Income-Expenditure Gap in Retirement
Whether there will be an income-expenditure gap in retirement depends on several factors, including your current income, lifestyle, savings, investments, inflation, and post-retirement expenses. This gap is a concern due to rising life expectancy, increasing healthcare costs, and no social security.
When you are about 10 years away from retirement ask yourself these questions:
- How much is your monthly expenses on electricity, society charges, food, travel, fuel, salaries to cook, servants, driver, etc.,
- How much do you really spend on buying food, eating out, etc.
- Expenses on special occasions -marriage of siblings, children of siblings, other events, festivals, etc.
- Vacations and other annual expenses – insurance, etc.
Income Sources in Retirement:
Pension : Limited to government or organised sector employees
Investments : Returns from fixed deposits, mutual funds, dividends, or rental income.
Savings : Withdrawals from savings accounts, PPF, NPS.
Other : Part-time work, family support, or annuity plans.
Most Indians rely on personal savings or family support.
Expenditure in Retirement:
Regular Expenses : Food, utilities, rent/housing maintenance.
Healthcare : Costs rise with age (e.g., medicines, hospitalisation, insurance).
Lifestyle : Travel, hobbies, or supporting family.
Inflation: In India, inflation averages 5-7% annually, eroding purchasing power over 20 years of retirement.
The Gap:
If your post-retirement income (pension + investment returns) is less than your expenses, a gap emerges.
Example: A retiree with a monthly expense of ₹50,000 but only ₹30,000 from pension and investments faces a ₹20,000 monthly gap.
Factors like medical emergencies or unexpected expenses (e.g., home repairs) widen this gap.
How to fill the Income-Expenditure gap
To bridge this gap, you need a combination of savings, investments, and income-generating strategies. First of course, retire as late as possible. If you retire at 65 years instead of retiring at 60, it means you will need say 25x your expenses instead of 35 years if you retire at 60.
Build a Retirement Corpus:
Estimate Needs : Assume you need ₹50,000/month (in today's value) for 35 years post-retirement at age 60, with 6% inflation. Using the 4% safe withdrawal rule, you'd need a corpus of about ₹3 crore.
Start Early : Invest in long-term instruments like Equity Mutual Funds or NPS for higher returns.
Rental Income : Invest in real estate for steady rental yields.
Dividend Stocks/Mutual Funds: Invest in high-dividend stocks or mutual funds.
Optimise for Inflation and Taxes:
Equity Investments : Allocate 50-60% of your portfolio to equity mutual funds or stocks for inflation-beating returns
Tax-Free Instruments: Use Senior Citizens' Savings Scheme (SCSS) or tax-free bonds for stable, tax-efficient income.
Manage Healthcare Costs:
Health Insurance : Buy a comprehensive health plan early to cover hospitalisation and critical illnesses.
Emergency Fund : Keep 6-12 months' expenses in a liquid fund or fixed deposit for emergencies.
Part-time Work : Leverage skills for consulting, freelancing, or teaching.
Reverse Mortgage : If you own a house, use a reverse mortgage scheme to get monthly payments while retaining ownership.
Downsize Lifestyle : Move to a smaller home or Tier-2 city to reduce costs.
Budgeting: Use the 50-30-20 rule (50% needs, 30% wants, 20% savings) even in retirement to manage cash flow.
Family support: Many retirees depend on children, but this is less reliable with nuclear families and rising costs.
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