Imagine you have just retired after years of trudging to work to work, a busy family life of raising children, and more. You are on your first extended break and your calendar is essentially empty for the first time in years. You can sleep in, walk in the park, travel without applying for leave, or pick up that old hobby. It feels good. It feels fun. And yes, it feels a bit surreal. But again, the same question keeps popping up in your mind:
Many people presume life after work is cheaper. There is no more daily commute. Your children are likely more independent. Big expenses such as house loan have been eliminated. Yet the reality is that usually the first number of years of retirement tend to come with additional costs that you did not expect, such as increased health care expenses, an impulse to travel, maintaining a lifestyle, or offering financial help for children.
You will often find that your costs are just as high, or possibly higher. The first five years of retirement are very important. They set the stage for the next twenty or more years of your life. If not planned for financially, these years can really eat into your savings and potentially leave you with less money in their 70’s and onward.
In this article we outline the real cost of early retirement in India, suggests effective planning, and helps you pass this new phase of life with less fear.
Why the First Five Years Are The Most Important
- A Change in Lifestyle, Not a Slowdown: Retirement does not mean the end of life — retirement is living life a different way. Many retirees will take their first few years of retirement to do all the things they have delayed — travel, become involved with hobbies, or just enjoy a better lifestyle. The activities they become involved with are typically discretionary spending and those costs will ramp up sharply in the first few years of retirement vs. their expectations.
- Health Costs Start to Materialise: Once you hit your 60s health costs start to become persistent. In some cases, you can be relatively healthy. But preventive check-ups, services related to aging, drugs, and insurance premiums all ramp up dramatically during your 60’s. If you had employer insurance, you won’t ever have the same level of health costs ever again.
- Sudden & Emotional Costs: Wedding expenses for your daughter or son, upgrading your house to fit your lifestyle, other gifts to help children or buy that cabin at the lake in the hills, are all things that happen, and these costs are all typically sudden and emotional decisions. For these reasons they aren’t typically planned for, and can take a big bite out of savings.
Sample Cost Breakdown for the First 5 Year
To illustrate, consider the example of a common recently retired couple living in a metro city in India who lead a comfortable lifestyle, balancing standard living with occasional higher outlays. Together their household costs: everything from groceries, electricity, and water, to home maintenance and out of the house consumption, could on an average, add up to ₹40,000. This is ₹480,000 a year.
In addition, healthcare, which as we have seen becomes a regular and often increasing cost post-work life. If you consider their outlay for health insurance premiums, consultations, testing and medicines at ₹180,000 a year, these don’t include a major healthcare emergency.
Travel and leisure was also increased in early retirement — is there ever really a set time schedule? From family visits, spiritual pilgrimages and vacations, they may spend upwards of ₹120,000 a year depending on geography.
What about family related outlays? Occasionally gifting, wedding or festival event contribute; or maybe financial support for children or grandchildren. Even conservatively, this may add another ₹60,000 a year of costs. Then there are incidental costs: say for home drywall repairs, festival costs, or other unexpected bills which will push incurred costs up to another ₹60,000 a year.
In sum, their described expected spending may have a total above ₹900,000, at the least an approximately ₹4.5 million total for the first five years of retirement. But this is important; the above expense breakdowns are presented as examples. Every retiree has a unique situation and situations can change.
In small town India, these costs may be substantially lower. Likewise, inflation must not be discounted, what costs ₹900,000 today, may cost upwards of ₹1,100,000 – ₹1,200,000 just a few years from now.
Also why it is important not to use a flat number for retirement costs prior to retirement. Retirement plans need to be flexible and adjusted annually by inflation or health cost changes or lifestyle changes. It is something to revisit on a semi-annual basis noting both personal need changes and changes in the economic environment in which a retiree finds themselves living.
How to Be Financially Prepared: Smart Methods for the First 5 Years
Preparing for retirement is about more than just lumpsum of money – it is about planning to monetise that money so it lasts, adapts, and pays for your lifestyle through constant life changes. The first 5 years are the most financially vulnerable, so a straightforward yet properly diversified approach is the key to a successful financial strategy. Here are some things you need to keep in mind as you navigate this journey.
#1. Create a Separate 5-Year Retirement Reserve
Don’t just put all your retirement funds together in one big basket. Create a separate retirement reserve that is specifically allocated for your first 5 years. This reserve should cover fixed monthly expenses, medical expenses, and reserve funds to be used only in case of emergencies and should be managed through low-risk, highly liquid financial products, such as:
- Senior Citizens’ Savings Scheme (SCSS)
- Post Office Monthly Income Scheme (POMIS)
- Bank Fixed Deposits (FDs) with staggered maturity dates
- Short-duration debt mutual funds or liquid funds
This helps to protect your much-needed cash flow for the essentials from market risks while still holding your core assets untouched for the long term.
#2.Use SWPs to Create Your Own Pension-Style Income Stream
Rather than withdrawing lumps some of money from your mutual fund corpus or savings account, set up a Systematic Withdrawal Plan (SWP) through a debt or hybrid mutual fund. You can withdraw a set amount each month while the remainder of your original capital continues to earn returns. The SWP can create a monthly income stream similar to a pension, which gives you predictability and control over your finances.
#3.Pre-Allocate for Poorly Known Large Expenses
Do you want to go on an overseas trip? Contribute to a wedding for your child? Renovate your house? Set aside money for these planned one-time expenses and do so outside of your monthly spending corpus. Park those funds in either ultra-short-term debt funds or a fixed deposit. This will ensure that you do not have to withdraw from your investments that you are intended on holding long-term, and enable you to maintain your monthly budget.
#4. Consider Inflation from Day One
Inflation is one of the most underappreciated retirement risks. Your lifestyle might remain the same, but the cost to sustain that lifestyle would not. Essentials like groceries, electricity, medicines, and healthcare, seem to rise every year, and as you retire, you suddenly realise that it’s a slow but continuous build-up of expenses, which can affect your purchasing power. That’s where inflation can caught you off guard if you are on a fixed income. There are some steps you can take to compensate for inflation starting right away.
One such step is to always increase your planned monthly withdrawals, by as much as 5–6% or more every year, to stay ahead of rising expenses. In addition to raising your income needs, a portion of your corpus to remain invested in an inflation beating instrument (equity mutual funds or low-cost index funds) so your money can grow faster than inflation over the long-term for growth purposes. Finally, you will find it useful to review your expenses each year. Your needs will change, sometimes slightly, sometimes drastically, and your inflation can change too. A yearly recalibration of your income plan will ensure no surprises and will help prepare you better for the journey ahead.
#5. Have a Dedicated Health Emergency Fund
Even with insurance, medical expenses can be insurmountable because of exclusions, co-payments, or treatments not covered by your plan. You will want to have a separate health emergency fund of at least ₹3–5 lakhs, in a liquid account (special savings account). This fund will support you in the event you encounter urgent medical expenses not covered by insurance, such as dental work, diagnostic tests, or home care.
#6. Review and Rebalance Once Per Year
Retirement planning is not a one-time event; it is a process that extends throughout your retirement career. Each year, set aside time to sit down and take an in-depth review of your entire financial picture. Begin by looking at how much you spent versus your budgets. This will help you identify if you had lifestyle creep, unexpected expenses, or areas where you could cut back. Then take a look to see if your investments performed as you expected, and whether they still met your needs for income.
You also need to review if your monthly income needs may have changed. Life in retirement is dynamic. New health issues, changing family responsibilities, or evolving personal objectives can all have an impact on your needs. Your risk tolerance may also have shifted, especially if you experienced a life-altering event like a medical emergency, or loss of your spouse. Rebalancing your portfolio can allow you to make adjustments between asset classes as necessary, and your money would be based on your needs, not just market performance.
#7. Work with a Financial Advisor (Not a Banker)
Managing your retiree funds yourself can be daunting, especially as the financial products proliferate and as your needs change. Therefore, pairing with a financial advisor – that is, the advisor whose sole interest is your best welfare can be transformative. Unlike bank relationship managers who are missioned to sell specific products, your planner is a qualified individual who will be able to give you more holistic advice for your objectives.
Your good advisor should not only help you develop a sustainable withdrawal strategy, help to make tax-efficient income, but can also assist with legacy planning. They are able to help amend your strategy further down the road, particularly during major departure points in your lifetime such as going from growth to preservation, or making plans to leave an inheritance.
The first five years of retirement typically chart the course for the decades to come, and a new chapter in life offers plenty of freedom and opportunity. That also comes with a particular set of what we like to call “financial pressures” as well; inflation, health care costs, and perhaps a different lifestyle. If you’re totally unprepared, it’s quite possible that you might be worried about funds all the time!
By developing a good plan, including the consideration of inflation, monitoring your spending, and managing your investment, you should be able to maintain and monitor your spending.