How to age gracefully

July 11, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The title of this article may appear an oxymoron to a first-time reader. How can old age be associated with grace? No one likes to grow old and eventually die, despite this being an irreversible universal truth.

The topic becomes quite sensitive, can even lead to violence if posed directly to an elderly person — we will need to wait for Amitabh Bachchan’s response to the same in “Bbuddah Hoga Terra Baap“.

Retirement from the productive stage of life is also a similarly inevitable process. Society — developed ones more so than developing — doesn’t look too kindly on this population. The perception of such people is usually negative. Call them a spent work force or a burden to the family or a drag on government healthcare funding — it isn’t a happy situation to be in.

“If I’d known I was going to live this long, I’d have taken better care of myself.”

Here are some rules which can help you age gracefully:

Rule 1: Understand and manage longevity risk better

Never plan retirement savings with an expectation to live up to a certain age. No one can tell you how much of retirement money/savings is good enough and how long will it last.

Predicting the expected life of an individual is a difficult task. However, the general trend across the globe is that wives outlive husbands in most cases. Hence, do not underestimate the residual resource one may require to support a spouse.

Rule 2: Understand and manage inflation risk better

Inflation should be a key concern for anyone who is living on fixed cash flow. Double digit inflation can seriously erode the financial wellbeing of retirees in a short span of time. Hence, invest early in asset classes which can outperform inflation risks by a large margin — equity will be a good bet.

Rule 3: Understand and manage interest rate risk better

Lower interest rate can reduce retirement income due to low reinvestment return. An individual is forced to save and accumulate more in his/her retirement savings portfolio in a low interest rate environment.

Investment in long-term bonds or high dividend paying stocks offers a certain level of protection against lower interest rate and should form a certain part of the retirement saving portfolio. However such investments are subject to fluctuation based on market movement and may still cause shortfall.

Rule 4: Understand and manage residual risk better

Death or retirement of a spouse can cause a major shift in standard of living. The broad consensus is that the surviving spouse needs about 75 percent of the couple’s income to maintain living standards.

It is usually seen that a retiree’s lifestyle and his/her spending habits don’t change immediately after retirement from active professional life. Further, old age and failing health in the long term implies that the long-term cash flow from the retirement savings portfolio should go up gradually to meet one’s requirement.

Almost 30 percent of your monthly expenditure in the latter part of retired life is likely to be spent on healthcare. Hence, a comprehensive health insurance policy is a good way to mitigate this risk

Now for the most useful advice

“Quit worrying. Start planning”

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