March 21

Illusion of Pension

In India pension products are bought emotionally. We can describe this as a herd behaviour. Here investors follow others without identifying the features of products and their requirements. When sales pitches are made, the sellers push the product and make people understand in such a way as if they are losing their last opportunity. Investors also seek if they get any free gift, i.e. income tax benefit. There are many traps and investors fall prey.
In today’s scenario most of the employees don’t have defined benefit pension scheme. One has to depend on contributory pension product. NPS is an example of contributory pension scheme.

Illusion of Pension

Apart from that, when you want to make a provision, you always consider the benefits U/s 80C. Here also you consider the limit of Rs. 1,50,000 ceiling and knowingly or unknowingly you restrict yourself to defined contribution. While people save or insure against loss or damage and insure for retirement, they make some mistakes which have damaging consequences for them and for the society at large.

Retirement is the second dependency period. You will become an unproductive consumer; you may be too old to work but too young to die. You must resort to financial plan before you buy any product(s) to support your retirement. Retirement provision is required by both those who are employed and self-employed as well.

Unless investments for retirement are made with asset allocation (depending upon your risk profile), you take stress not only by lengthening your working period and but also seeking higher rate of return for retirement. You can expect more return during accumulation phase but not during the phase of distribution. Why do you fail to recognize? It is because you fail to visualize invisibles. If you seek guaranteed return you may not offset inflation, which is a guaranteed loss. Changes are unavoidable. Regular monitoring is required to assess your fund performance based on your need.

Insurance companies or other financial institutions are coming with products which are very complex for consumers to understand or trust. Insurance companies offer both life insurance products and investment products. Those who fail to plan for retirement in early days may postpone retirement or try to save more in later years or both. These are not solutions- they are pretending to solve the problem. Another challenge in India is people join in jobs after they become specialist and retire early. Can anybody avoid old age? Retirement is like holidays- you’ll become more social as you may have ample time. In India, you need to keep in mind the demographic factors and behavioural patterns and keep your head above water.

Pension is illusion if you are biased. Sometimes investors prefer to take less risk even they have long time horizon (deferment period).If pension is not adjusted with inflation, and then your pension may not suffice. You need to consider your household, lifestyle expenses and your longevity after retirement.

I’m citing an example: Mr. Ramesh retired at the age of 58 years, and is expected to live up to the age of 75 years. He has both income from pension and income from other sources Rs. 2, 40,000 p.a. and Rs. 60,000 p.a. respectively. Both incomes don’t keep pace with inflation. Here inflation is assumed 7% p.a. While he retires, he gets Rs. 3, 00,000 (Rs. 2, 40,000 + Rs. 60,000).

His expenses are also Rs. 3, 00,000 in the first year and he might be satisfied as he’s biased. Although in the first year he has met his expenses, he will not be able to meet the expenses second year onward since his expenses will exceed Rs. 3,00,000 due to inflation.

At the age of 58, his deficit is nil. But gradually the deficit increases. At one point of time the expenses become double the total income.

To conclude, the people of India deviate from the rational choice- they are biased about today’s consumption and self-control problem like procrastination of retirement planning. Consider your health and your surroundings. If you see the consumption part is more than your income, you will be in distress. If inflation if not compensated by nominal increase of both your earned and unearned income, you’ll become poorer. If you take care of your investment, it’ll reciprocate. Your wishful mental chemistry must be replaced with pragmatism.


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