Nearing Retirement? Here's What You Need To Consider

Have you planned your retirement? Researches show people as young as 35 have started thinking about it. Surprisingly, while most invest in residential real estate in their prime years, few use it to their advantage in their later years. One of the takeaways from a recent report by the Reserve Bank of India was that the financing of retirement happens mostly through informal arrangements between parents and children.

Here are some insights from the report:

The love for physical assets

India's love for tangible assets is noteworthy –majority of household savings in India is parked in gold and real estate. This is unusual in the international context, says the report. Every state in India has the distinction of holding more wealth in terms of land and housing than any other asset.

Also read: How To Save Money When Buying a Home After Retirement?

Taking risks in the end 

Indians tend to borrow in the later part of their lives. They are more likely to reach retirement age with positive debt balances, emphasises the report. The pressure to pay back falls on every member and even dependents in the family. If real estate is better utilised, this problem of going illiquid can be mitigated.

Not letting real estate serve us

Typically, households shift their gold holdings towards real estate, without allocating their wealth ─ when it is at its peak ─ into either financial assets or retirement accounts. An average Indian would bestow his housing wealth to his future generation and in turn receive support during retirement. Such traditional approach to financial management has likely evolved over time as a rational response to prevailing economic conditions, the report says. At a stage when past investments should be yielding, they lie doing the opposite for a majority of Indians.

Pension funds, too, stay unproductive

The contribution of pension wealth to household wealth is negligible, says the report. Although these are a security for people, it is seldom used to create further wealth. Also, there are high levels of unsecured debt, and debt taken from non-institutional sources such as moneylenders. These translate into high interest payments on informal debt and impose substantially greater costs on Indian households.

Really awestruck with realty

The RBI maintains that if the current patterns of allocation are maintained, there will be significant additional pressure on the demand for assets such as gold and real estate in the coming decades. Over the coming decade and a half, the elderly cohort is expected to grow by 75 per cent. Only a small fraction of this cohort has saved in private pension plans.

Reallocation is the key 

Indian households can benefit greatly by re-allocating assets towards financial markets and away from gold. If households re-allocated a quarter of their existing gold holdings to financial assets, they could earn an amount equivalent to 0.8 per cent of their annual income per year (on an ongoing flow basis) on an average, says the report. However, if real estate investments could be made productive, one could consider that option as well.

Also read: Don't Let Retirement Take You By Surprise, Prepare In Advance

Options for seniors

Senior living has evolved into an attractive concept. However, only a few opt for this. For most Indians, senior living is still a luxury, thanks to the pricing dynamics within the real estate sector.

Also read:  Government Brings Senior Living To Centre Stage; To Evaluate Services Soon