Retirement Planning
A simple question most financial planners ask their clients is “have you started saving for your retirement”. Most people answer “No” to this.
The next question would be, “when do you plan to save for your retirement?” Everyone has a different answer for this question.
Some of the answers we have received from our clients for this question are: after my 30th birthday, after my 50th birthday, after I repay my housing loan, after I get married, after my child is born, I will be getting a pension so I don’t require to save for my retirement… so on and so forth.
If anyone asks my opinion about when one should start saving for one’s retirement, my answer would be “when you get your first pay check”, if anyone asks me the second question “when should I start to save for my retirement” my answer would be “now”.
Most people, including myself when I started my career, would find this difficult to understand. If someone had told me to start planning for my retirement when I received my first pay check, I would have laughed at him/her. “How dare he / she suggest about my retirement when I am just starting my career” or probably “is this person insane, advising me to plan for my retirement when I have a long career in front of me.”
Honestly till such time a person does not realise the value of time and how compounding works and what compounding can do to one’s wealth he/she would not realise why it is important to start planning for one’s retirement early in life.
Let us take a couple of case studies of people from two totally different backgrounds and analyse the situation.
Mr Ghate was a bank employee. He was born in a typical middle-class family. Was an average student in school. Completed his graduation in Arts and landed himself a job in a government (PSU) bank at the age of 25. Got married, had kids one son and one daughter, sent them to a good school. His family adopted a frugal life style. By default, his retirement nest started getting built right from his first salary. The bank started deducting provident fund and Ghate’s retirement kitty started growing slowly but steadily. He did not touch his PF for any of his major expenses such as children’s education, house purchase, etc. Instead opted for loans which his bank obliged and offered at a low(er) staff rate. He repaid the loans from his monthly salary bit by bit. Once the loans were paid off, he ploughed his extra surplus in Voluntary Provident Fund. He was entitled to a nominal pension. When he retired, he had built a decent retirement corpus plus he was entitled to a reasonable pension. He had purchased his own house, his children had a good education, were married and had good careers. One is self-employed and doing very well and the other is employed in a leading private sector enterprise. Ghate’s retirement corpus plus pension is more than enough to take care of himself and his wife till their end, without having to depend on either of his children financially. In all probability he would leave behind a nice fortune after him. As a bank employee, Ghate would have probably worked out that in the long-term compounding will do its magic and help him to put together a nice corpus.
Jatin is 45 years old. Born in a business family, as an only son, he did MBA from a top-ranking college. He started his career as a second-generation business person in his family expanding it sizeably in a few years. The family sold the business as a going concern and earned a sizeable fortune. After the fortune the immediate priorities were a big apartment in Mumbai, membership in prestigious clubs and top-notch education for his children. Having born with a silver spoon, he was never bothered and never thought about having a corpus for retirement. After the purchase of a new apartment a major portion of the sizeable fortune was invested in a new age business. Unfortunately, this business did not take off the way Jatin expected. Fortunately, he had not taken any loans for the business. By now his father was in his early seventies and due to health issues could not attend to the business. When a sudden emergency medical situation hit the family Jatin realised that he did not have an emergency fund available for the occasion. So far, all fund requirements, regular or one time, was being taken out from the business, which is not doing well now. This was when he realised the importance of building a retirement fund for himself. Had Jatin’s father planned a retirement corpus for himself the situation would have been well under control. Regarding the business Jatin is sure that he can shift to something else. He is also confident that he can do well in that. But now he is aware that he should plan for his retirement. He is also thankful that at least at the age of 45 he has realised the importance of having a retirement corpus. He realises that with the type of cash flow which he was having in the earlier part of his life had he started setting aside something for his retirement, compounding would have worked wonders for him. So now, he has not only started building a retirement corpus for himself but has also started a nominal but regular investment for his children’s retirement!
The above 2 case studies show that irrespective of what background one hails from, planning for retirement is an important aspect.
In Mr Ghate’s case the long period (age 25 to 60) for which he kept the money in his PF and also his formula of not touching the PF for any other requirement ensured that compounding did its work.
Similarly, Jatin too realised this and ensured that if not himself or his father, atleast let his children get the benefit of keeping money invested for a long time.
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