Many people do not understand when I say “your retirement will fail”. Well what can happen if you do not have ENOUGH money for retirement? well, your retirement will fail.
At this stage if you are not living with your children, you will wonder where the next meal will come from.
Retirement researchers often use the term “standard of living” in a way that refers to the cost of purchasing these “comforts, material goods and necessities.” For example, we might say that a household has adequate retirement assets to fund a Rs. 500,000 annual standard of living when what we mean is that the household can enjoy whatever standard of living Rs.500,000 a year can purchase. We may even mean that this can be maintained for X number of years assuming y% of inflation.
Since none of us (Indians) are eligible for Social Security benefits, virtually all of us have to build some floor below which our income SHOULD not fall. However, the level of that floor can vary greatly. Rich and Wealthy households will be able to build a floor that completely protects their standard of living regardless of investment results, while other households may have a floor consisting of only an annuity benefits that provides very little safety. The higher your floor, the less market losses will harm you standard of living. A floor is insurance and the more wealth you have, the more insurance you can afford. In the Indian context if you have say an annuity of Rs. 2 crores which gives you a pension of Rs. 10,00,000 a year, you are reasonably insulated. You can clear a higher aspirational portfolio with amounts more than that. For example, assume that Rs. 750,000 a year is a retiree’s desired standard of living but she believes that in the worst case scenario she could get by spending Rs. 500,000 annually. Spending less than this Rs. 500,000 a year would imply a significant change in her lifestyle.
With a floor-and-upside strategy, she might try to build a Rs. 500,000 floor with ANNUITY benefits and fixed deposit and invest any remaining assets in equities. She hopes to generate Rs. 750,000 or even more annual income at the risk of having only Rs. 500,000. Whether she generates more or less than the additional Rs. 250,000 annually depends on her investment results – it’s “market-funded.”
Sometimes it fails…
Let us look at the various types of failure….
- You were leading a luxurious life style being funded by your salary and a decent portfolio – this will vanish. You had a corpus in equities from which you were getting a dividend and you were managing it yourself. Suddenly, your luck ran out – and you were unable to manage your equity portfolio. Or your husband died at a young age and you are unable to look after the money. Any of these reasons can fluctuate the value of your portfolio. At this stage her income has fallen from 750,000 to 500,000 pa and she is a able to live well but the annual foreign vacation has been shrunk to a vacation to Goa.
- When it gets worse it means her income has fallen to Rs. 450,000 – this is taking a toll on her living and she is unable to meet some of her expenses. If you have a child who is well off, she can ask that child to fund the difference. However if she does not have children, she may be stressed.
- When income falls even more – say it is Rs. 340,000 for one year she may have to withdraw from her assets. If she is 78 at this stage she may still be worried that this will not be sufficient till she reaches 98 years of age..
What to do?
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