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Retirement: Plan retirement or stop buying potatoes

For Indians in their 20s and 30s, the accumulation phase—when they earn and save—is of great import for retirement. And insurance products can help

THIRTY years ago, a kilo of potatoes sold for less than a rupee in Bombay. Since then, not only has the city changed its name to Mumbai, it but nowhere will you find potatoes selling for less than Rs 10 a kilo. The price of onions has risen more than five times; beans sell for ten times what they cost in 1985. Local transport costs have increased more than 1,000%. Electricity costs almost four times what it did just ten years ago. Even water charges have doubled.

Rising salaries help people cope with the increasing cost of living. But what happens when income from regular sources stops, and costs keep rising?

A national survey of more than 63,000 households, equally divided between rural and urban areas, conducted by the National Council for Applied Economic Research (NCAER), found that only 4% of the people could survive on their savings for more than a year if their current income were to dry up. Where have the savings gone?

The recently released report of the survey, How India Earns, Spends and Saves: A Max New York Life-NCAER India Financial Protection Survey, found that about 81% of Indian households save, but as many as 36% keep their savings as cash at home. Over 50% keep their savings in banks, 5% in post office accounts, and 3% in cooperative societies. A large number—58% of labourers and as much as 20% of salary earners—said their first choice for depositing savings would be to keep them at home.

So that;s where Indians’ savings go—into non-remunerative channels.

Thus, when income dries up, the future spells dependency, anxiety and attendant pain. India is becoming increasingly young—more than 40% of its population is below 30. Three decades from now this group will be ready to retire. They will be retiring from jobs that have allowed comfortable lives, regular holidays, eating out, mobile phones and other gadgets, and graduating to lives that may well involve more expenses, with healthy special diets and more expensive modes of transport, with loss of income, not to mention increased health insurance costs.

How will today’s 20-and 30-year-olds cope with this, unless they have planned to substitute their current income with an equivalent or higher income from other sources? This is necessary to avoid dependency, ensure security, and avert anxiety.

Retirement planning is a growing area of financial planning today, as the joint family system disintegrates, and even nuclear families grow more independent and widely dispersed. India does not have a social welfare system, offering state-supported retirement homes and other facilities, leaving senior citizens to fend for themselves. Thus, retirement planning has become an imperative. The Max New York Life-NCAER India Financial Protection Survey pointed out that although 69% of Indian households save for their old age, they deposit their money in low-return instruments. Thus, even though there is a growing awareness of the need for retirement planning, there’s very little awareness of the range of instruments available in the market for such purpose.

For the young Indian population, the accumulation phase—when they earn and save for their retired days—is of great importance and interest. They need to understand the instruments available in the market which enable them to maintain the discipline to invest for the long term. Life Insurance offers such products both in traditional and unit-linked designs. Retirement planning is always a long-term affair, and one should look at such investments from that perspective. The asset management capabilities of life insurance companies are tuned to manage long-term investments and reap better returns over a longer period of time, as compared to other investment instruments, which have a comparatively shorter term perspective. The world over, the basic nature of life insurance companies makes them an ideal investment avenue as far as retirement planning goes, while financial instruments like mutual funds can be considered for short- to medium-term investments. For instance, the unit-linked platform offered by some products gives the customer the flexibility to invest more in equity in the early accumulation phase, to gain from high returns. As retirement age comes closer, one may opt for debt funds. The dynamic allocation facility, in fact, takes care of this fund allocation need as per life stages automatically. Other products that can also be used for retirement planning offer features such as annuities guaranteed for a period ranging from five to 20 years, accident and disability benefits, including riders for “dread diseases” and so on. To keep the investments within the manageable limits to enjoy a carefree old age, the earlier you start planning, the better. In-built flexibility allows customised packages that depend on individual needs...characteristic of the flexibility that retirement demands!

So, when potatoes sell for, say, Rs 50 a kilo 30 years from now, you might leave them off your shopping list because the doctor—and not your wallet—said so!

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