Retirement planning: Start early, finish rich

"Aubrey de Grey of Cambridge University believes many more of us will live to be 122. In fact, he thinks the first person to live to be 1000 was born around 1959". (Times of India dated 3rd July 2006).

The report is at once joyous and frightening. Joyous because all of us can look forward to long long life and frightening because who will finance this long life, to make it a happy life. There was a time in not too distant a past, when age of 60 was considered almost the end of the life (51 to 58 years period was the dreaded one literally referred to as if 'in the woods').

Time span then mercifully between the end of our productivity and our death was very short and hence sweet. Stories of 'he died with his boots on'; 'in harness'; 'on his desk', were frequent because death came on early. Now, death comes only in the bed as late as at 90, largely because medical profession and scientists are working overtime to discover gene therapy, age reversal and more. Thus, old age is becoming the longest and often a painful period of our life.

Hence, we can no longer sit back after retiring from productive life waiting for the life to come to an early happy end. Retirement now calls for careful planning, in terms of money, finances, returns on investments, allocations, liquidity, safety etc.

Any financial planning for retirement obviously raises many questions like:

(i) How long will I live? ;
(ii) What will I earn on my savings? ;
(iii) What will be the inflation rate and its effect on my savings? ;
(iv) Whether I will outlive my savings? ; And finally,
(v) What, if I do outlive my savings?

Ironically, adding to our anxiety is the harsh reality that literally there are no answers to any of the above questions.

Inspite of the increased longitivity, government and private sector companies continue to retire its employees at 58 or 60 years rendering post retirement period painful to many who have not planned properly their finances and savings.

A survey conducted by AC Nielson – ORG Marg based on a sample of 300 white collared professionals and businessmen in Mumbai, Delhi and Bangalore, though not adequately representative but yet broadly indicative, revealed an unusually high preference (87%) for long term insurance plans as an instrument of financial planning for retirement and only 10% for shares [Outlook Money of July 06]. This low level in equity was well before the recent market fall from 12,600 in May 06 to 9600 in June 06, since the survey was carried out in early April 06. What is significant is that preference for life insurance is observed across all age groups and all three cities. Second preferred instrument was bank deposits (39%) followed by NSS/NSC/PPF (National Savings scheme/ National Savings Certifictae/ Public Provident Fund) that ranked 22%; mutual funds ranked 11%; 9% in pension plans; and 4% in company deposits.

This unduly high preference for life insurance plans throws up serious gap in awareness, even among urban centres, of availability of several other innovative financial instruments and should serve as an eye opener for the marketing departments of mutual funds and other players to tap the huge potential for garnering savings for providing attractive returns at low risks.

With great respect to insurance companies, life insurance premium can never be an investment instrument nor an attractive savings plan. At best, it has always been a 'cost' of insuring our life against accidental or premature death. Insurance companies have never claimed to provide great 'investment' option but only provision against death. With the entry of private players with foreign partners in the life insurance sector, new products more of 'savings' rather than 'investment' have no doubt recently been introduced.

Any investment instrument should yield returns to beat inflation. Since times immemorial, insurance companies including LIC (Life Insurance Corporation) have been known to be very generous at the cost of its policy holders in their rewards to their agents by offering as high as 50% commission for procuring the business thereby only the balance premium, after meeting the establishment costs, gets effectively invested and most of it in safe government securities, yielding nominal returns. Thus, a good financial retirement plan must go well beyond insurance.

Ideal insurance plan should be whole life policy without profit available at nominal cost to protect merely the life against premature death. Premium on such a policy should be treated as necessary 'cost' and not an 'investment' on lines of mediclaim policy for medical cost of hospitalization. Money so saved should go for investment among several diversified financial instruments as NSC, PPF, ELSS (Equity Linked Savings Schemes) of mutual funds, postal and bank Deposits and equity shares. Equity shares of listed companies is one instrument, which historically has yielded dividends and also capital appreciation. Now, that we are living in a borderless world, international events like wars, rising crude and gas prices, weakening US dollar, allocation of some of our savings in gold (not jewelry) or gold units is also suggested as a hedge against inflation and fall in value of paper currency including Indian Rupee.

Last thought for the retirees. Serious error that retirees make is to park their savings in debt instruments in the mistaken belief that these are safe compared to risky investment in equity shares. However, vagaries of inflation and taxation erode the value of and returns from debt investments rendering the plight of retirees pitiable. To quote an eminent retiree himself, Mr. S. S. Tarapore, former Dy. Governor, RBI who says "Not taking any risk by retirees by staying away from equity is itself, the biggest risk".

To conclude, I quote an eminent financial expert who asks his audience "By not doing anything about your investments, you are doing something; you are losing money… to inflation". 'How much' do I start with for investment? is not the question. 'When' is the question? Your time to save and invest starts 'now'…