As per “The 100-Year Life” a book by Lynda Gratton and Andrew Scott a baby born in the west today is likely live till a ripe old age of 105. Similarly the life expectancy in India has been steadily been increasing over the last many decades. As per a World Bank study it was a shade above 40 years around 1960s and currently it is 66 years with improvement in medical services, food, immunization etc. While these numbers are averages for the country, these numbers are going to be much higher for typical readers of this blog due to better access to medical facilities.
So the question is how is living too long a risk? The risk is – are we financially prepared to live a post retirement life of 30+ years when there is no income inflow and we have to manage with the retirement savings with ever rising increase in living and medical costs.
Let me give you some sense of the risk with a very simplified example, let’s say you are currently 60 years and need about Rs 1 lac per month for expenses. These expenses are increasing at 10% per annum and currently you expect to live till the age of 80 years. Just in order to sustain these expenses you would need a retirement nest egg of Rs 2.6 crore with 8% return. Now with improvement in medical science and your life style let us assume that actually you live till 85…what would be the size of the retirement nest egg required now? The kitty required would be Rs 3.5 crore (a 30% increase) and if you live to an age of 90 then the kitty is almost Rs 4.5 crore (a 65% increase). So you see that even a few years of increase in life span requires a lot more money in the retirement nest egg.
The life spans are increasing and we need to plan for longer lives. The solution of course is a nest egg big enough to take care of the increased life span. This will require that some of us to work longer (for money) beyond the 58-60 year benchmark that has existed in India for a long time. Apart from that just like Insurance which protects the family in case of an untimely death, an annuity plan will be required to provide a cover against the Risk of Living Longer. Unfortunately at present in India the maturity of this product is low so we will have to continuously look for other options to cover the “Risk of Living Longer”.
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