New Reality of Retirement Savings: Why Investors Must Save More or Work Longer

For many years, investors in India planned their retirement on the belief that the Nifty index would continue to deliver annual growth of 12 to 15 per cent. This assumption was based on long-term historical averages. But currently, forward-looking projections suggest that returns are likely to be lower, in the range of 9 to 11 per cent.

The reason for this decline is that valuations are stretched. The Nifty price-to-earnings ratio, which measures how expensive stocks are compared to company profits, stands at 22 times. Historically, this figure has averaged around 17.5 times. At the same time, corporate income has normalised, which means they are no longer at the high levels that previously boosted equity returns.

The Impact on Retirement Corpus

This difference of three to four percentage points in expected returns may look small, but over decades it creates a large gap. Calculations show that investors could face a 37 per cent shortfall in their planned retirement savings if they continue to lean on the old growth assumptions. The money they thought would be adequate enough for retirement may fall far short of their needs.

The Options Ahead Experts say that there are two clear approaches for investors to consider. The first thing they need to do is increase their monthly Systematic Investment Plan (SIP) contributions by 30 to 50 percent. Putting more money into the market each month lets investors take out a rather large amount.

The second choice is to work for three to six more years. Working and saving for longer buys more time for investments to grow. In both cases, the lesson is clear: conserving money in a disciplined way is more crucial for building wealth than anticipating that markets will grow at an astounding rate.
According to NJ Wealth's blog, making larger SIP contributions over time helps investors keep up with inflation, adjust to rising income, and reach their financial goals fast. It shows that SIP top-ups are a good method to keep up with changing living needs while still building wealth.

No Panic Sell

When markets drop, retirees have to face a unique problem. If they need money during a dip and don't have any cash on hand, they have to sell their stocks at lower prices. This incurs permanent losses and stops them from making money when the markets hit back.

The fall in March 2020, when the market plunged by 38%, is a striking example. Many investors who sold at that time missed the rally thereafter. By December 2020, stocks had gone up by 59%. There was a huge 97 percentage point disparity between those who stayed and those who sold.

3-Bucket Strategy

Financial advisors suggest a basic arrangement called the three-bucket liquidity plan to avoid the crisis.

The first bucket is for things an investor needs currently. Retirees should have enough cash on hand to cover their living expenditures for around two years. These investments are safe and easy to get to, just like cash.

The second bucket is for things an investor requires in the medium term. This should be enough to cover three to five years' worth of expenses in solid debt instruments like government bonds or high-quality corporate bonds. These investments generate stable income and are less volatile compared to stocks.

The third bucket is for growth over the long run. The rest of the money is put into stocks, which are not affected by short-term market changes. This money keeps the growing part of the portfolio so that it can fully benefit from recoveries.

"Sequence of return risk is the quiet wrecking ball of retirement portfolios. People don't get in trouble with the average return; they get in trouble when the negative returns come in. A bucket technique protects retirees by keeping short-term cash separate. This way, they don't have to sell stocks at a loss when the market goes down," Derek Delaney, a financial planner, said this on his LinkedIn page.

Discipline

Retirees can avoid selling their stocks at low prices during a crash by taking money out of the first bucket. This systematic way of doing things helps them navigate through ups and downs and make sure their long-term financial future is met.

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