04 October, 2009

Retire with a smile!

A smile on the face. A happy looking 60 something “Dadaji” playing badminton ( having Chyamprash, before and after the game ) with his Grandson. Nana Nani frolicking on the beach in floral print tops… you get the scene. Vignettes of happy retired seniors as seen on the brochures of Pension plans.
Most people fear retirement for more reasons than one. First - what to do in retirement. Second – does one have the dough to indulge & do what one wants to? Like travelling abroad… or living life kingsize in the autumn of one’s life ( remember the nana nani scene…? )… or atleast live like they used to. Most people dread the penury in old age or being dependent on their children.
These are genuine concerns. Most people find themselves spending a good portion of what they earn, before retirement. Somehow, there are expenses and more expenses to consume surpluses lying in the bank. Retirement concerns surface, when the Salt and pepper hair is more Salt than pepper – beyond 45, even 50.
It is at this stage that they buy pension plans to see them through retirement – in line with the sentiments of “hold your head high, live with dignity” that pension plans so evocatively portray. But in most cases, it may be too little, too late. At this stage committing even large sums of money is of limited help. If the target amount is Rs.1.5 Crores at retirement, the amount to be committed per month (assuming 8% return throughout the period) for someone who wants to invest for 30 years is Rs.10,065 per month. For someone who has only 15 years to go, it turns out to be Rs.43,348 per month. That illustrates the power of compounding, over time. Starting early is important for a well funded retirement.
Pension plans may not be the best vehicles, from a tax point of view. Consider the following –
a) If one wants to withdraw the accumulation before vesting, the entire amount is taxable.
b) Just before vesting, only upto one-third can be taken out, without tax incidence ( the rest will be used for paying annuity )
c) After annuity starts, one cannot access the funds at all, however badly you may need it
d) Annuities from these plans are taxable as income
Many are not aware of these facts and pension plans are equated with retirement planning.
What are the things to bear in mind while planning for retirement ?
A) Pension plans are not the only way forward for planning retirement
B) Invest in a basket of instruments like PPF, FDs, Bonds, MF, Equity, property etc. and gradually move the growth instruments to debt, over time. One can start with upto 75% in growth instruments and can slowly scale it down over time to bring it to between 40-50% at retirement, as per needs and risk bearing ability.
C) Property may be a good idea at retirement, as it can give a consistent rental income
D) Start early and invest every month for retirement
E) Retirement corpus need not be committed to “safe” investments like PPF & NSC only. This way, the corpus will not grow fast enough to create the nest egg required. If one starts early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. Early starters need not worry about market volatility. They can weather the storm as they are longterm investors
F) Do not access the funds earmarked for retirement for any other need
G) Keep speculative investments out of the ambit here.
H) Understand that Retirement period spans decades, these days. The money accumulated needs to last through the lifespan. Hence, it is a good idea to keep a portion of one’s assets in growth instruments like equity & MFs. Since retirement period itself is long, these instruments will have time to perform.

Pitfalls one should avoid
a) Not having a good medical cover is a serious lacuna at retirement & beyond. Ideally, such medical cover should have been taken earlier on and the policy should continue into retirement. If one has not taken, it needs to be done post haste.
b) Thinking about retirement too late in life is a pitfall one should avoid. We are not getting any younger with each passing day. And the day of retirement will come, eventually. Be prepared to welcome that day in comfort.
c) “Will use up whatever is left after all expenses during the lifetime”, is the planning lot of people do. That approach, can potentially be a minefield exposing you completely. That strategy will potentially expose those who’ve been swimming naked, when the tide of income recedes. You could end up with a much smaller corpus than required, that way.
d) Putting some money in most schemes that come ones way is something many do. Investments done should be carefully considered, from the risk/ return point of view as also the manageability.
e) Playing too safe will ensure that corpus does not grow enough to meet your needs at retirement.
f) Understand what you need to put aside for retirement every month. Do that first and then spend. Discipline & persistence are proven virtues here.
g) Don’t panic on investments made and keep shuffling them. It may be a good idea to keep them on , if inherently, they are good investments.
Good retirement planning needs just common sense. That ensures financial freedom. Once that is ensured, you could frolic on the beach too ( with your spouse, as in ads !). Or woo your spouse all over again, like the zoozoo in Vodafone ads. And play badminton with your grandson ( after the fortifying goodness of Chyawanprash ). And look like a million bucks, at 60.

Published in Moneycontrol.com 23/09/09

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