2019 is an interesting year to discuss the topic of retirement in India. The first batches which entered post liberalisation in the early '90s are in their late '40s or early '50s. They were the first to experience mass-scale consumerism, taste fruits of globalisation, and arguably, become the most financially independent generation we ever had. As this generation matures, it faces some uncomfortable questions.
One significant change that the salaried segment of this generation will see is lack of post-retirement guaranteed pension which their predecessors enjoyed. Barring the armed forces and some corporate employees who will get defined-benefit pension, majority of this greying generation has probably saved for but not secured their post-retirement pension.
Fixed income alone will not help
Parking money only in fixed deposits and enjoying interest income may be suicidal for the generation planning to retire in the next five to 10 years.
From 14% levels 23 years ago, G-Sec yields have fallen to 6-8%. FD rates have closely mirrored this fall. The risk is imminent that retirement corpus may not yield enough interest to take care of regular expenses or the cost of medical requirements.
Retirement planning for this generation is trickier as those who entered workforce in the 1990's are likely to live into 2050's, given the increase in life-expectancy.
In 2017, Indians at age 60 were expected to live another 18 years. How long can Indians who hit retirement in 2030 expect to live? Most likely, well over 20-25 years. If interest rates fall over this period, the interest earned from instruments such as FDs is going to be volatile and grossly insufficient.
What is the way out?
Is there a way to secure oneself against interest rate fluctuations and risk of outliving one's savings? Immediate annuity plans by life insurers offer an effective solution. At the time of purchasing such plans, one is guaranteed a monthly/annual income (called annuity) for lifetime. Versions of annuity plans also extend income to the spouse in case the policy-holder expires earlier.
These plans have been in vogue for ages and some annuity purchase is statutorily mandated in employer-linked or private pension plans. However, there is a need gap for the generation retiring in the next five to 10 years. They would want retirement income to start later, but would like to know with certainty, what the future income amount would be, now.
Deferred annuity plans
To cater to their need, deferred annuity variants have recently been introduced by some insurers. These plans provide guaranteed income (which is declared today) for whole of life, starting from a chosen date in future. These plans also offer a top-up option to systematically invest in deferred annuity as one approaches their retirement date and with each step increase the guaranteed lifetime income.
Think of a 50-year old who plans to retire 10 years from now, investing Rs 10 lakh in such plans. If deferred life annuity option is chosen, Rs 1.32 lakh (at the rate of 13.2%, which is the current rate for some plans) per year starting from age 60 till whole of life is paid.
Alternative plan is to invest the Rs 10 lakh in some savings instrument to accumulate a bigger corpus (say, double it in 10 years) and then invest in immediate annuity at age 60. The risk here is, immediate annuity rates 10 years from now (in 2029) may not be in the current 6.8-6.9% levels. Even a fall to 6% will lead to Rs 20 lakh yielding life time income of Rs 1.20 lakh per annum, which is below the guaranteed Rs 1.32 lakh that the deferred annuity offers. At 5% the annual income for life drops to Rs 1 lakh.
Prudent financial advice for this generation would be to invest some of their retirement corpus in deferred annuity products today.
OLD AGE WOES
- The generation retiring in the next five to 10 years would want retirement income to start later, but would like to know what the future income amount would be
- Retirement corpus may not yield enough interest to take care of regular expenses or medical costs
The writer is chief risk officer and product head – Tata AIA Life Insurance
