You Need to invest More for Retirement..!

You Need to invest More for Retirement

by Mr. DHIRENDRA KUMAR, Value Research



The basic numbers of saving / investing, life expectancy of people have changed

If you want your savings to be worth more, then you should invest more.

Long-term projections

Over the last few months, while analysing savers' long-term projections and answering their questions, it's become clear that most people do not save enough.

This is not unique to India ­­ financial advisors globally have started talking about it. In the developed world, this is driven by the realisation that interest rates and the resulting income from fixed-income products could possibly stay at negligible levels for many more years.

In India, there are many reasons why savers need to save more, and interest rates are only one of them. Nominally , in terms of the number that your bank has written on your fixed deposit certificate, interest rates in India are quite high.

However, anyone who understands even a little bit about savings and investments knows that this is an illusion and real interest rates over and above inflation are a fairly small 1 to 2%.

But, even that's an illusion. People's personal inflation rates, especially as they retire, is much higher than the official one.

DHIRENDRA KUMAR, Value Researchonline

Real rate of return

What's more, interest rates will likely head down. Mr. Raghuram Rajan is the rare RBI boss who was committed to maintaining a certain real rate of return.

In future, under a governor who is more accommodating to the low-interest cheerleaders, savers will probably have a harder time earning anything at all after adjusting for inflation.

What makes this worse is taxation on interest income. Even if you are in the 10% tax bracket, post-tax real returns from interest on deposits is barely neutral.

In the higher tax brackets, it's clearly negative. That's the reality of interest income that few realise.

None of this is going to change anytime soon and some of it is going to actually get worse. If, like most Indians, you are a believer in deposits, then you'll just have to put in that much more to get out the same value.

However, that's not the end of the story . What's making this worse is longer life spans.

Better healthcare

In India, life expectancy at the age of 60 is now 17.8 years. In 1990, this was 14.8 years. That big a change in average means that some people­­ especially those with access to better healthcare ­­ are living a lot longer.

It's very likely that this trend will continue.The flipside is that your retirement kitty may have to last 25 or / 30 years. To do this, your savings will have to earn better returns which is likely to be a challenge.

Even if they can ­­ perhaps for investors who have a reasonable equity allocation ­­ there is no alternative to saving more.

Most people just save whatever they can, or they save some arbitrary number driven by tax saving needs. Instead, we'll have to start projecting future needs and projecting backwards from there to see how much we need to save.

The best thing to do is to be pessimistic in these calculations ­­ assume that needs will be higher and returns lower.

This is for those who manage their own savings. For the millions who depend on statutory schemes such as PF, the government should tweak the system to lead to higher savings and returns.

In the last budget, there was an attempt to reform EPF that had to be rolled back in the teeth of protests.

However, an increase in the EPF contribution or some other fundamental tweak is needed to ensure that those dependant upon it can cope with the changes that are taking place.

Longer lifespans and lower returns are a lethal combination for being comfortably off.

All of us will have to recognise the threat and act sooner rather than later to manage it.



About the author..!

Mr. DHIRENDRA KUMAR is CEO at Value Research online

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