Running out of money before running out of Years

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Longevity risk retirement plan

Running out of Money before running out of Years.

Read that again.

It’s a big risk that many young people face today. But unfortunately, they are unaware of it.

Suppose you have done some bit of retirement planning and have been saving money for your retirement at 60. You expect the retirement savings to last until the age of 75 (just assuming). Now the money which you have saved up is enough to help you live from 60 to 75.

But what if you outlive that figure of 75?

It’s possible.

And this is exactly the risk I am talking about.

Outliving your savings. Or technically speaking, the Longevity Risk.

No doubt you would be lucky to live longer than your own estimates. But these estimates are exactly what all your retirement planning calculations are based on.

So in case you plan (or God thinks you deserve) to live longer than your expectations, you are in for some big trouble very late in life. 🙂

Think about it… having no or very little money when you are about to touch 80. Scary!

Of course many will die much sooner than their expected lifespans. But many others won’t. That’s how averages work.

But with medical advancements and better healthcare, living up to the 80s is increasingly becoming common. In fact, it’s possible that our generation (or the next one) will easily live up to the late 90s if not 100s. That’s not all. If you are from a fairly decent financial background and have good health, your life expectancy might be at least a decade or two more than the average Indian life expectancy.

So…what does it mean?

It means that…

You Need to Save More for Retirement

To avoid running out of money before you die, you need to save more. And here are some more points to help you realize this fact:

  • Unlike previous generations, our retirements are expected to last longer. Maybe 20 or even 30-40 years.
  • Previous generations also had the comfort of pensions. Most of us are on our own with almost no social security.
  • Many believe that when they retire, their expenses will go down. Easy in theory but very difficult in practice. And not correct unless the plan is to drastically downgrade the living standards. Changing yourself (and your lifestyle) once you have crossed 60 is not easy.
  • Spending doesn’t remain same throughout retirement. Initially, you might want to spend more money on travelling. But later on, as your health starts getting in way of your life adventures, you would be spending more on healthcare. So expenses are pretty dynamic and generally don’t go down much.
  • And please don’t forget inflation. Unlike us, Inflation never retires. 🙂 It will continue to increase the cost of goods and services that you would need in retirement.

Why do You need to be in Equities?

It’s clear that your retirement corpus has to last for 20 or 30 years. And with expenses not expected to reduce much, your savings and investments now necessarily need to earn better returns.

And when it comes to earning inflation-beating returns, there is just one option – Equity. You just have to take exposure to equity for your retirement savings. Even if you are conservative, you ‘need to do it’ as that’s your only viable option. Provident fund options like EPF / PPF / VPF alone would not be sufficient for your retirement.

Planning for Retirement Properly

Most people (till very late) keep saving whatever they can. Or if their employer is deducting something from their salaries (like EPF/EPS/etc.), they consider it to be sufficient for retirement savings.

But that doesn’t work in reality. And by the time such people realize it, it’s already very late.

If you want to do your retirement planning properly, you need to identify current expenses (that will be relevant in retirement) and those which might start later on – and then project them to the future. This will tell you how much you need to save for retirement.

See, the aim of retirement planning is to help you accumulate enough money so that you can maintain your chosen standard of living even in your retired life. If done properly, retirement planning takes care of various risks like the one discussed earlier this post too (longevity risk).

So “How much do I need to save for retirement?”

There is no one correct answer here.

Infact, the answer is different for different people. That’s because it depends on a number of factors like:

  • When do you wish to (or will) retire?
  • What are your current expenses that will remain applicable even in retirement?
  • What are expenses that will start in your retirement (ex – senior healthcare, etc.)
  • What is your current age?
  • Till what age do you expect to live on your retirement savings? What about your spouse? What if she outlives you?
  • Can you start saving for retirement from today itself or later?
  • How much can you invest periodically?
  • Do you already have some savings for retirement?
  • Do you expect some extra income in retirement from your side-projects or part-time work?

Since the answer to all these questions will be different for different people, the answer to “How much do I need to save for retirement?” will also be unique for everyone.

Proper retirement planning can really help in getting such answers.

And never make the mistake of taking random numbers (like Rs 1 Crore or Rs 3 crore) for your target retirement corpus. If the number is underestimated, you will only realize your mistake when it’s too late. If it’s overestimated, you will be saving extra money uselessly.

And you don’t want to be in either situation. 🙂

Suggested Reading – Your Children are not your Retirement Fund

Source – https://goo.gl/Y77fST

Final Thoughts

If you are young (I mean up to the mid-30s), you might feel that it’s too early to start retirement planning.

But I can tell you it is not.

Had you started earlier, it would have been much better. Here is an interesting proof. But if you still haven’t, then please start as soon as possible. You really don’t understand what risk you are taking by delaying.

Having said that, there are just too many variables that can impact a retirement plan. Read this article on retirement uncertainties and why retirement planning is called the nastiest problem in finance to get an idea. But even though it’s impossible to plan perfectly everything in advance, it still helps as it moves you slowly towards a reasonably acceptable scenario.

And please remember that retirement planning is important because unlike other financial goals, you will not get a loan for retirement. So you are on your own.

11 comments

  1. Very important topic. Nice written. I strongly believe basics of financial planning should be part of high school / college curriculum. This will ensure at least some percentage of folks start saving as soon as they get their first job. Starting at mid twenties instead of mid-thirties is a huge advantage due to the power of compounding.
    Warren Buffet famously said ” i made my first investment at age 11. I was wasting my life until then” . Now imagine if you start saving for retirement at 40 years…….

    1. Yes. Basics of personal finance should be made part of school education. It will surely help build a good base of financial common sense.

  2. This article presumes wrong theory at least in Indian context. If you take survey in India, am sure most would say they live up to 90 if not 100 and say they are planning to that period. No one would admit they would die in 70s or 80s. Most of us are too optimistic as far as longevity is concerned.
    Leave alone running out of money, this is what I had seen in recent cases. This couple retired from PSU telecom company and gifted entire retirement corpus that they got from the company to kids. Another person post retirement bought gold to grand kids and fully spent what she got from her employer after 30 years of service.

    1. People who are gifting most of their retirement corpus away ofcourse have their own situations/views. They might have a decent source of passive income or maybe, they are sure their kids will take care of them. But atleast when one is starting to save for retirement etc., its better to be a little pessimistic and save more.

      As for living upto 90 years is concerned, I am not sure it’s that common. 🙂

  3. Dev,

    Please sometime do a write up on an expected PF corpus at the end of retirement by considering different variables like:

    1. Investment started around age 25 and retirement of 60
    2. Approximate starting salary = 25k with an approximate increment of 5% per annum
    3. Approximate reduction of interest by government of 0.25% every 5 years 🙂
    4. If a person withdraws or does not withdraw from PF in between
    5. Any other factors you deem necessary.

    I am curious to know how much would it all ultimately add up to so do a write up if you think it would be worth a post or read.

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