Running Short On Money Before Years
If you’re decades away from retirement, you may not think it’s necessary to start saving yet, as your money can be better spent elsewhere. Unfortunately, most of the young people are completely unaware of how big of a risk this is.
Suppose you have done a bit of retirement planning and have been saving money for your retirement at age 60. You would expect your retirement savings to last till the age of 75.
But what if you outlive that estimated figure of 75?
It’s possible, and this is exactly what we are here to talk about.
Outliving your savings, or technically speaking, the Longevity Risk.
One would ideally like to live longer than their own estimates. However, these estimates are exactly what your retirement planning calculations are based on. Therefore, in case you live longer, you are in for some big trouble later in life.
Think about it… having little or barely any money when you are about to be 80. Frightening!
Of course, many will die sooner than their anticipated lifespans. But others won't. That’s just how averages work.
However, with medical breakthroughs and health care advancements, it's likely that our generation will live up to the late 70s. That is not all. If you're from a decent financial background and have good health, your life expectancy may be at least a decade or two more than the typical Pakistani life expectancy.
So…what does that tell us?
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 points to help you realize this fact:
- Unlike our past generations that retired early, our retirements are expected to last longer. Maybe 20 or even 30-40 years than our previous generations.
- Previous generations also had the benefit of pensions to their aid. Most of us are on our own with almost no social security or additional support.
- 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 traveling. 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.
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.
Planning for Retirement Properly
Most people keep saving whatever they can. Or if their employer is deducting something from their salaries, 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 correctly, you Need to recognize current expenses (which will be applicable in retirement) and those that might start later on -- and then project them to the future. This will let you know how much you will need to save for retirement.
Accumulate money so you can maintain your standard of living even in your retired life. If done correctly, retirement planning takes care of various risks like the one discussed before this post too (longevity risk).
So "How much does one have to save for retirement?"
The answer varies.
In fact, the answer is different for each individual. That’s because it depends on a number of factors, for instance:
- 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 other means?
Proper retirement planning can really help in getting such answers.
And do not make the mistake of taking arbitrary numbers (such as Rs 1 Crore or Rs 3 crore) for your intended retirement corpus. If the amount is underestimated, you may realize your mistake when it is too late. When it's overestimated, you'll be saving additional money uselessly.
And you don’t want to be in either situation.
If you are young, you might feel that it’s too early to start retirement planning, but let us assure you it is not.
The earlier you start the better it is for you, if you still haven’t, then please start as soon as possible. Having said that, there are just too many variables that can impact a retirement plan. 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.
It’s always good to keep in mind that retirement planning is important because unlike other financial goals, you will not get a loan for retirement. So, you are on your own.