Factor in rising longevity for Retirement

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Factor in rising longevity for Retirement





In a recent party to celebrate the 80th birthday of a person in Chennai, the average age of people was around 70. Surprisingly the number of 90-year-olds blessing the birthday boy was also high.

Longevity is now a reality in our lives.

Life expectancy is increasing by a year every three years, and whether we like it or not, we are most likely to live longer than the previous generation. So a longer retirement also means a bigger retirement fund.

Your money needs to grow by borrowing technology from the chewing gum manufacturers ­ same mass but extra elasticity! So what you need to do is to stretch the rupee without bursting the financial bubble.

Here, the second problem is high inflation, which is hovering between 8% and 10%. So we need to stretch out our money more than inflation so that we can move forward toward our goals. Now if you want high returns, you must be willing to take higher risks. However, for a 70-year-old, the risk tolerance will be far lower than when he was younger. This classic risk-reward trade off has left many of us in search for something that defies this rule. Clearly, we would all be wealthier and happier if we could get high returns with low risk.

So, say, you are a 70-year-old, and your current expenses are about Rs 3.6 lakh a year. Assuming your expense patterns don't change through your life, and an inflation rate of 8% per annum, you will be spending Rs 17 lakh for the same set of expenses when you are 90. The returns from the existing corpus have to beat inflation and offer better tax-adjusted returns to keep pace with rising expenses. Investing in mutual funds can be the answer. Good equity funds can earn you annualized returns of between 14% and 18% in the long run, thereby comfortably beating inflation. Capital gains are also tax free after a year. Investing about 15-20% of your overall financial portfolio in equity could help you beat inflation without adding too much risk.

After retirement, you can earn an income from your existing mutual funds through systematic withdrawal plans (SWPs). You can lock in a fixed income during your retirement, thereby enjoying a worry-free retirement. These plans are flexible, so you can stop them whenever you want. You can also increase the withdrawals each month if inflation catches up with you.

To bring further safety , you can invest in good open-ended debt funds if you fall in the 30% tax bracket. Even after the recent tax changes, debt funds still have an edge over fixed deposits as they carry indexation benefits if held for three years or more. The tax incidence also falls on the investor only when he/she redeems the fund, unlike fixed deposits where interest is taxed each year.

Liquid funds offer the ability to plan for an emergency , vacation or any short-term goal by generating far superior returns compared to savings accounts.

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