In a recent survey conducted by Cafemutual among mutual fund distributors (MFDs) it was found that Retirement is the top priority for clients followed closely by children’s education/marriage and protecting themselves against an uncertain future. The survey covered 1256 financial intermediaries including mutual fund distributors (MFDs) and RIAs across 24 cities.
Here are some key reasons why retirement planning will be in demand:
- Increasing life expectancy and cost of living
- Since many people have been working in private sector, they get very limited retirement benefits, if at all
- Desire to maintain a comfortable lifestyle without becoming a burden to children
- Absence of any social welfare for retired people in India
- People do not get loan to fund retirement; they can get loan for other financial goals like buying a house or funding children education
- Reverse mortgage is not popular in India
- With children staying away from homes, retirement planning becomes important for parents
Various research reports highlight that currently India is a young country with a rising number of millennials joining the workforce. But in the coming years, the country will transition slowly from a ‘young’ to a ‘greying’ country, where the population of individuals above the age of 60 would increase significantly. This makes a strong case for advisors and MFDs to focus on the retirement theme and make investors plan for their retirement.
Here are some key data points that support opportunities in retirement planning for MFDs:
- According to the economic survey 2019-20, India created around 2.62 crore new jobs with 1.21 crore in rural areas and 1.39 crore in urban areas between 2011-12 and 2017-18
- Overall, India created 44 lakh jobs per year in the mentioned period
- Demographically, India will transition slowly from a ‘young’ to a ‘greying’ country, where the population of individuals above the age of 60 would increase from 8.9% of the total population to 19.4% by 2050. Those above 80 are likely to increase from 0.9% to 2.8% of the total population (2017 PFRDA estimate)
- The United Nations Development Programme (UNDP) underlined in its 2016 Regional Human Development Report that among Asia-Pacific countries, India will have the largest workforce of 1 billion by 2050
- A 2017 report by Morgan Stanley Research noted that India’s more than 400 million millennials—those born after 1982—account for a third of India's population and 46% of its workforce. They may be young but they are already the chief wage earners in most households, with millennial income contributing to 70% of total household income
- Only 18 per cent of Indian investors think of retirement as a priority investment goal, observes the fourth edition of the Trust Study Report released by the CFA Institute. Globally, half the investors keep retirement on top of their investment list
- Only 12% of the workforce (or approximately 58 million people) are covered under various pension systems according to the 2011 census. Covered individuals belong to the organized sectors and are employed by the government, government enterprises, public and private sector enterprises, which are mandatorily covered by the Employees Provident Fund Organization (EPFO)
- The remaining 88% of the workforce are mainly occupied in the unorganized sector (self-employed, daily wage workers, farmers etc) and some are in the organized sector, but are not mandatorily covered by EPFO. For this share of the workforce, the Public Provident Fund (PPF) and Postal Saving Schemes have traditionally been the main long-term savings instruments but these have only catered to a relatively small section of this population
What MFDs can help their clients with
Encourages goal based investment
Planning for retirement gives an opportunity to MFDs to introduce clients to goal based investing.
At times, many people invest in mutual funds without keeping any financial goal in mind. While there is nothing wrong in this approach, such investors tend to redeem money after witnessing sharp volatility in the market.
On the other hand, if people invest their money to achieve a specific goal like retirement, they get emotionally invested in it.
To tangibilize goal-based investment like retirement, MFDs can help clients imagine their future goals like retirement more vividly. It can be as simple as telling them to write a letter with their dreams and goals in life, to their retired future self. They could write anything like prepaying for a luxurious holiday in Sweden post retirement or following the passion of playing golf at 65.
The next step could be to make them understand how they can achieve these goals through prudent financial planning. You can either do asset allocation on your own based on the risk appetite of the clients or simply recommend a retirement solutions fund.
Inculcate investment discipline
Once an investor understands the significance of goal-based investment in mutual funds to achieve financial goals like retirement, he / she will be open to other long-term investment goals like children education.
In addition, from an emotional perspective, people are generally reluctant to redeem investments from their child fund or retirement fund. It is very rare for investors to quit mid-way, making this ideal for both MFDs and clients.
Relationship building exercise
If the client feels happy about the level of commitment you have taken to make their retirement happy, the relationship becomes stronger. In other words, it helps in starting a long relationship, not just between your client and you, but also with their family.
