The higher EPS pension proposed for those eligible is approximately 50% of the last drawn pay, as is the norm in government establishments. However is this enough? The short answer is, nope!
Here is a set of retirement planning slides that I used at investor workshops. The aim is to convey the importance of retirement planning in a few slides to young earners.
1. Imagine how your monthly income will evolve in the future
The abrupt stoppage in income represents retirement.
2. Now imagine how your monthly expenses will evolve in the future
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Obviously expenses do not stop when income stops. So those who do not have the means to account for expenses when income stops better hope they are dead on or before retirement!
The expenses in the above graph seem to head for the roof. Let us rescale it over our expected lifetime.
In about 15 years after retirement, the monthly expenses, thanks to inflation, is higher the last drawn pay!
If I had an (imaginary) monthly pension that equals my last drawn pay, I would only be financially independent for about 15 years after retirement. So we need to do a lot better!
The sad truth is actual pensions (from a pension plan or employer-provided annuity) are much lower than the last drawn pay. Something like this. This is what one should expect from the revised EPS pension.
Therefore a pension is necessary but only one component of a retirement portfolio. See: Creating the “ideal” retirement plan with income flooring!
So before you jump in and opt for that higher EPS pension, ask yourself do you have enough money to fund the higher expenses due to inflation and lifestyle changes.
Instead, think: Inflation-protected income (blue dot within the red circles below)
To generate this inflation-protected income, you need a corpus between ~ 25-35 times (depends on inputs) your annual expenses at the time of retirement (the earliest green dot). As you withdraw more and more from the corpus, it decreases and drops to zero, hopefully when you die and only when you die. Ensuring this, is the third stage in retirement planning.
The second stage is to ensure our investments grow and hit the first green dot, when we retire.
We need to do two things to grow the corpus. 1. Choose a productive but diversified portfolio; 2. Invest
One cannot choose to invest a constant sum because, the monthly investment to be made immediately will be much larger than monthly expenses.
We can increase our investment each year from now until retirement to ease our burden. This would imply we must strive to invest as much as we spend.
This is easier said than done. Let us have a look at the second graph again.
In this picture, the gap between the monthly salary and monthly expenses increases as we approach retirement. If this is how our lives pan out, then we can mange to invest as much as we spend with a little effort and discipline.
Unfortunately, our expenses grow in steps, as shown in green above. Call it lifestyle creep if you like. If we embrace every new technology that arrives, if we cannot distinguish between our needs and wants, if we succumb to peer pressure and buy what others buy, we will never be able to invest enough.
Meaning we are sowing the seeds for our future financial doom today.
Lifestyle creep, the desire to spends for today and enjoy when young, resides in all of us. What is needed is a definite boundary: We can spend how we wish as long as we can manage to invest as much as we can.
Safeguarding that boundary is the first and foremost step of retirement planning.
If you want to start your retirement planning, you can do so with an automated risk reduction strategy before and after retirement with our robo advisory tool. For an illustration, see: I am 30 and wish to retire by 50; how should I plan my investments?
In summary, a pension of 50% of the last drawn pay is not enough to handle inflation after retirement. Before you jump in and opt for that higher EPS pension, ask yourself do you have enough money to fund the higher expenses due to inflation and lifestyle changes and plan accordingly.
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