06 September, 2010

Crossed 45 and Panicking...

For many, realization dawns that they need to do something fast to secure their future when they cross 45. What can they do? Read on…
It was when Vatsal comfortably reclined in his easy-chair that it hit him… he was somehow feeling uneasy. When he thought about it, he understood why. The easy-chair brought back memories of his uncle back in his home town, who was having money problems. His uncle was a pensioner – but it was not enough. He was somehow managing with it.
Vatsal was acutely aware of his situation. He has not been a great saver till this point. At 47, it occurred to him that the time is running out. His situation is in stark relief, compared to the position of many of his friends and colleagues. His only asset is his home and some savings in FD, MF, Equity etc., all amounting to about Rs.7.5 Lakhs. His PF accumulation is showing about Rs.11 Lakhs. His only liability is a home loan of Rs.3 Lakhs.
In his case, he has had a load of responsibilities… he had to support his parents, brothers, sisters as his father had retired, even when his children were still studying. That has not given him too much of a chance to save. But Vatsal is determined not to follow his uncle’s footsteps. He does not want to spend his retirement years in penury.
There are many like Vatsal who are on the wrong side of 40 and are panicking now, when they realize that they are but a decade away from retirement and the bank balance is more like a worn out mattress than a feather bed. What do they focus on?
Cover your bases – The first thing to do is to ensure that the family is covered medically… for this is one thing that can make a pauper out of even the well -endowed. A medical insurance cover of at least Rs.5 Lakhs for adults and Rs.3 Lakhs for dependant children is a good idea. Critical illness cover, Hospital cash etc. are good to have bells & whistles.
Is the family security ensured? A family has a lifestyle and future expectations based on a certain amount of income coming in, every month. If suddenly that were to stop, it puts a huge pressure on them. Their cherished goals, suddenly become impossible to meet… reason why, a person needs to take adequate insurance. But how much ? A ball park figure would be about 7 -8 times gross income for someone about 45 years. Add to that any liabilities and subtract insurances already there.
Drive away the retirement blues - Am I sufficiently funded for Retirement is a question that keeps the 45+ awake at night. Suddenly, this has become a looming concern for them. There is a way to estimate and act on this. Project what the expenses will be ( say Rs.6 Lakhs )in the first year of retirement. Multiply that by 12. That ( Rs.72 Lakhs ) should be the corpus at retirement. Now add a 25% buffer for inflation. The corpus needed becomes Rs.90 Lakhs. Assuming that retirement benefits will amount to Rs.20 Lakhs, another Rs.70 Lakhs need to be found. Suppose 13 years of earning life is left, Rs.25,700/- needs to be saved every month to retirement ( this can be done in a spreadsheet or using one of the calculators freely available these days ). So, you can estimate how much is needed for the golden years.
What about other goals ? There may be other goals like Children’s education. In Vatsal’s case, he has a son studying in 1st year Engineering. He needs to fund for the next three years. Estimate is about Rs.4 Lakhs for these three years. He can easily meet this from his savings and surpluses in these years. But if the amounts are huge, the recourse would be to take a loan, draw from PF, save up every month to meet the goal…
Liquidity position – It is a good idea to have atleast three months expenses as liquidity. A portion of this, say 2 months expenses can be in the bank and the rest can be in a ultra short term funds ( to earn a little more ). This can be brought down, if one has access to overdraft, which some banks offer. A good idea would also be opting for sweep in deposits, which bear a higher interest than Savings account. Here money becomes accessible on demand and earns, till that point.
It would be a good idea to provide for any lumpsum payments one has to make – like Insurance premium payments, fees for education, travel etc. According to the time the money is required, it can be invested in debt funds, FDs or other instruments.
Investments – It is important to choose the right places to invest, especially if one has not done too much savings till that point. The good news is that, the last few years can make all the difference in one’s savings for – loans get over in this stage, income is high, expenses related to education comes to an end in this period and lifestyle related expenses moderate. Hence, in the last decade or so, the savings that one can do will be much more than what one has done till that point.
Typically, it is good to invest about 50% of the surplus in Equity / Equity oriented assets. Land / property investments can also be a good idea – but due diligence needs to be done here before investing as all properties do not appreciate to the same extent. Investing in Gold is a hot topic today. Do it to the extent of 5-10 % of the portfolio. In case of debt instruments like FD, bonds, NSC etc., calculate the net return after taxes and decide the place to invest. PPF may be a good idea as it gives 8% tax free returns… could be a good vehicle to plan one’s retirement. So would be the NPS, for funding one’s retirement.
Vatsal was happy that there is a roadmap, a plan which he could follow. He was happier that he would be able to achieve his goals, if he followed this rather simple path. With a decade or more to retirement, things can still be made to work. And that should give solace to the 45 somethings.

Published in Business Standard on 25/8/2010

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