Retirement planning: Why the US retirement model may not work for Indian retirees

It is fall season in the United States and the colours around are breathtakingly beautiful. The trees understand that winter is around the corner. Roots decide to take defensive action to preserve life underground, where it is relatively warm, and shut off the water lines and seal the leaf nodes. When leaves can no longer make sugars through photosynthesis, they can no longer be green. They turn yellow, orange and red, and drop off to the ground. By covering the ground around the tree with brown leaf mulch, they help the roots stay protected and warm.

At one of my recent walks, I met an 85-year old gentleman. My elderly friend loved my explanation of fall. Then, he told me that an elder like him was also enjoying the beauty of the Fall in his life. Lower spending, higher fi nancial comfort and higher predictability. The retirement spending smile was in action.

Go-go, slow-go & no-go years

David Blanchett formally identified this shape of a retiree’s real (after inflation) annual spend ing in 2014; it has since been popularly quoted in US retirement planning forums, bringing smiles of relief to many seniors.


The retirement researcher first splits the retirement period into the go-go years of 65-75, when spending is high. Retirees tend to be enthusiastic about their time and money, and the relaxed reality of not having to go to work every weekday. They spend on renovations, indulge themselves with new gadgets, take exotic holi days, and spend on new and existing hobbies.

In the slow-go years of 75-85, spending drops. Retirees like to limit their activities to closer circles and areas of interest. They don’t prefer upgrades and changes to their homes and cars. They like simpler travels, meals and entertain ment, cut back on the aggressive ones.

In the no-go years of 85 plus, their expenses start creeping up again, as they may require care-giving, out-of-pocket medical expenses and the like. However, the spending does not creep above the go-go year levels. That keeps the retirement smile intact.

Would this apply in India? My understanding is that it may not. Not to sound alarmist, but to caution that rules of the West look attractive; they are backed by extensive research and easy documentation that makes them available to a larger audience to read, hear and be eager to adopt. However, the cultural and institutional contexts are different. We do not have local research that confirms or denies the presence of the retirement spending smile for retirees in India. We may, therefore, have to be cautious.

Culturally, the Western society optimises for the individual. The finances and wealth of a retiree are clearly separated from those of their children and immediate family. The Indian retiree is firmly a part of the extended inter-generational family, viewing their wealth as the source of their collective well-being.

We know of retirees spending for the wedding celebrations of their grown children out of their retirement corpus; or funding the higher education or business start-ups of adult chil dren from their retirement savings. The go-go spending years include spending on the family, and not on the retiree alone.

Leaving behind for posterity

We also know that the Indian retiree is not look ing to spend the entire corpus in their life-time. They like to leave behind wealth for the next two generations, at least. Culturally, the ori entation is towards accumulation, saving and leaving it behind, than towards accumulation and spending. In the West, the residual wealth is inherited. In India, the retiree spends the residual wealth after all the large outlays and bequests for the family. The risk of overdoing the go-go years with the newfound retirement wealth is quite high in the Indian context.

In a mix of cultural and institutional context, Indian retirees have a conservative wealth portfolio. The composition is mostly real es tate, gold (both typically unavailable to spend, but passed on to the next generation) and fixed income products. Despite the surge in SIPs, the actual proportion of equity investment in the average Indian wealth portfolio, remains small. Retirees, in particular, prefer to stay away from equity investing because they see it as too risky at their age. This impacts the retirement smile significantly.

While the American retiree would settle for the much-touted 4% drawdown rate from his retirement corpus, this cannot be applied to an Indian portfolio that is mostly in fixed income and physical assets. The American rate is based on a 30-year longer term inflation rate of 2-3% and applied to a portfolio invested in both equity and debt. In the Indian context, the inflation rates are higher. As we shall see soon, the structural costs of services a retiree would avail of, might push their needs higher. Without the cushion of equity investing, the retirement portfolio in India runs the risk of higher drawdown and faster depletion or both.

Institutional advantages

What is the institutional advantage to the American retiree? Health care costs are covered by medical insurance that evens out the payments in the form of premium. The infrastructure for health care operates with predictable regular payout, based on the benefits that an individual chooses. Out-of pocket costs are defined, capped and known in advance, and medicare is part of the social security benefits for seniors.

In contrast, the Indian institutional framework poses unexpected risks. Not only is insurance costly for seniors, it’s not avail able as a standardised social welfare benefit. Unexpected spikes in health cost can throw off a retiree’s spending patterns well out of balance. Reliance on adult children and costly privatisation of senior health care and hospi talisation poses a serious risk to retirees in India, making their retirement spend a possible upward sloping line, than a smile.

The focus for the Indian retiree should be on these four aspects: one, protect the corpus from large outlays that will deplete it in early years, or reduce it drastically in the later earn ing years. Two, do not overdo physical assets that you will not use in your lifetime and avoid distress selling them in a medical emergency late in life. Three, ensure that a portion of the wealth (perhaps the one you plan to leave behind) is invested in equity indices or funds, so that your wealth has a chance to grow and protect you from inflation. Four, consider an earmarked corpus for healthcare and hospital isation, and choose palliative home care when that money is exhausted.

The deciduous trees of the Northern hemisphere may look very pretty in the fall. But the intelligence of their protection for the winter may not apply to the tropical forests of India.

The Author is Chairperson, Centre For Investment Education And Learning