Why Retirement Planning Is Necessary – Inflation & Longevity Risk
Note
Exam Relevance: This topic is often asked as "Explain the factors necessitating retirement planning" (10 Marks). Focus on the 5 key factors below.
Introduction
The golden rule of retirement is: "You cannot borrow for retirement." You can take a loan for a home, car, or education, but no bank will give you a loan to pay for your grocery bills at age 70.
1. Increasing Life Expectancy (Longevity Risk)
- The Paradox: Living longer is good for life, but bad for finances.
- Data: In 1947, average Indian life expectancy was ~32 years. Today it is ~70 years. By 2050, it may be 80+.
- Impact: If you retire at 60 and live till 85, you have 25 years of "unemployment". Funding 25 years of consumption requires a massive corpus.
- Definition: Longevity Risk is the risk of outliving your assets.
2. Inflation (The Silent Erosion)
Inflation reduces the purchasing power of money.
- Example: ₹10,000 today buys a monthly grocery basket.
- @ 6% Inflation, in 20 years, you need ₹32,000 to buy the same basket.
- The Trap: People save thinking "₹1 Crore is enough". But in 20 years, ₹1 Crore will be worth what ₹30 Lakhs is today.
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3. Medical Inflation (Healthcare Costs)
- Fact: Medical costs rise faster than general inflation (approx. 12-15% in India).
- Reason: New technology (Robotic surgery) costs more.
- Reality: Most savings of senior citizens are wiped out by one major illness (Critical Illness). Health insurance becomes very expensive after 60.
4. Disintegration of Joint Family System
- Past: "Children are the retirement plan." Parents lived with sons.
- Present: Children move to other cities/countries for jobs. Nuclear families are the norm.
- Necessity: Parents must be Self-Reliant. Depending on children financially is risky and affects dignity.
5. Lack of Social Security
- Western Countries: Govt provides Social Security (Pension, Free Healthcare).
- India: Only Govt employees (Old regime) got pension. Private employees (EPF) get a lump sum which usually runs out in 5-7 years. There is no state-sponsored safety net.
Summary (Exam Points)
- Inflation: Destroys purchasing power.
- Longevity: You need to fund a 30-year holiday.
- Medical Cost: Rising faster than income.
- Nuclear Families: No support system.
- No Loan: You cannot borrow for retirement.
Quiz Time! 🎯
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