30 December, 2010

What do you do to ensure peaceful retirement ?

Retirement is the time for enjoyment claimed one of the ads for Pension products. Yes it should be. But, whether it is actually that or it’s time to cut corners and count the coins, depends squarely on the actions prior to retirement of the individual concerned.

Most people are not that concerned about retirement… but they should be. Retirement period these days are two to three decades. The corpus accumulated needs to be able to sustain for such a long period. There are a whole lot of goals which take precedence as a rule – like a home, children’s education, vacation etc. These goals are important – but not nearly as important as planning for one’s retirement.

General perceptions about retirement :

• It’s so long into the future that we will look at it when the time comes. I want to enjoy life now.
• Retirement planning is taken care of by buying a few pension policies.
• I have pension and retirement benefits and that should take care of my retirement.
• I’m investing what I can. Is there anything more I could do?
• I have children on whom I’m investing. I’m sure they will take care of me after I retire.

While some of the above sentiments are even legitimate, it is not a good idea to give them as excuses for not planning for retirement. Like Warren Buffett famously said in another context, it will show who has been swimming naked, when the tide turns.

Starting off early - This is so often mentioned that it may be as interesting as watching a snail on trail – but bears repetition. A small amount saved every month for a longtime will create a sizable corpus, overtime. Rs.2,000/- pm invested in MF Schemes ( yielding 12% pa ) over the working years ( assumed as 30 ), will yield a princely sum of over Rs.70 Lakhs! That’s power of compounding at work – which Einstein called the eighth wonder of the world.

Investing sensibly - Invest in a good diversified basket of investments. There is a perception that retirement corpus needs to be invested in safe instruments only. That is wrong. For the retirement kitty to support decades of post-retirement period, it is necessary to have a portion invested in growth instruments ( like Equity / Equity oriented MF schemes ). Even in the run-up to retirement while one is building the required corpus, one needs to invest in growth assets to ensure that the corpus grows to the required level.

Look at taxation aspects while investing for retirement - Pension fund investments provide annuity after vesting. But, that is added along with the income and is taxable. Also, at vesting one can take out only upto 33% of the accumulated corpus, without tax. The rest if taken out is taxable. This is a major problem. Most people invest in Unit linked pension funds which are very similar to a typical ULIP. ULIPs & even Equity MF investments ( after 12 months ) are not taxable, but pension plans are. It is a sensible thing to invest for future in Mutual Funds or ULIPs ( the low cost ones ). The effect of tax works against pension plans currently.

Estimating the requirements in future - You would need to estimate the expenses at retirement. Let me suggest an easy way. Take your basic living expenses for a year and reduce it by 25%. Now, assuming 7% inflation over the years, multiply the figure arrived earlier by (1.07^(number of years left for retirement ). Now, that is probably what you may spend at the time of retirement. Multiply this by about 20. This will approximatel y give you a corpus required, inflation adjusted for future.

Let us do it with some numbers. Current expenses of Ravi’s family is Rs.2,40,000/-pa. Expenses at retirement is Rs.1,80,000 x ( 1.07^30), assuming 30 years of working life for Ravi. Rs.13.7 Lakhs pa would be the expenses when he retires. Multiply this by 20, which gives the corpus required as Rs.2.63 Crores. Incidentally, if someone has been investing Rs.7,500 pm ( instead of Rs.2000/-pm assumed above), the required corpus could be reached . Now, that does not sound like a big deal, does it.

I can always catch up later – That’s what the hare from Aesop’s fable thought. The tortoise was lumbering , slow and was a destined to lose. But, it won. Retirement planning is uninteresting, I concede. But, if you require your shot of adrenaline, it can be had through adventure sports – not necessarily through last minute legerdemain for accumulating the retirement stash.
Start early. Invest sensibly. Look at the tax aspects. That should see you through your Golden years in comfort – like they depict in those pension ads.

Published in Moneycontrol.com on 30/12/2010

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