The Impending Retirement Crisis

India Inc. is fast careening towards a retirement crisis – or at least, that’s what I predict. Our general propensity to delay retirement planning until the eleventh hour, combined with the general “ostrich in the sand” approach many of us adopt towards this important financial goal, is going to snowball over the next two decades and escalate into a full blown catastrophe.

The last lot of baby boomers are due to retire within the next decade, and it’s safe to say that a large percentage of them will either scrape by or sail through their retirement years on the back of their accumulated properties alone. But what about the next generation of retirees – where are they headed in the next 20-25 years? It’s worth a thought.

There’s a host of factors which I see as contributing factors to this upcoming crisis – I don’t know which one to position at the forefront! But to begin with, compare the differences in the attitudes to money that both generations have. The currently retiring generation were largely savers – there were no malls to shop in, no Facebook posts to update with the latest international conquests, no shiny Audi and Mercedes cars to purchase per se. Keeping up with the Joneses was so much easier!

Burgeoning consumerism and overleveraging is going to be the first contributor to this crisis. Our previous generation saved before they spent – the current one either harbours utopian ideologies or survives largely on wishful thinking about a brighter future, and hence they postpone retirement planning “ad infinitum”! In fact, a recently published “India Retirement Readiness” report by Aegon highlights the fact that only around 36 per cent of Indians are confident that they will wind up achieving their target retirement corpus.

The second culprit is the retirement savings habit itself. The Aegon report inferred (across a survey of 1,000 people) that Life Insurance (63 per cent), Fixed Deposits (62 per cent) and PPF (50 per cent) are the three most preferred investment avenues for retirement planning. It’s unlikely, to say the least, that such low return asset classes will prove to be adequate in order to accumulate a sizeable corpus.

Around 42 per cent of Indians “save in property” for their retirement – but these properties are by and large being purchased using expensive, long term home loans; that’s not how our previous generation did it. A home loan of Rs. 1 Crore, at an interest of 10.25 per cent interest entails an EMI of close to Rs. 1 Lac. This is, in effect, a leveraged investment – you’ll be paying back Rs. 2.35 Crores over 20 years, so that’s really your breakeven point. And who’s to say where rental yields will be at that stage? And how confident are you that property prices in our country will continue to grow at a significantly higher rate than 10.25 per cent per annum?

To put the numbers in perspective – a 35-year-old individual spending a lakh a month today will likely be spending a minimum of around 58 per cent of that every month (Rs. 58,000) in his retirement. Adjust that for inflation, and the monthly number in the year of retirement jumps to Rs. 280,000 – the corpus requirement assuming a life expectancy of 85 years to approximately Rs. 6 Crores. With other, highly expensive goals to achieve (such as a child’s education or marriage), it’s quite likely that there will be a significant quantum of intermediate drawings on this corpus that’s being built out using FD’s, Life Insurance and PPF’s. 6 Crores looks like a steep ask!

Consider also socioeconomic trends – it’s estimated that most baby boomers are already getting ready to support their families well into their retirement years. A mix of a global economic slowdown and tougher competition in the job market may be contributing to this unfortunate trend. When I extrapolate this for another twenty years, I shudder to think how many current generation workers will be supporting their families well into their sixties or even seventies. Will 6 Crores suffice?

What about the effects of increasing Life Expectancy? Better medical care has contributed to a steady rise in life expectancy not just in India, but globally. It is estimated that Life Expectancy is going up by 5 years every decade, on average. By the time you retire, it’s not just likely but highly probable that 90 will be par for the course for most people. Couple that with the fact that medical expenses will continue rising, and the 6 Crores comes up woefully short once again.

Is there a solution in sight? Well, not an immediate one. Individual, sporadic efforts are unlikely to make a dent in the problem. What our country needs is a holistic plan that goes beyond just tweaking PPF rates and mandating the occasional, fragmented investor awareness program. A well rounded approach that focuses on encouraging individuals to make early starts, save in aggressive assets, manage one’s health, and even consciously limit their family sizes keeping in mind the hypercompetitive state that the country (and the world) is likely to devolve into, over the coming decades. On an individual level, you need to start giving some serious thought to your retirement today. Tomorrow may be too late.