If you are in your 40s and not saving enough, here are a few ways to set it right
People in the 20s and 30s might get away by not thinking too much about retirement, though a prudent financial planner will advise otherwise. But, when you enter the 40s, retirement becomes a reality that’s not too far away.
As recent surveys by Willis Towers Watson and HSBC show, most people don’t pay much attention to retirement savings. Yet, they are worried as well. The survey by Willis Towers Watson found 56 per cent of Indian employees fear they will be worse off than their parents in retirement. An earlier survey by HSBC had found 21 per cent of respondents had not even started saving for retirement and an alarming 44 per cent of those who had started had stopped, owing to financial difficulties.
While these surveys were done across people of all age groups, experts say the fear of a shortfall in retirement savings starts in the 40s and accentuates in the 50s. So, what should you do?
Do you have enough? Assess whether you are investing enough in the retirement portfolio. Take your current monthly household expenditure, reduce it by the expenses that will diminish in retirement (transportation, children’s expenses, etc) and add those that are likely to go up (medical bills). Once you have an estimate of post-retirement expense in current terms, use an expected inflation rate to arrive at the amount you will need after retirement. Further, using the expected rate of return on your portfolio and your expected life expectancy, arrive at the amount you need to invest monthly. This calls for a bit of financial modelling.
Options: If you find you are not investing enough and could fall short of your targeted retirement corpus, here are a few strategies you may adopt.
Try to boost your saving and investment rate even if it entails belt tightening. Investors in the 40s would on an average have 15 years or more to go before retirement. "Given the long investment horizon, they could move to a more aggressive portfolio by enhancing their exposure to equities," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.
Educate and re-skill yourself and try to shift to a higher-paying job. Taking up a foreign assignment for a few years is an option. If your spouse had taken a break to raise children, explore the possibility of her rejoining the workforce. Look at all your long-term goals - house purchase, children’s education, and retirement planning - and select ones you can compromise on. Importantly, review each of your existing investments to find out if they are all invested in the most optimal manner. Get rid of real estate, stocks and other assets that are underperforming and replace these with better-performing assets.
For fixed-income investors: Majority of Indian investors depend predominantly on fixed-income instruments to fund even a long-term goal like retirement. This could cost them dearly. "In the long run, interest rates in India will head downward, as they are much higher than in other parts of the world," says Anil Rego, chief executive officer, Right Horizons. Fixed-income investors face what is called reinvestment risk: when their current investments mature, they will have to reinvest at lower rates. Such investors should keep a close eye on the real, rather than nominal rate of return. "If interest rates fall and inflation remains up, their real rate of return would turn negative and that would pose a problem," says Dhawan.
Fixed-income investors have two options. One, they could buy longer-term debt instruments and lock into the current interest rates, thereby reducing reinvestment risk. Tax-free bonds, long-term bank fixed deposits (tenure extends up to 10 years) and government securities are options they can use.
The second is to invest in equities. "Fixed-income investors should be shown the longer-term historic data of returns from equities. This will convince them that while equity investing can be risky over the one- to three-year span, it can yield much higher returns than other asset classes when the investment horizon is 10 years and beyond," says Dhawan. Such investors also need to educate themselves about the benefits of equity investing. Only then will they become convinced about the merits of this option and not exit at the first sign of a downturn in the markets.
Risk-averse investors should also automate their investment process, by using Systematic Investment Plans and Systematic Transfer Plans. Conservative investors should also foray into equities gradually. "They could dip their toe in equities with monthly income plans, which have a 20-25 per cent exposure to equities, and balanced funds, which have around 65 per cent exposure. Only once they become comfortable should they move to pure equity funds," says Rego.
Desperate times need desperate measures: In case the funding gap is very large, one option is to sell the house in the city and move to a smaller town, where both the cost of a new house and the cost of living are likely to be lower. Moving to a smaller house within the same city (like a retirement home at the outskirts of the city) is an option. "The difference between the price of the old house and the new one can go towards funding the retirement corpus," says Kapur.
Those who find themselves in dire straits should also factor in any assets they may inherit. In case of two siblings who have jointly inherited a house, one may want to keep it while the other may want to sell it off for cash. They should explore the option of one sibling buying off the other’s stake.