report - 9 risks to retirement

8/2/2019 Report - 9 Risks to Retirement

1/16

Sameer Rastogi

Saksham Wealth Solutions P. Limited

April 2012

9 Key RISKS

during

RETIREMENT


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Overview

Retirement Planning is more art than science. Sure it involves numbers and spreadsheets, but

there are many unknowns that can dramatically affect your projections and ultimately your

quality of life in retirement.

Most people approaching or in retirement know that they must balance their retirement income

with their retirement expenses. The tricky part that is often not addressed is guaranteeingthe

retirement income and safeguarding against unforeseen circumstances.

There are some incredibly serious issues in play when it comes to a securing your retirement

life. Retirement is not as simple as working, saving and then living off of those savings. For

people either preparing for retirement or already retired, there are a number of macro-economic

and demographic factors that need to be considered.

For example:

Do you know how long you will live?

Are you sure the economy will behave as you think?

Have you factored inflation and swings in financial markets into your retirement plan?

Will government schemes like PPF, EPF, MIS, Pension Scheme remain as they are

today?

Are you sure you will not have to spare a big amount from your Retirement kitty towardsfinancing your kids Marriage, Education or Business.

Are you sure your mediclaim policy will cover every illnesses you develop and will last

for repeated hospitalization and domiciliary medical expenses?

Have you estimated your expenses properly?

The good news is that there are many financial products designed to help retirees protect

themselves, their finances and their quality of life. And, these products are evolving and

improving rapidly.

But perhaps the best way to protect yourself is to understand some of the important risks your

finances will face in retirement. Forewarned is forearmed. Understanding these concerns could

mean the difference between enjoying sunsets in your golden years and dreading the sunset

because you cannot pay your electricity bill even if you thought you were well prepared.

Learn more about the specific retirement risks listed out in this ebook.


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Risk # 1

Insufficient Planning - Comfortably ObliviousOver next 10 - 30 years, too many Indian will retire without adequate planning.

The three main mistakes that people make when planning for retirement are:

Not saving enough

Not guaranteeing enough income for retirement

Having contradictory views on wealth accumulation

While not guaranteeing your retirement income or effectively protecting your retirement assets

are serious problems they are only issues if you actually have adequate savings.

Though many people think that they have adequate resources for retirement, few actually do.

As per the recent survey conducted by Citibank India:

85% of people earning 3 lakhs to 15 lakhs are financially concerned for their Kids

Education and Marriage. Only 71% of the people surveyed said that they are concerned

for Retirement as well. Its noteworthy here that the amount of retirement corpus

required is much greater than for kids education and marriage.

Only 23% of the surveyed people are actively contribution towards Retirement Corpusbesides contributing towards EPF, which is mandatory in organized sector.

While 51% of the people surveyed were confident about their short term finances, only

21% people were very confident about their long term finances.

74% of the people surveyed stated that buying real estate and gold will safe guard their

long-term wealth objectives. (this is dangerous as people are misjudging the risk and

returns associated with Real Estate and Gold and are overexposing themselves to only

two assets.)

The above fact is further startling as 76% of people wish to pass on their accumulated

Real Estate and Gold to the next generation. This strategy is bound to delay and

diminish contributions towards Retirement objective. As the two asset classes will not beliquidated for consumption, they will create liquidity crunch during Retirement.

As is clear from the above surveyed findings, people are not planning for their Retirement.

Their emotions are the drivers of their financial decisions.


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Risk # 2

Longevity

The Risk of Living Too Long

When planning for retirement, you want to insure that you have enough money to cover your

living expenses for every year you are alive. The problem is that you have no way of knowing

how long you will actually live.

According to the Old Age Social and Income Security (OASIS) report, the average life

expectancy in India is rapidly increasing. From 32 years in 1951, it has already shot up to 64

years in 2001. According to the report, the average life expectancy in India will be 80 years by

2025. So, if you are retiring at 58 years of age, that neat 22 years of life without work.

However, these life expectancy numbers are misleading. Life expectancy numbers are

averaged for all deaths regardless of age so they include infant and other young person

deaths making the average deceivingly young.

More useful statistics include these facts:

In 2010, life expectancy for people age 60 was 75 years old.

In 2010, for those age 75, life expectancy was 82,

According to the New England Centarian Study for US, people ages 100 and older arethe fastest-growing segment of the United States population, and this pattern is

expected to continue. Over the long term, we can expect something similar here

There is a greater than 50 percent chance that at least one partner from a couple in their

60s will live to the age of 80.

It is important to understand that you have a good chance of living a long time to 80 or longer.

Good health and good genes contribute to a long life. The average person is born with a set of

genes that would allow them to live to 85 years of age. People who take good care of

themselves may add as many as 10 quality years to that. People who smoke, are overweight or

fail to practice preventive medicine may subtract substantial years from their lives.

Our longer life spans mean that we must have vastly more retirement assets than previous

generations. The good news is that there are actions you can take and financial insurance

products to help you insure you do not outlive your assets no matter how long you live.

Lifetime Annuities are a good way of guaranteeing your income.


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Risk # 3

Retiring Too SoonHow Long Can You Afford to Live in Retirement?

Our life spans are increasing dramatically. Paradoxically, the percentage of time we spend

working is decreasing. The current working population seems eager to stop working earlier than

their forefathers.

Only 3 percent of population in the India work past their 65th birthday, unlike previous

generations who worked until the end of their lives.

A hundred years ago, most people worked until the end of their lives. Today only 3 percent of

men in the India work past their 65th birthday. If, as statistics suggest, you can expect to live agood 20 to 25 years after you leave the workforce, a prickly question is raised: have you

properly calculated how much money you will need to live comfortably and independently for the

rest of your life? Have you a realistic plan for achieving that goal?

Why are people working a smaller percentage of their lives? Economists are not sure, but two

theories seem probable:

Rising Income:

The theory regarding why Indians are likely to chose a retirement age well before their mortality

is that rising lifetime income has led workers to choose a larger period of leisure at the end of

their lives. And, it is true; we are earning more money than previous generations.

The problem here is that many individuals are not saving adequately. More money has been

made, but not saved sufficiently to be spent in retirement.

What is driving you toward retirement? Are your goals reasonable and rational?

.


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Risk # 4

Uncertainties of Government Investment schemesWill PPF, EPF, LIC, MIS, Sr. Citizen Schemes remain the same over next 10 years?

Mathematics of Retirement is getting further complicated with frequent changes in investment

options. While, the population of 70s, 80s and 90s could see stable government policies

towards various investment options, there have been several revisions in the first decade of 21 st

Century.

Following instances are some of the indicators of how uncertain the future can be:

1. In last 12 years, rate of interest on PPF has been revised 5 times and brought down to

8% from the high of 12.5% per annum. EPF has been also put to similar fate.2. PPF and EPF rates have recently been pegged to 10 years GILT rates which is totally

market driven. Hence, if the policy is adhered to, PPF returns can range between 5% to

9.5% ( as has been the band of GILT movement over last 10 years)

3. UTI, once the cash cow of the Government, was almost at the bankruptcy stage. To

avoid any upheaval, it was split into two parts. All previous promises of 18% to 21%

returns on various UTI schemes were called prematurely in 1998 2000 and hence

caused major disturbance to long term planning of investors. Similar treatment was

meted out to IFCI schemes as well.

4. Several LIC schemes offering High Guarantees over long term period were discontinued

in period between 2000-2003. This shunted lot of good longterm investmentopportunities.

5. Almost in similar fashion as it used to be with UTI, the Government is today using the

funds of LIC for financing its own targets of reducing fiscal deficits. At times, Government

has bent rules and proceeded with impunity while making IRDA (Insurance Regulatory

and Development Authority). This may actually hurt the long term performance of LIC

policies, which investors are pretty ignorant about.

6. To increase tax collections, Government has been trying to enforce EET regime (Exempt

Exempt Tax). Once enforced, this regime will take away the Tax Free advantage

from investments like Insurance and PPF. This would straight away take 30% of your

Retirement corpus.

7. In 2010, Government enforced upon all Insurers to offer minimum guarantee of 4.5% p.areturns on all Pension Policies. This move backfired as all the industry experts criticized

the move as it would hurt the potential of policy to earn higher returns. The Industry

players also found it risky to offer any guarantees and hence never launched a pension

plan since then.

8. With lot of fanfare, Government launched New Pension Scheme. It was positioned as

the cheapest Pension Scheme in the world. It failed to excite investors. The investors


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never wanted the cheapest. All they want is Easy, Transparent and Tax Efficient mode

of Investment. NPS has failed so far on several of these parameters.

The above 8 points are just tip of the iceberg. There have been several other changes that

affect the investors directly as well as indirectly. Just because its very difficult to project

Governments next move, we cannot follow the retirement strategy as followed by our previous

generation.


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Risk # 5

Wife, when she is the lone survivor!Women, Retirement, & Poor Finances

Most notably, older women end up living in poverty a lot more than men. In US, women

comprise three-fourth of seniors who are considered poor. In fact, one out of four older women

depends on Social Security for 90 percent of their income and many of these women live in or

near poverty.

Why is this? Well, women tend to earn less than men and, on average, spend less time in the

workforce

Due to home and care giving responsibilities most of women either give up their careersor compromise a great deal.

Indian socio-economic structure is such that it often discourage women from working

In all families, Rich or Poor, Urban or Rural, women tend to avoid taking financial

decisions and financial education.

The lack of financial education among women makes them financially vulnerable while their

Husbands are no more. They will either get too defensive about investment or will leave too

many decisions for outsiders. Both the approaches have their pitfalls.

What Do You Need to Avoid a Situation like this?

Make women of the home party to all financial decisions

Understand her comfort with various assets classes and give due weight-age while

allocating assets.

Ensure that all assets are jointly held

Ensure that most of the assets you hold during Retirement are generating income to her

name as well.

No Loans shall remain outstanding for which the spouse has to repay.

All medical and critical illness policies shall be in due knowledge of wife.

A will, and a financial emergency kit (list of important documents, contact details,

procedures etc,) should be in the know of your spouse.

The above mentioned points are the least you should do to avoid any financial hassle later.


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Risk # 6

InflationInflation Can Devastate Even a Good Retirement Plan

"Inflation is when you pay fifteen dollars for a ten-dollar haircut you used to get for five dollars

when you had hair." -Sam Ewing

"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit

man." -Ronald Reagan

"Some idea of inflation comes from seeing a youngster get his first job at a salary you dreamed

of as the culmination of your career." -Bill Vaughn

"Inflation is taxation without legislation." -Milton Friedman

"Bankers know that history is inflationary and that money is the last thing a wise man will hoard."

-William Durant

"Inflation is the crabgrass in your savings." -Robert Orben

"Inflation is when sitting on your nest egg doesnt give you anything to crow about." -Unknown

Despite these witty quotations, no one could say it strongly enough when living on a fixed

income, inflation has a profound impact on your quality of life.

The American Heritage Dictionary of the English Language defines inflation as, "A persistent

increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused

by an increase in available currency and credit beyond the proportion of available goods and services."

Basically, inflation makes goods and services more expensive and decreases the value of your

money.

When you are working your income generally rise as the costs of goods and services

increase. Your earnings "keep pace with inflation", so normal inflation is not generally a big

concern. However, when you are living off of savings inflation literally robs you of income.

Most people underestimate the impact inflation will have on their retirement plans. Even atrelatively low rates, inflation is a real thief of buying power over time. Most experts feel safe

recommending that individuals calculate their retirement needs using a 8 percent inflation rate.

But, it is important to understand that we have seen (as in the late seventies, eighties and early

nineties) sustained inflation rates of around 12-17 percent!

Failing to account for the effects of inflation is a very damaging mistake. Perhaps the following

example will help you understand the real world implications of inflation. These scenarios


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assume that you now require Rs. 500,000 a year to maintain your lifestyle and would like to

maintain that standard of living in retirement. A 8 percent inflation rate is used -- the recent

historic average (neither low nor high):

If you need Rs 5 Lakh a year to live now (your age 58 years), you will need Rs10.07

Lakhs a year in 10 years to support the same standard of living.

Rs 39.94 Lakhs a year is the amount of money you would require in 27 years (age 85 if

you retired at 58).

And, if you retired at 58 and lived to be 99 years old another 41 years, you will need

Rs 1.17 Crores a year!

If we adjusted the inflation rate upward just 1 point to 9 percent, then the Rs 39.94 Lakhs

required to support you at 85 becomes Rs 51.12 Lakhs a rather significant increase.

The math is even more staggering when supporting a Rs 10 Lakhs a year lifestyle. At just a 8

percent inflation rate you will need the following amounts to support the same expenses:

Rs 21.58 Lakhs a year in 10 years (age 68 years).

Rs 79.88 Lakhs a year in 27 years (age 85 years)

Rs 2.34 Crores in 41 years (If you retire at 58 and live to 99, you have lived 41 years in

retirement.)

The good news is that some pension programs (though increasingly few) adjust your income for

inflation. The bad news is that if you are living in retirement by withdrawing from investments or

savings, then the value of your money will dramatically decrease overtime. You will require far

more money to support your lifestyle in the future.


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Risk # 7

Rising Medical Costs

Out of Pocket Medical Spending in Retirement can Ruin Finances

Healthcare costs in retirement can be staggering. You are older, your body is more vulnerable

and prone to disease and medical expenses increase every year. Even though your mediclaim

policy may provide coverage, still you may have spend out-of-pocket health care costs.

Many retirees are not prepared for the high-cost of medical care in retirement when they are no

longer part of a company plan. And, too many people believe that their Mediclaim policies shall

see them through their life time.

Well the truth lies somewhere else. Actually, your mediclaim policies will fall way short of your

medical expenses.

When people ask me, how much mediclaim coverage is sufficient, then for a Retiree, I suggest,

atleast Rs 10 lakhs. Unfortunately, most the insurers decline this coverage at this age, or it

costs a bomb!

Anyways, even if they get coverage for this amount, still it will fall short. Lets understand with

the help of this illustration:

If you retire at age 58, with an assumption that you may require Rs 10 lakhs as medical

expenses over the remaining life, you chose to take mediclaim coverage accordingly.

Considering that Medical costs dramatically outpace inflation (as in the past), with 12% annualcost rise, the similar medical facilities shall cost you:

Rs 31.05 lakhs when you are 68 years old

Rs 68.66 lakhs when you are 75 years old

Rs 2.13 Crores when you are 85 years old

Are the figures above shaking the ground underneath for you? The figures mentioned above are

based on genuine assumptions based on recent 10 years averages. Your mediclaim policies

cannot match the inflation that increases medical costs.

The cost of medical care has outpaced inflation for the past 20 years. These increases are

expected to continue in the years ahead. Some industry surveys predict that costs will rise as

much as 15 percent annually. This growth will double the cost of retiree health care in just five

years.

Furthermore, health spending as a share of after-tax income will rise dramatically. In US, in

2000, health care spending for older married couples was 16 percent of their total income.

According to the Center for Retirement Research, that number is expected to increase to:


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24 percent of income in 2010.

29 percent in 2020.

35 percent in 2030.

Why is healthcare getting more expensive? The answer is twofold. The bad news is that more isgoing wrong with your body. The good news is that there is more that medicine can do to fix

you. Healthcare costs are increasing because of:

Advances in medical technology leading to better but more expensive treatments.

Increases in the prevalence of expensive medical conditions.

High administrative costs associated with a fragmented health care delivery and

financing system.

The existence of many highly paid medical specialists.

The medical profession is making some astonishing findings and treatments. These

developments promise a remarkably long and hopefully good quality of life for the aged but

they will be increasingly expensive.


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Risk # 8

Swings in Financial Markets

If the Stock Market Crashes, Will Your Retirement Plan Crash Too?

When planning for retirement, you must consider how you can account for the swings in

financial markets. How will a sluggish economy, natural disasters, terrorist attacks, corporate

scandals and other unforeseen events affect the stock market and your ability to fund

retirement?

In retirement, you need to plan for how much money you will need for every year you are alive

but just as you don't know how long you will live, you cannot know what rate of return you will

receive from your various investments.

Between 2000 and 2002 the stock market declined dramatically from the heights it saw in the

1990s. During this time the market lost 37 percent in value. This loss meant that many people

who had been well prepared for retirement and had invested in stocks could not stop working.

Around that time, in US, a survey of several about to retire people was conducted:

It was learnt that:

Of the respondents who owned stocks, 77 percent said that they had lost money in the

previous two years.

Of those who lost money and had not yet retired, 21 percent postponed retirement as a

result of their losses.

Of investors who lost money in stocks and had already retired, 10 percent either

returned to work after retirement or continued to work due to their losses.

Among investors who lost money, 43 percent think that they will be less comfortable in

retirement due to their losses, and 20 percent expect to have difficulty paying for health care

during retirement.

And, many retirement experts would summarize that these opinions were optimistic. In the far

more serious crisis of 2008-2011, similar questions posed to retirees indicated even higher

proportions of these types of responses.

Stock market declines significantly affected the retirement plans of most of these individuals. In

retirement, you need to plan for how much money you will need for every year you are alive

but just as you dont know how long you will live, you cannot know what rate of return you will

receive from your various investments.

Many retirees hope to gain income from their savings or keep pace with inflation by investing in

financial vehicles that offer high rate of returns. The problem is that as a general rule

investments that offer high rates of return are often the riskiest.


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Other retirees hoard their savings in accounts that offer no or very small dividends meaning

their principal is safe, but the money may be loosing value by not keeping pace with inflation.

And the savings are certainly not creating income.

It is difficult to find just the right way to allocate your assets. But, it is critical to understand that

you should try to plan on having enough guaranteed income to cover your basic needs should

something happen to make the financial markets collapse.


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Risk # 9

Debt /LOANS

When Living Off Fixed Retirement Income And Assets, Debt Does Not Make Sense

When living in retirement on a fixed-income, you will not have more money tomorrow to pay off

the debt than you do today. Eliminate this debt as fast as possible to save money. Explore debt

consolidation.

In India, fortunately, the DEBT culture among retirees is neglible or non existent. However,

given the way people are hoarding Home Loans, Credit Cards, Car Loans, Consumer Durable

Loans, Loan against GOLD / Shares, or a Personal Loan, who knows 10 years from now, we

may see some retirees enjoying their life on Credit Card. While you are working, you may be

able to repay the loans with ease. But the same may not be possible during Retirement as there

will be no fresh income. The high interest cost of loans shall mean Death by a Thousand Cuts

One of the reasons of economic debacle in Europe and US, post 2008, is high Debt across the

population and government alike. Homes were sold at Zero percent down payments to jobless

and elderly people. Can that happen to India? No one knows!


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Reference:

1. Project OASIS Report the first comprehensive study of Indias pension sector

published in 2000.

2. Future of Retirement Report - A global perspective of Retirement Industry Published

by HSBC in 2011

3. More Americans Calling It Quits, Even With Less to Live On A retirement study by

TIME (Time Moneyland) published in 2011

4. Several media reports and statistics as published by Central Statistical Organization

report - 9 risks to retirement

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