The pace at which medical science is evolving, it may not be too farfetched for the average life expectancy to rise up to 100 years after a decade or two.
This brought us to my next question, "What difficulties will we face if we live till 100?" While the medical advancements can help us overcome the complications of health, what we often tend to ignore are the aspects of our finances. But remember, the pension fund you are banking on may not be sufficient for you. You need to factor in the cost of living and the increasing aspirations that we have from life into a financial plan to deal with the future.
Let us take the example of an average 40-year working professional. A dinner for four in a restaurant which today costs him about 1,000 will cost him 3,200 in 20 years. Similarly, if his monthly groceries bill is 8000 right now, it would shoot up to 14,000 after 10 years and 46,000 after 30 years – and at that stage he would probably have retired. At close to 90 years, a movie for two which costs 500 today could easily cost him 9,200! (Assuming long-term inflation to be approximately 6%)
These figures provide a snapshot of the way things can shape up over the next couple of decades. Also, remember that with increased life expectancy, we will live for more years without a source of income as compared to generations before us.
A fundamental fact that we need to understand is that when we create a financial plan for the future, we need to take into account the increase in the cost of living. But this cannot be a one-time activity since changes in the economic scenario will also require you to change your financial plan.
When you get a financial plan created for yourself, your resources are translated into investments, which are then spread across various asset classes, and not just a particular tool. However, you need to start on this process now. With the GDP growing at 8-9% per annum and long-term inflation hovering around 6-7%, your financial plan could help you achieve decent returns to match the nominal GDP growth (nominal GDP = GDP + Inflation).
Don't underestimate the power of compounding. The earlier you begin investing and the more you remain disciplined in your approach, the better yields you can achieve.
We had done an analysis on returns on an investment of 10,000 per month in systematic investment plans (SIPs) in diversified equity funds in early 2000 to evaluate the power of compounding.
The results were startling. With a disciplined approach over 10 years, the returns on 12 lakh (10 years x 12 months x. 10,000) on an average were valued at 48-50 lakh in 2010. In the case of some of the top performing diversified equity funds, this valuation breached the 90-lakh mark.
Financial planning has no end point, just like our needs and wants.
