Given that on most days I write stuff on economics and finance, one query I regularly get tends to be from senior citizens.
They basically want to know how can they go about increasing their monthly income, given that their current income was proving to be insufficient to meet their needs, because of high inflation.
This is a tricky question to answer. One cannot ask a senior citizen to start investing in stocks, in the hope of earning a better return, and in the process a higher income. That would be an irresponsible thing to do.
Further, most senior citizens generate a regular income by investing in fixed deposits and post office savings schemes. There’s only so much these schemes pay at any given point of time and one cannot do anything about that.
Corporate fixed deposits pay better, but then one has to be careful about which corporate one is investing with. And given the low financial literacy
of most Indians, such a recommendation is best avoided.
So what does that leave us with? Nothing really. In case of many senior citizens, the monthly income is simply not enough because they haven’t gone around saving as much as they should have for retirement.
There can be many reasons for this. Right from not earning enough, to too many expenses when it comes to getting kids educated and married. In some cases, family emergencies and responsibilities for the extended family take away whatever has been saved.
Nevertheless, in many cases it is simply a case of not saving regularly, even though the earnings are reasonable enough. The reasons for this can vary, from sheer laziness to the fact that regular investing is boring or the fact that the individual has been taken for a ride a few times.
I have tried to motivate some of my friends as well as family to invest regularly, and met with failure regularly on that front. This behaviour is something that the American social psychologist Kurt Lewin studied extensively. His solution for it was also a fairly straightforward change of focus.
As Thomas Gilovich and Lee Ross write in The Wisest One in the Room—How You Can Benefit from Social Psychology’s Most Powerful Insights: “When people try to change someone’s behaviour, they typically try to give the person a push in the desired direction: They promise rewards or issue threats. They hire motivational speakers to get their employees to take more initiative; they offer their kids money to get grades; they give impassioned speeches about the importance of eating right, avoiding wasteful spending, or practicing safer sex.”
But these impassioned pleas don’t work many times. And this is where Lewin’s simple insight about change of focus comes in. What Lewin meant by this was that instead of trying to increase motivation, a much better strategy is to identify and then go about eliminating the obstacles that stand in the way of the desired behaviour.
As Gilovich and Ross point out: “Lewis insight applies broadly. To produce change, smooth the path or open a clear channel that links good intentions to effective action. Having difficulty saving money? Set up an automatic deduction plan. Having trouble losing weight? Empty your cupboard of tempting foods. Want your son to spend less time playing computer games and more time reading? Start him out with graphic novels and comic books.”
In the context of putting together a reasonably big retirement corpus this means investing regularly in tax efficient financial instruments. This means investing in fixed deposits to build a retirement corpus (or for that matter any corpus) is a bad strategy because the interest earned is taxable. But investing regularly in financial instruments like mutual funds (through systematic investment plans) and public provident fund (which allows investors to invest up to 12 times in a year) is a great way of building up a corpus.
Once you invest regularly for a longish period of time, only then does the power of compounding come into play. And that remains the only way to accumulate a big enough corpus for retirement for a middle class Indian.
The column originally appeared in the Bangalore Mirror on August 17, 2016