Of late, I have been doing a lot of reading on the topic of retirement planning. I must say that, while there has been a certain level of interest about retirement issues in India now, much of the good inputs come from the US, where this has been a topic of great interest over several decades. One of the areas most of the financial community there agree on is the need to structure your decades of retirement by activity levels. In this post I will try to suggest a framework, we can adopt to our context in India.
One of the important differences between US and India that we need to keep in mind is the age of retirement and life expectancy. Many people in the US work till the age of 65 and consider they will live till 90. In the Indian context, it will make sense to look at these figures at 55 and 85 respectively. Yes, I know many people retire at 60, but with the focus on shorter career spans along with many wanting to look at doing other things, 55 will be a good age to aim for. Moreover, with the passage of time, more people are going to have non-traditional careers where the working in regular jobs will have shorter life span. The other aspect is life expectancy – I feel with the current state of medical advances, it will be logical to take 85 as the figure. Again, it is possible to live beyond that and you must factor that into your plan. In the end however, a 30 year retirement period which you need to plan for and fund will probably do the trick.
Ok having established the above, let us now turn to a framework of the 3 decades. I will follow the terminology from an US blogger. He calls the first decade to be the Go-Go decade, where you are going to be quite active. This is the time to catch up on all the family visits, travel the world, organise your monetary and other affairs, spend time with your adult children and to indulge in the hobbies and interests for which you may not have had much time during your working life. The second decade is termed as the Slow-Go decade, where you still do much of the earlier stuff, health permitting, but there is a palpable slowing down in both the numbers and frequency of activities. The final decade is termed as the No-Go decade where you will mostly be indoors with limited activities.
If we adopt this framework to the Indian context, how will things look? I can think of the following for the first decade, in terms of the situation and the activities:-
- You will still be actively engaged in some professional activities but not a regular job any more.
- Your income will mainly come from passive category with some active income.
- It is likely that your children are into their careers now or at least finishing up their post graduate education.
- They will also possibly get married in this decade of your life.
- With time and hopefully money in your hands, you can look at travelling much more than you have done earlier.
- You may want to replace some assets such as cars or white goods.
- You can also indulge in your hobbies and interests in a more significant manner. If these are outdoor in nature, this is obviously the best decade to do so.
- You will settle down in your home town or your place of retirement during this decade. Catching up with friends and family there will be a good part of leisure.
In the second decade, the professional activities will probably cease. Your outdoor aspects such as travel or any active sports will also taper off gradually. While you will still be healthy ( hopefully ), you will not be too inclined to venture out of home. This will probably be a time to view movies in home theatre as opposed to the cinemas and to order food in as opposed to driving out to a restaurant.
In the third decade when you are 75 plus, it is very unlikely that you will engage in a lot of activities that require a lot of physical exertion. Yes, it will still be important to do regular exercises, but your travels and other outings reduce drastically. Visits to the doctor are, unfortunately, going to increase in frequency. We can look at this decade as the winding down phase, where you should take care of your affairs, rest as much as you need to and hope that the passing away, when it happens, is a relatively smooth affair.
What happens if you live longer than you have estimated? We need to understand that this is possible, given that many people are living well into their 90’s nowadays. While you will either be almost inactive, if not in some long term care facility, there is clearly a need to plan for this financially. The last thing you need at this stage of life is to worry about money or being dependent on your children when you are at your most vulnerable. Any financial plan should include a final 5 years for you and your spouse.
Once you have chalked up your road map, we can start to put a financial dimension to it. This should be done in a bottom up manner, by understanding your lifestyle and then working out the relevant cash flows needed in the 3 decades. This is conceptually a little difficult and I will explain with a personal example in the next post.