Life Insurance - Are you saving too much for retirement?

Many people pinch pennies and do not spend on basic comforts even after building a sufficient corpus. Experts suggest one should instead work out a budget, and save and spend accordingly

Instead of enjoying the golden years of their life, most seniors become even more frugal in their lifestyles for fear that they may blow up their nest egg too soon and the surviving partner may suffer.

After years of scrimping for retirement, many seniors just cannot bring themselves to spend the money for what they view as luxuries. While such parents do not spend on themselves, they willingly spend on their children, be it on lavish weddings or the child’s education.

Besides, in keeping with Indian cultural traditions, Indian parents and grandparents wish to pass on their wealth, assets, etc, to the future generations.

“To do so, many senior citizens lead a tight-fisted life to pass on to the next generation. As a result, they do not provide themselves with basic comforts,’’ says Vidya Bala, head of mutual fund research, FundsIndia.

Yogita Dand, who is a certified financial planner, says, “We have come across persons who have a sufficient corpus but they still invest and save for their well-settled offsprings instead of living their lives. For such people, we always recommend that they begin living their lives fully so they have no regrets at the end. Frankly, if their offsprings are well-educated and financially settled, they really need not save for them or leave money for them.’’

Incidentally, “The new generation is income rich, but wealth poor,’’ remarks PV Subramanyam, a chartered accountant and financial trainer. This is because while the new generation spends as much as it earns, the older generation has assets.

Besides, many seniors end up with a frugal lifestyle as they are worried that they may blow up all their savings and become dependent on their children.

Rather than worry needlessly, it would make financial sense to work out a budget for the post-retirement years and save and spend accordingly.

The first step is to calculate the amount of money one needs for life after retirement. “You need to calculate the household expense today and take the future value of the same for the first year of retirement. For example, if your monthly expense is Rs 50,000 today for a 40-year-old person, the future value of the same amount at 7% inflation would be Rs 1,93,484 after 20 years, that is, at the age of his retirement. This works out to having a corpus of Rs 4,64,36,214 for the next 25 years (considering that the average lifespan is 85 years),’’ says Dand. Do remember, these are all assumptions and circumstances could change.

You can also use the many retirement calculators that are available online. “Incidentally, if one wants to end up with a corpus of Rs 4,64,36,214, as mentioned above, the 40-year-old needs to invest Rs 7,37,054 annually at a rate of return of 10%,’’ reminds Dand.

Ideally, there should be a separate corpus for emergencies, as the above corpus is only for their basic household expenses. “If you do not have a medical insurance, at least Rs 5-10 lakh needs to be kept as short-term liquid investments for emergencies,’’ says Bala.

“You should ideally save 3 to 6 months of your expenses in cash deposits that are safe along with medical insurance so that it can be used for emergency needs,’’ says Sushil Jain - national head, Client Connect & Financial Planning, Bajaj Capital.

Also, for retired persons, it is prudent to take stock at intervals to ensure that they are not going overboard with their spending. “A simple thumb rule is to be able to live within the interest income and not deplete the corpus at a fast rate. If within 5-6 years of retirement you are left with 20-30% lower corpus than you started with, then you know you are in trouble and need to re-look at your expenses,’’ says Bala.

Besides, the senior citizens should invest such that they diversify their investments to fetch optimal returns and reduce risk. “They should invest in a mix of post office senior citizens’ scheme, bank and corporate FDs and low-risk debt mutual funds,’’ says Bala.

Jain suggests, “Seniors should keep some amount in cash and some amount should be invested in instruments where they can earn a fixed income for their monthly expenses and a little amount in equity for beating inflation and capital appreciation.’’

However, Subramanyam prefers to keep it simple. “Assuming you are above 75 years of age, simplify your investments with the likes of only bank fixed deposits and an LIC annuity,’’ he advises. It is not advisable for senior citizens to get adventurous with their finances and take undue risks. “This often leads to disastrous consequences,’’ points out Bala.


Source : DNA back