No Reason Not To

Retirement planning is a financial goal that has the greatest number of unknowns attached to it. We have no way of knowing how long we will live, how much we would spend, what inflation would look like, the kind of return our portfolios would generate and what our income streams would look like post retirement. This is just the tip of the iceberg. And yet planning for retirement is the one goal that most of us tend to put off for the future. This is mostly true regardless of whether or not we appreciate the consequences of doing so.

Those of us who put retirement planning off would definitely have our reasons for doing so. And they may look perfectly logical and plausible to us. But as I will attempt to show today, the consequences of putting of retirement planning for a later date quite comprehensively outweigh the benefits of doing so. This shows that there really can be no reason for us to delay planning for retirement. I will give a list of common reasons as to why retirement planning is put off. I will then show why each of them cannot be justified.

Reason : The numbers involved in my retirement plan are scary

Why it is not justified : There is no escaping this fact. The numbers are going to be scary. Assuming zero real returns throughout our lifetime, the required retirement corpus for a life expectancy of 90 may be given as :

Current annual expenses * (90 - age at retirement)

This amount would be the bare minimum requirement to have a shot at a comfortable retirement. But putting retirement planning off for later would not help. It actually makes the numbers scarier. Have a look at the calculations given below. It represents the required monthly investment multiplier for a 30 year old wanting to retire at 60 with a life expectancy of 90.

This shows that a 30 year old wanting to retire at 60 must invest an amount equal to their monthly expenses each month for retirement. Now consider the same calculations for someone who begins planning for retirement at age 35.

So someone who starts saving for retirement at 35 would have to save 120% of their expenses each month for retirement. A full 20% more than someone who starts at 30. So delaying saving for retirement because the numbers are scary only worsens the predicament.

Reason : I won't be able to save as much as I need to for retirement. So there is no point trying.

Why it is not justified : This is akin to forfeiting a challenge before it begins. The most logical solution to this is to stop fixating on the target savings target and invest as much as possible each month. This needs to be coupled with gradual increments in our savings rate, at least annually. Over the years, this gives us a fair chance of building a reasonable retirement corpus. We may still end up with a corpus that is short of our required target. But we must remember that a reasonable retirement corpus is better than none at all.

Reason : Providing for my children's education is more important to me than planning my retirement.

Why it is not justified : Let's get one thing straight. Most of us make a conscious choice to have children. So it is only fair that we ensure their needs and dreams are not compromised in the slightest. Funding education is a goal that requires time to be achieved effectively. With regard to the education goal, the inflation numbers are challenging. This is shown in the graphic below. It shows the average cost of various courses in 2020 against projected figures for 2030 (All figures in lakhs)

So funding our children’s education is clearly a significant challenge. But the same is true for our retirement. And time is not divisible between these goals. So they need to be planned for in parallel. This is possible only when we place equal importance on both goals. This would ensure that neither parents nor children are a financial liability for the other. This ultimately reduces stress and fosters better relationships between them.

Reason : I will be spending a lot lesser than I currently do post retirement. So I don't need a large corpus.

Why it is not justified : We may consciously cut down on discretionary spending post retirement. But we are likely to spend a lot more than before in other areas. This is especially true in the case of healthcare expenses. Spending on healthcare is an ever present need. And it comes into greater focus during later years in retirement. Moreover, healthcare inflation in India today may be as high as 15% per annum.

So over a post retirement period of 30-35 years medical expenses would double 6-7 times. This shows that even though our spending patterns may change in retirement, overall spending needs are unlikely to change. So it does not make sense to delay retirement planning assuming a smaller retirement corpus would be sufficient.

Reason : I am a self employed professional /entrepreneur. I plan to work as long as I am physically and mentally able to.

Reason it is not justified : There are a number of risks associated with this approach. There would always be a significant degree of uncertainty around our physical health, especially in our later years. Our core professional skillsets may lose importance or become irrelevant over time. Finally the level of stress associated with most jobs, especially entrepreneurial ones may affect mental health in the long run. Any or all of these factors may force us to stop working well before we had actually planned to.

The absence of a retirement corpus in such a situation can genuinely be a financial nightmare. And course correction at that point of time would be extremely difficult, if not impossible. Therefore while those who intend to keep working indefinitely can adopt this approach as the primary plan, an adequately sized retirement corpus must be funded to serve as a contingency plan against negative surprises that life may throw our way.

Planning for retirement is a financial goal that takes the longest amount of time to achieve effectively. And yet, it is the one goal which we put off as far as possible. The aspects discussed in the preceeding paragraphs clearly show the goal of having an adequately sized retirement corpus in place should be placed at the forefront with our most important financial goals. Doing so would help us avoid the severe financial and emotional consequences associated with not having enough money in retirement. We must wake up to this fact as soon as possible and begin planning for our retirement right away, if we have not already done so. Because quite clearly, we have no reason not to.