Retirement Planning is an Important Goal
Pension Assets in India is a Cause for Worry - IMRB Reliance Mutual Fund Retirement Survey 2015
The number of people above 60 years is expected to increase to over 350 million by 2050, up from around 120 million at present. This 200% increase over the current numbers is expected to pose a major economic challenge in the future.
The 60 years plus demographic would form over 20% of the population by the middle of this century and the numbers are only expected to rise as overall life expectancy increases. Our research shows that most people who would form a part of that age bracket by 2050 and are currently working, seem unaware of the urgent need for them to take stock of their finances. For instance, over 40% of respondents believe that their family or children will take care of them while 35% seem unwilling to invest because it would reduce their liquid funds. Another astonishing, though hardly surprising, fact is that 21% of the respondents were unaware of retirement plans. These numbers also reflect in the overall national data. India’s per capita retirement assets and pension assets as a percentage of GDP are among the worst in the World. The findings clearly indicate that urgent steps are necessary to mitigate the problem at the earliest.
Though retirement planning is the most important goal people have, most of them plan their retirement finances only after they reach their 30s. They are also unaware of factors such as inflation that drastically reduce the size of their investments. Our research further shows that only 15% or only 1 in every 7 individuals in the 30-55 years age bracket have planned for their retirement. And of these only 35% are regular investors. Another concern is that over 40% of the investors seem to favor life insurance policies and bank fixed deposits, both low return avenues. To illustrate, in the last 35 years equities have generated a CAGR of 17%* while other traditional debt instrument have given 8.5% returns over the same period. The difference in the percentages adds up over the years and can create a significantly higher corpus for equity investors.
Though equity exposure is seen to be a highly risky alternative and most people remain averse to the idea, we believe that mutual funds are still the best bet for a secure future. Systematic Investment Plans (SIPs) are a good way to go forward. People should choose funds that are aligned to their risk appetite and age profile and make regular investments. The inherent ability of equity to give better returns can be again illustrated through an example. Taking two return percentages, 15% and 7%, over a 30-year period, we see that an investment of Rs. 5,000 per month will create a corpus of Rs. 3.46 crores at 15% returns whereas it will only create a corpus of Rs.61 lakh at 7%. Moreover, the higher corpus will continue to pay for itself even if the investor chooses to withdraw monthly annuities after the initial 30-year period. Opting for mixed plans that offer both debt and equity investments and take care of both aspects – security and growth, may be the way forward for skeptical investors.
"We believe private pension has to play a significant role if the country wants to prevent any economic issues in the future. Companies need to put some thought into how to get this done as there are areas of concern, and thus opportunities for improvement, across most departments. For instance, client interactions have to be become more intuitive and organic. The investor should feel that the financial analyst is a trusted advisor and friend rather than a representative of a fund house. Also, firms need to promote client-centric policies that negate any fears the investors may have and allow them to take the right steps. Another aspect that is often ignored is customer education. People have to be made financially aware of various products, investment plans and given incentives to think for themselves a bit more. Only a holistic effort will solve the problem" says Mr Sundeep Sikka.
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