you afloat. As you will not be earning post retirement and will have to spend from your corpus, this will be subject to inflation and impact your income. To stay ahead of inflation during retirement, it is critical to factor inflation into your retirement corpus.

Inflation Rates

3] Age of retirement –

There is no official age of retirement, but people (working class) generally retire around 60 years of life. Some people seek early retirement while others work as long as they are physically able to do so. Choosing the age of retirement and then calculating the number of working years left, will help decide the retirement corpus.

4] Life expectancy –

You can’t calculate your retirement corpus assuming that you will live forever. Thus, you will have to put a number to life expectancy that will give you an idea about the span of life post retirement. Improved healthcare is helping people live longer. But to calculate a corpus, you need to work with a fixed age.

In the image below, blue area depicts the ages lived healthily and the red area depicts unhealthy ages of life. And the area as a whole is the total life expectancy of a person in India.

healthy-life-expectancy-and-years-lived-with-disability INDIA.png

5] Rate of Returns –

This depends on your allocations to different asset classes such as equity, debt, gold and real estate. The higher the allocation to growth assets such as equity, the higher the expected returns. If most of your money is in debt instruments, you will have to assume slightly lower returns. Interest rates always play a role in financial planning.

Without a doubt, interest rates are going up. When interest rates go up, people tend to borrow less and this can have a negative impact on spending, which means stock prices typically fall. But, rising interest rates mean opportunity, too. If you know what you’re doing, you could pursue an earlier retirement than you originally planned by rearranging your investments.

Asset Classes - ROR
5 factors to decide retirement corpus

6 Common Money Mistakes During Retirement Years

A happy and stress free retirement is the ultimate sign of a successful financial and retirement planning. There are a few mistakes that people make during retirement years. These mistakes should be identified and avoided. Some of them are listed below:-

1] Over Allocation to Fixed Deposits –

While financial security is a big focus on retirement, getting out of the market isn’t a safe bet either. People, because they focus on not losing money, forget the risk of outliving your money, inflation risk, credit risk, so they put themselves at risk in every category except losing money. Retirees put money in fixed deposits that earn a low rate of return.

Be realistic about how long your money will be invested. At age 65, your life expectancy is, on average, another 20 years, but if you make it to 85, then you’ve still got another 6-7 years of expenses left to cover. So, don’t worry about losing your money over the next six months, but instead ask yourself how you can make it last another 25-30 years. It may make sense for you to separate your assets into different pools, and invest a little aggressively.

The average FD returns below are pre-tax returns. These returns would go down after tax depending upon your tax slab.

FD vs Inflation

2] Almost Zero Allocation to Equity Asset Class –

Many retirees’ are overly cautious because they don’t have a lot of money and are afraid of losing it. Without an appropriate level of exposure to equity, you will likely need to save far more money to reach your long-term goals, leaving less room in your budget for anything else you want to accomplish.

Holding a certain amount of equity could potentially boost returns for that level of risk.  Ideally, you should bring down the equity component of your investment to protect the corpus and reduce risk as you approach retirement. However, it is equally important to invest a certain portion in equity. If you are too much conservative, then it will lead to losing the value of your money.

3] Underestimating Inflation Impact –

When it comes to financial planning, people usually ignore two things- the current time value of money and how money loses its value over the time. While we are focusing on increasing income with time, it is also essential to pay attention to the rise in expenses and drop in the value of money because of overall annual increase in prices of common goods and services behind the same.

Ignore inflation rate and you will notice that your savings gradually erode away while your monetary plans go haywire. Inflation is one of the most critical factors that can disturb your retirement plans. It is essential to factor in inflation into your retirement planning program. Also, realistic projections of future inflation rates are critical to building a strong retirement corpus.

For example, if a person needs Rs. 30,000 for monthly expenses right now, and considering 7% inflation, then after 25 years that persons’ monthly expenses would reach around Rs 1,60,000.

4] Buying Retirement Plans from Insurance Companies –

Insurance companies were not designed to fund retirement or provide retirement plans. Insurance companies were never meant to be an investment vehicle, and it’s certainly not the best way for retirement planning. While insurance companies make it possible to fund your retirement, there are risks involved as well as huge fees to consider.

So if not a retirement plans from insurance companies, then what?

If one is in your 30’s or 40’s, and has more than 20 years to go for retirement, invest the retirement investments into a mix of asset classes, that is equity, debt and maybe gold.

If one is nearing retirement, i.e. one is already in 50’s and have less than 10 years to retire, invest up to majorly into debt such as debt mutual funds and high yielding but safe corporate bonds, keep small portion into equity to make the portfolio a little aggressive, and the remaining maybe in gold.

5] Depending on Children for Retirement Needs –

No matter how well you think you know your children, money can make them unrecognizable in an instant. For that reason, it’s never safe to assume your children will be the same generous, giving types that they are today.

Your children may be unable to support you even if they want to. Handling your finances allows more privacy. You don’t want to be a burden to your children. You know your retirement needs better than your own children.

Retirees depending on children
6 common money mistakes during retirement years

Why Retirement Planning?

Retirement Planning is a process whereby you will have a road map of your personal and financial life, which will help you to meet all your life’s expenses post retirement.

Hence, Financial Planning is a comprehensive term which includes retirement planning.

Following are some of the main reasons why retirement planning is important:-

Longer Life Span –

The life expectancy of humans is consistently increasing across the world thanks to technological advancement in medical sciences. In India too, the average life expectancy of an adult of age 60 has extended to almost 78. That means 18-20 years post the working years (depending on when you retire).

No Fixed Returns –

The returns on the investments may not be fixed always. Over a period of time they may go down. So this will affect the total corpus at the end of investment. The amount of funds left with you during your retirement may go down, as the returns decreased. Therefore, this needs to be taken into account while planning for retirement.

Falling Interest Rates –

india interest rates

Similarly as no fixed returns, the interest rates too may fall in the future. The interest you receive on your investments will get reduced. Falling interest rates will result in the reduction of final retirement corpus required and expected. Hence, falling interest rates should be accounted for while retirement planning.

Rising Medical Expenses –

With increasing age come more health problems. Medical expenses which may make a huge dent in your income post retirement. Failure here could lead you to liquidate (sell) your assets in order to meet such expenses. Remember medical claims do not always suffice.

Medi-claim or health insurance policies sometimes may not cover all your medical expenses. Therefore, your retirement corpus must be large enough to cover your and your family’s medical expenditure to avoid a financial crunch in the later years of life.

Hospital-Costs-in-India

Increased Standard of Living –

Standard of living is the way of living your life, how you are living right now and how you want to live in your retirement years. These could be travelling and exploring new places or taking up hobbies that you have always wanted to pursue.

However, if you do not plan and save for all these living habits in your working life, they cannot be continued in your post retirement years.

Hence, it is absolutely essential to have a strong Retirement Plan that will give you awareness on where you stand today, and what steps you need to take to maintain and increase your standard of living.

Early Retirement –

You never know what will happen. Your retirement may either be postponed or preponed. If it gets postponed, it is not a problem because you are still getting income. But your retirement could also get preponed, voluntarily or because of some reason. In this case, you haven’t planned for these extra years. Thus, retirement planning should also take this into consideration.

Inflation –

This is the main and biggest reason for retirement planning. Inflation refers to the rise in the prices of goods and services. It has the power to kill the value of your money. There has been constant rise in price of goods and services and it will continue to be on a rise until you reach the retirement age.

This means that you would have to pay more for everything in the future. From grocery to travel to accommodation, it is all going to cost you relatively more in the future. As you need to worry about it you need to account for it as well. You need to take into account inflation while calculating your retirement funds as well as your expenses.

yearly-inflation-last-10-years
Retirement Planning

Why do you need Retirement Corpus

Retirement is a new way of life in many ways. Apart from adjusting your work life, you also need to adjust your financial life to the new reality and that’s why Retirement Planning is critical. Here’s what you need to do to build your retirement corpus, if your current monthly expenses are Rs.75000/-, and you expect to retire in the next 30 years.

Why do I need Retirement Corpus or Retirement Planning
How to calculate Retirement Corpus

If you consider the rate of inflation at 8.0% p.a., you will need to build a retirement kitty of Rs. 15,30,06,036/- to live comfortably.

You will need to invest a lump sum of Rs. 87,68,554 or invest Rs. 67,687 each month, at an annual return of 10.0%, in order to enjoy your golden years.


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