Sameer Rastogi Saksham Wealth Solutions Private Limited

Top 10 Risks to Retirement

An essential guide to Retirement

April 2012

Preface
Retirement Planning is more art than science. Sure it involves numbers and spreadsheets, but there are many unknowns that can dramatically effect your projections and ultimately your quality of life in retirement. Most people approaching or in retirement know that they must balance their retirement income with their retirement expenses. The tricky part that is often not addressed is guaranteeing the retirement income and safeguarding against unforeseen circumstances. There are some incredibly serious issues in play when it comes to a securing your retirement life. Retirement is not as simple as working, saving and then living off of those savings. For people either preparing for retirement or already retired, there are a number of macro-economic and demographic factors that need to be considered. For example: Do you know how long you will live? Are you sure the economy will behave as you think? Have you factored inflation and swings in financial markets into your retirement plan? Will government schemes like PPF, EPF, MIS, Pension Scheme remain as they are today? Are you sure you will not have to spare a big amount from your Retirement kitty towards financing your kids Marriage, Education or Business. Are you sure your mediclaim policy will cover every illnesses you develop and will last for repeated hospitalization and domiciliary medical expenses? Have you estimated your expenses properly?

The good news is that there are many financial products designed to help retirees protect themselves, their finances and their quality of life. And, these products are evolving and improving rapidly. But perhaps the best way to protect yourself is to understand some of the important risks your finances will face in retirement. Forewarned is forearmed. Understanding these concerns could mean the difference between enjoying sunsets in your golden years and dreading the sunset because you cannot pay your electricity bill even if you thought you were well prepared. Learn more about the specific retirement risks listed out in this ebook.

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Insufficient Planning - Comfortably Oblivious
Over next 10 - 30 years, too many Indian will retire without adequate planning.

The three main mistakes that people make when planning for retirement are: Not saving enough Not guaranteeing enough income for retirement Having contradictory views on wealth accumulation

While not guaranteeing your retirement income or effectively protecting your retirement assets are serious problems they are only issues if you actually have adequate savings. Though many people think that they have adequate resources for retirement, few actually do. As per the recent survey conducted by Citibank India: 85% of people earning 3 lakhs to 15 lakhs are financially concerned for their Kids Education and Marriage. Only 71% of the people surveyed said that they are concerned for Retirement as well. Its noteworthy here that the amount of retirement corpus required is much greater than for kids education and marriage. Only 23% of the surveyed people are actively contribution towards Retirement Corpus besides contributing towards EPF, which is mandatory in organized sector. While 51% of the people surveyed were confident about their short term finances, only 21% people were very confident about their long term finances. 74% of the people surveyed stated that buying real estate and gold will safe guard their long-term wealth objectives. (this is dangerous as people are misjudging the risk and returns associated with Real Estate and Gold and are overexposing themselves to only two assets.) The above fact is further startling as 76% of people wish to pass on their accumulated Real Estate and Gold to the next generation. This strategy is bound to delay and diminish contributions towards Retirement objective. As the two asset classes will not be liquidated for consumption, they will create liquidity crunch during Retirement.

As is clear from the above surveyed findings, people are not planning for their Retirement. Their emotions are the drivers of their financial decisions.

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Longevity
The Risk of Living Too Long When planning for retirement, you want to insure that you have enough money to cover your living expenses for every year you are alive. The problem is that you have no way of knowing how long you will actually live. According to the Old Age Social and Income Security (OASIS) report, the average life expectancy in India is rapidly increasing. From 32 years in 1951, it has already shot up to 64 years in 2001. According to the report, the average life expectancy in India will be 80 years by 2025. So, if you are retiring at 58 years of age, that neat 22 years of life without work. However, these life expectancy numbers are misleading. Life expectancy numbers are averaged for all deaths regardless of age so they include infant and other young person deaths making the average deceivingly young. More useful statistics include these facts: In 2010, life expectancy for people age 60 was 75 years old. In 2010, for those age 75, life expectancy was 82, According to the New England Centarian Study for US, people ages 100 and older are the fastest-growing segment of the United States population, and this pattern is expected to continue. Over the long term, we can expect something similar here There is a greater than 50 percent chance that at least one partner from a couple in their 60s will live to the age of 80.

It is important to understand that you have a good chance of living a long time to 80 or longer. Good health and good genes contribute to a long life. The average person is born with a set of genes that would allow them to live to 85 years of age. People who take good care of themselves may add as many as 10 quality years to that. People who smoke, are overweight or fail to practice preventive medicine may subtract substantial years from their lives. Our longer life spans mean that we must have vastly more retirement assets than previous generations. The good news is that there are actions you can take and financial insurance products to help you insure you do not outlive your assets no matter how long you live. Lifetime Annuities are a good way of guaranteeing your income.

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Retiring Too Soon
How Long Can You Afford to Live in Retirement? Our life spans are increasing dramatically. Paradoxically, the percentage of time we spend working is decreasing. The current working population seems eager to stop working earlier than their forefathers. Only 3 percent of population in the India work past their 65th birthday, unlike previous generations who worked until the end of their lives. A hundred years ago, most people worked until the end of their lives. Today only 3 percent of men in the India work past their 65th birthday. If, as statistics suggest, you can expect to live a good 20 to 25 years after you leave the workforce, a prickly question is raised: have you properly calculated how much money you will need to live comfortably and independently for the rest of your life? Have you a realistic plan for achieving that goal? Why are people working a smaller percentage of their lives? Economists are not sure, but two theories seem probable: Rising Income: The theory regarding why Indians are likely to chose a retirement age well before their mortality is that rising lifetime income has led workers to choose a larger period of leisure at the end of their lives. And, it is true; we are earning more money than previous generations. The problem here is that many individuals are not saving adequately. More money has been made, but not saved sufficiently to be spent in retirement. What is driving you toward retirement? Are your goals reasonable and rational? .

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Uncertainties of Government Investment schemes
Will PPF, EPF, LIC, MIS, Sr. Citizen Schemes remain the same over next 10 years? Mathematics of Retirement is getting further complicated with frequent changes in investment options. While, the population of 70s, 80s and 90s could see stable government policies towards various investment options, there have been several revisions in the first decade of 21st Century. Following instances are some of the indicators of how uncertain the future can be: 1. In last 12 years, rate of interest on PPF has been revised 5 times and brought down to 8% from the high of 12.5% per annum. EPF has been also put to similar fate. 2. PPF and EPF rates have recently been pegged to 10 years GILT rates which is totally market driven. Hence, if the policy is adhered to, PPF returns can range between 5% to 9.5% ( as has been the band of GILT movement over last 10 years) 3. UTI, once the cash cow of the Government, was almost at the bankruptcy stage. To avoid any upheaval, it was split into two parts. All previous promises of 18% to 21% returns on various UTI schemes were called prematurely in 1998 2000 and hence caused major disturbance to long term planning of investors. Similar treatment was meted out to IFCI schemes as well. 4. Several LIC schemes offering High Guarantees over long term period were discontinued in period between 2000-2003. This shunted lot of good longterm investment opportunities. 5. Almost in similar fashion as it used to be with UTI, the Government is today using the funds of LIC for financing its own targets of reducing fiscal deficits. At times, Government has bent rules and proceeded with impunity while making IRDA (Insurance Regulatory and Development Authority). This may actually hurt the long term performance of LIC policies, which investors are pretty ignorant about. 6. To increase tax collections, Government has been trying to enforce EET regime (Exempt Exempt Tax). Once enforced, this regime will take away the Tax Free advantage from investments like Insurance and PPF. This would straight away take 30% of your Retirement corpus. 7. In 2010, Government enforced upon all Insurers to offer minimum guarantee of 4.5% p.a returns on all Pension Policies. This move backfired as all the industry experts criticized the move as it would hurt the potential of policy to earn higher returns. The Industry players also found it risky to offer any guarantees and hence never launched a pension plan since then. 8. With lot of fanfare, Government launched New Pension Scheme. It was positioned as the cheapest Pension Scheme in the world. It failed to excite investors. The investors never wanted the cheapest. All they want is Easy, Transparent and Tax Efficient mode of Investment. NPS has failed so far on several of these parameters.

The above 8 points are just tip of the iceberg. There have been several other changes that affect the investors directly as well as indirectly. Just because its very difficult to project Governments next move, we cannot follow the retirement strategy as followed by our previous generation.

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Wife, when she is the lone survivor!
Women, Retirement, & Poor Finances Most notably, older women end up living in poverty a lot more than men. In US, women comprise three-fourth of seniors who are considered poor. In fact, one out of four older women depends on Social Security for 90 percent of their income and many of these women live in or near poverty. Why is this? Well, women tend to earn less than men and, on average, spend less time in the workforce Due to home and care giving responsibilities most of women either give up their careers or compromise a great deal. Indian socio-economic structure is such that it often discourage women from working In all families, Rich or Poor, Urban or Rural, women tend to avoid taking financial decisions and financial education.

The lack of financial education among women makes them financially vulnerable while their Husbands are no more. They will either get too defensive about investment or will leave too many decisions for outsiders. Both the approaches have their pitfalls. What Do You Need to Avoid a Situation like this? Make women of the home party to all financial decisions Understand her comfort with various assets classes and give due weight-age while allocating assets. Ensure that all assets are jointly held Ensure that most of the assets you hold during Retirement are generating income to her name as well. No Loans shall remain outstanding for which the spouse has to repay. All medical and critical illness policies shall be in due knowledge of wife. A will, and a financial emergency kit (list of important documents, contact details, procedures etc,) should be in the know of your spouse.

The above mentioned points are the least you should do to avoid any financial hassle later.

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Inflation
Inflation Can Devastate Even a Good Retirement Plan "Inflation is when you pay fifteen dollars for a ten-dollar haircut you used to get for five dollars when you had hair." -Sam Ewing "Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." -Ronald Reagan "Some idea of inflation comes from seeing a youngster get his first job at a salary you dreamed of as the culmination of your career." -Bill Vaughn "Inflation is taxation without legislation." -Milton Friedman "Bankers know that history is inflationary and that money is the last thing a wise man will hoard." -William Durant "Inflation is the crabgrass in your savings." -Robert Orben "Inflation is when sitting on your nest egg doesnt give you anything to crow about." -Unknown Despite these witty quotations, no one could say it strongly enough when living on a fixed income, inflation has a profound impact on your quality of life. The American Heritage Dictionary of the English Language defines inflation as, "A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services." Basically, inflation makes goods and services more expensive and decreases the value of your money. When you are working your income generally rise as the costs of goods and services increase. Your earnings "keep pace with inflation", so normal inflation is not generally a big concern. However, when you are living off of savings inflation literally robs you of income. Most people underestimate the impact inflation will have on their retirement plans. Even at relatively low rates, inflation is a real thief of buying power over time. Most experts feel safe recommending that individuals calculate their retirement needs using a 8 percent inflation rate. But, it is important to understand that we have seen (as in the late seventies, eighties and early nineties) sustained inflation rates of around 12-17 percent! The Math Failing to account for the effects of inflation is a very damaging mistake. Perhaps the following example will help you understand the real world implications of inflation. These scenarios

assume that you now require Rs. 500,000 a year to maintain your lifestyle and would like to maintain that standard of living in retirement. A 8 percent inflation rate is used -- the recent historic average (neither low nor high): If you need Rs 5 Lakh a year to live now (your age 58 years), you will need Rs10.07 Lakhs a year in 10 years to support the same standard of living. Rs 39.94 Lakhs a year is the amount of money you would require in 27 years (age 85 if you retired at 58). And, if you retired at 58 and lived to be 99 years old another 41 years, you will need Rs 1.17 Crores a year! If we adjusted the inflation rate upward just 1 point to 9 percent, then the Rs 39.94 Lakhs required to support you at 85 becomes Rs 51.12 Lakhs a rather significant increase. The math is even more staggering when supporting a Rs 10 Lakhs a year lifestyle. At just a 8 percent inflation rate you will need the following amounts to support the same expenses: Rs 21.58 Lakhs a year in 10 years (age 68 years). Rs 79.88 Lakhs a year in 27 years (age 85 years)

Rs 2.34 Crores in 41 years (If you retire at 58 and live to 99, you have lived 41 years in retirement.) The good news is that some pension programs (though increasingly few) adjust your income for inflation. The bad news is that if you are living in retirement by withdrawing from investments or savings, then the value of your money will dramatically decrease overtime. You will require far more money to support your lifestyle in the future.

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Rising Medical Costs
Out of Pocket Medical Spending in Retirement can Ruin Finances Healthcare costs in retirement can be staggering. You are older, your body is more vulnerable and prone to disease and medical expenses increase every year. Even though your mediclaim policy may provide coverage, still you may have spend out-of-pocket health care costs. Many retirees are not prepared for the high-cost of medical care in retirement when they are no longer part of a company plan. And, too many people believe that their Mediclaim policies shall see them through their life time. Well the truth lies somewhere else. Actually, your mediclaim policies will fall way short of your medical expenses. When people ask me, how much mediclaim coverage is sufficient, then for a Retiree, I suggest, atleast Rs 10 lakhs. Unfortunately, most the insurers decline this coverage at this age, or it costs a bomb! Anyways, even if they get coverage for this amount, still it will fall short. Lets understand with the help of this illustration: If you retire at age 58, with an assumption that you may require Rs 10 lakhs as medical expenses over the remaining life, you chose to take mediclaim coverage accordingly. Considering that Medical costs dramatically outpace inflation (as in the past), with 12% annual cost rise, the similar medical facilities shall cost you: Rs 31.05 lakhs when you are 68 years old Rs 68.66 lakhs when you are 75 years old Rs 2.13 Crores when you are 85 years old

Are the figures above shaking the ground underneath for you? The figures mentioned above are based on genuine assumptions based on recent 10 years averages. Your mediclaim policies cannot match the inflation that increases medical costs. The cost of medical care has outpaced inflation for the past 20 years. These increases are expected to continue in the years ahead. Some industry surveys predict that costs will rise as much as 15 percent annually. This growth will double the cost of retiree health care in just five years. Furthermore, health spending as a share of after-tax income will rise dramatically. In US, in 2000, health care spending for older married couples was 16 percent of their total income. According to the Center for Retirement Research, that number is expected to increase to:

24 percent of income in 2010. 29 percent in 2020. 35 percent in 2030.

Why is healthcare getting more expensive? The answer is twofold. The bad news is that more is going wrong with your body. The good news is that there is more that medicine can do to fix you. Healthcare costs are increasing because of: Advances in medical technology leading to better but more expensive treatments. Increases in the prevalence of expensive medical conditions.

High administrative costs associated with a fragmented health care delivery and financing system. The existence of many highly paid medical specialists.

The medical profession is making some astonishing findings and treatments. These developments promise a remarkably long and hopefully good quality of life for the aged but they will be increasingly expensive.

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Swings in Financial Markets
If the Stock Market Crashes, Will Your Retirement Plan Crash Too? When planning for retirement, you must consider how you can account for the swings in financial markets. How will a sluggish economy, natural disasters, terrorist attacks, corporate scandals and other unforeseen events affect the stock market and your ability to fund retirement? In retirement, you need to plan for how much money you will need for every year you are alive but just as you don't know how long you will live, you cannot know what rate of return you will receive from your various investments. Between 2000 and 2002 the stock market declined dramatically from the heights it saw in the 1990s. During this time the market lost 37 percent in value. This loss meant that many people who had been well prepared for retirement and had invested in stocks could not stop working. Around that time, in US, a survey of several about to retire people was conducted: It was learnt that: Of the respondents who owned stocks, 77 percent said that they had lost money in the previous two years. Of those who lost money and had not yet retired, 21 percent postponed retirement as a result of their losses. Of investors who lost money in stocks and had already retired, 10 percent either returned to work after retirement or continued to work due to their losses. Among investors who lost money, 43 percent think that they will be less comfortable in retirement due to their losses, and 20 percent expect to have difficulty paying for health care during retirement. And, many retirement experts would summarize that these opinions were optimistic. In the far more serious crisis of 2008-2011, similar questions posed to retirees indicated even higher proportions of these types of responses. Stock market declines significantly affected the retirement plans of most of these individuals. In retirement, you need to plan for how much money you will need for every year you are alive but just as you dont know how long you will live, you cannot know what rate of return you will receive from your various investments. Many retirees hope to gain income from their savings or keep pace with inflation by investing in financial vehicles that offer high rate of returns. The problem is that as a general rule investments that offer high rates of return are often the riskiest.

Other retirees hoard their savings in accounts that offer no or very small dividends meaning their principal is safe, but the money may be loosing value by not keeping pace with inflation. And the savings are certainly not creating income. It is difficult to find just the right way to allocate your assets. But, it is critical to understand that you should try to plan on having enough guaranteed income to cover your basic needs should something happen to make the financial markets collapse.

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Debt /LOANS
When Living Off Fixed Retirement Income And Assets, Debt Does Not Make Sense When living in retirement on a fixed-income, you will not have more money tomorrow to pay off the debt than you do today. Eliminate this debt as fast as possible to save money. Explore debt consolidation. In India, fortunately, the DEBT culture among retirees is neglible or non existent. However, given the way people are hoarding Home Loans, Credit Cards, Car Loans, Consumer Durable Loans, Loan against GOLD / Shares, or a Personal Loan, who knows 10 years from now, we may see some retirees enjoying their life on Credit Card. While you are working, you may be able to repay the loans with ease. But the same may not be possible during Retirement as there will be no fresh income. The high interest cost of loans shall mean Death by a Thousand Cuts One of the reasons of economic debacle in Europe and US, post 2008, is high Debt across the population and government alike. Homes were sold at Zero percent down payments to jobless and elderly people. Can that happen to India? No one knows!