How to start saving for retirement in your 50s
Posted by: Uma Shashikant on Jul 17, 2017, 06.30 AM IST
When I wrote about a comfortable retirement, a few readers mailed to ask about what happens when retirement is not really secured. Some of them had lived through a life defined by large spends, and were now genuinely worried about their future. What should 50-year olds who worry about their retirement do?
First, seek control over the spending of the household, even as the income from employment continues to flow in. As the number of dependents drop and the need for newer physical assets such as a house, appliances and car reduces, the expenses of a household as a percentage of income should ideally drop.
In retirement the income would cease, but the spending persists. If the assets one uses in retirement to generate income do not cover the expenses that a household is used to, the inevitable compromise in the quality of life will follow.
Expenses can be classified as mandatory and discretionary. Mandatory expenses include groceries, utility bills, fuel, salaries of staff, medicines and such expenses that the household cannot do without. Discretionary expenses are those incurred on recreation, entertainment, eating out, travel and tourism, and such expenses that tend to be driven by the lifestyle and leisure preferences of the household.
When income increases and more money is available after meeting mandatory expenses, many households increase the discretionary expenses. When these expenses are habitually incurred, they create a lifestyle creep, or the insidious conversion of discretionary expenses into mandatory ones. There is no arguing with a woman who believes that the table must have fresh flowers each day, or with a man who must end the day with a mandatory drink or two.
Second, it is never too late to save for retirement. Some express remorse that they did not start early as mandated by retirement planners, and did not put aside money for retirement, except for the Provident Fund at work. They worry if it is too later already.
What the advocates of early saving miss, is the power of quantity. While it is true that the power of compounding will grow tiny amounts into a large sum, the reality of many households is that large amounts are available to save only as one advances in age, and in income.
It is true that Rs 10,000 saved for 30 years at 8% will become a valuable Rs 1 lakh. But given that the monthly salary of a typical 52-yearold when he began to work 30 years ago was merely Rs 3,000, saving Rs 10,000 a year is a tall order given the high expenses of the early years of earning. However, with a current salary of Rs 2 lakh a month, setting aside Ra 50,000 a month is not a tough call. And this sum would also grow to become large in the limited time it has until retirement.
The percentage of income that a household saves should progressively increase with time. Beginning with a 20% saving rate in the 20s, a household should ideally reach a 50% saving rate by the 50s and with increased incomes in the later years, set aside more towards retirement.
If a household took 15 years to build its first million in assets, it will typically find itself able to build the second million in the next 10, and the third and more in the next five. Building a large corpus to fall back is the goal. If quantity contributions happen later, it is quite normal.
Third, retire debt of all kinds before retirement. One of my readers is the typical parent who went beyond his means to send his children to the best schools, and has taken loans to finance their higher education. The children will soon graduate and hold paying jobs that should enable them to repay the loan.
The parent should seek a transfer of the loan to the child and relieve themselves of the debt. Another has a second home and a loan outstanding against it. It is a bad idea to retire with a EMI still due. The spouse will continue to work and pay the EMI. However, the household income will go primarily to repay this loan, leaving little for other uses.
Ideally, your retirement corpus should earn enough income to simply replace your salary income when you retire. However, not everyone has saved enough and even if they have, the corpus is not invested such that it can generate adequate income. Loan repayments burden the already fragile corpus and its earnings. It is a good idea to strive towards debt-free 50s as a financial goal.
Fourth, begin to work towards your next career even as you continue to earn and thrive in the current job. It is a bad idea to begin seeking a job after retirement, when the networks, contacts, and connections have all severed from the job you were doing earlier.
Many believe that their colleagues and friends will help them and are disappointed when no one seems to have the time for a retiree. Find out what you would like to do, even if it is a teaching assignment in a local college, and work towards securing it early.
A concrete plan for what you would do after retirement, and investment of time, money and energy in securing that pursuit, will help tide over the constraint of not having an adequate retirement corpus. There are stories of freelancers earning more in retirement than what they did on their regular jobs, and there are stories of retirees-turned insurance agents who do not know how to achieve their sales targets. Earning for a few years after retirement means you do not draw on your corpus and thus give it the ability to grow in value when you need it.
Fifth, ensure that your assets are aligned to work best for you, post-retirement. The text book prescription is to have 30% in property, 30% in equity, and 30% in fixed income. The balance 10% could be in cash and gold.
The property is likely to be the one you live in, and will perhaps bequeath. The equity will secure your retirement, growing in value with time and protecting you from inflation. The fixed income portion will deliver the income you need for your expenses.
Given 10 years, it is possible even at age 50, to realign assets to this ratio, provided you haven't invested in too much property, do not spend too much and save too little, and are willing to build assets for yourself through aggressive saving and investing habits. It is never too late to begin.
(The author is Chairperson, Centre for Investment Education and Learning.)
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com. This article appeared in Economic Times dated Jul 17, 2017, 06.30 AM IST