30 January, 2014

How to plan your retirement funding

Retirement Planning
All of us have seen brochures for pension plans showing old couples laughing and playing in the park with their grand children; or an old couple walking in the beach, hand in hand; or enjoying with their friends at a party.  Pension plans are sold that way. Most people have the morbid fear of having not enough money in old age and depend on their children for money. Today, no one wants to be in that situation.

That is why “Sar uthake jio” was such a hit campaign.  It talked to the innate desire in every one of us to be independent, self-reliant and respected. But, unlike what the advt. was trying to sell, there are several ways of accumulating a retirement corpus, than just going for random pension plans.

Understanding the importance of retirement funding :  Most people do not give retirement the importance it deserves.   Infact, this does not figure as a priority item at all in a lot of cases till they are in mid forties.

Today, the retirement corpus required would be quite huge. Inflation in the past four years have been alarming. The latest Consumer Price Inflation (CPI) figure for Nov 2013 is above 11%. We need to bear the effect of inflation in mind as this an ever pervasive demon which undermines one’s spending power. If one wants to maintain the same standard of living in future.

The figures are daunting.  Assuming that a person is spending just Rs.20,000 pm now, his expenses at the time of retirement in about 20 years would be Rs.77,300+ pm, assuming 7% inflation throughout.  Normally expenses come down in retirement.  Assuming a 25% reduction in expenses in retirement, the expenses would still beRs.58,000+ pm, in the first month after retirement. 

Assuming that 7% inflation prevails throughout and he is able to generate a real return of 1% above inflation in the retirement phase, the corpus requirement assuming a survival period of 25 years in retirement, is Rs.1.5 Crores. Mind you, this corpus will be entirely used up in these 25 years, with nothing left. For other tenures & expense levels, please refer to the table.

This shows the amounts involved are fairly large and one needs to save for it, for a longtime. If not, the amounts to be saved at the end would be rather huge. For instance, for  Rs.2.5 Crores corpus, one needs to save in excess of Rs.60,000pm, if one has just a 15 year period. If one has 30 years to do the same, the amount to be saved per month becomes a far more manageable Rs.11,000 per month! Hence, starting to save early for retirement is imperative, if one wants to pace it properly and not be overwhelmed in the later years.

Basic principles to keep in mind :  Firstly, we need to understand that  retirement funding is a very important goal, which cannot be compromised.  Since retirement is a long way off in most cases, the seriousness of disciplined funding for retirement is not realized in lot of cases.  Normally, retirement funding is subservient to various goals like children’s education, marriage, vacation and the like.  This is completely wrong. Secondly, some of the goals can be funded with loans. For instance, education can be funded with loans, which can be paid back by the student himself/ herself instead of using a part of the retirement kitty for that. Retirement on the other hand cannot be funded by any other means. Thirdly, regular funding for retirement starts much later in life, say when a person is in his/her forties. As seen earlier, the longer the tenure of  contribution, the lower the amount required. For instance, if a person is going to contribute to the retirement corpus for 35 years for a target amount of Rs.2.5 Crores, s/he needs to contribute just Rs.6,500/-pm!

Strategy for saving for retirement  :  For someone in their twenties and early thirties, they should contribute aggressively into equity / equity funds as these assets have good potential for long-term returns. For instance, people in this age group can have as high as 75% in equity assets. Apart from this, they could invest in PPF. If they are employed and there is a EPF contribution, so much the better. Only that, they should not withdraw it and use it up when they move jobs. They should instead transfer the kitty into the new account.  

The other good investment option for them would be National Pension Scheme. For those between 35-50 years of age, their equity assets should be anywhere between 55-70%, depending on the years to retirement. They could also contribute in PPF, NPS & long-term Debt funds.  Those above 50 years are nearing retirement. Their asset allocation should be rebalanced to between 40-50% in equity assets. They should now have substantial amount of assets in debt instruments of all types. They should have a good PPF kitty, EPF in case they are employed,  FDs, debts funds, NCDs etc.

Strategy for income in retirement :  Nearer retirement, their kitty should be about 40% in equity. Also nearer retirement, one should set up avenues to get regular monthly, quarterly, half yearly cash-flows. Depending on whether one is coming into the tax slab or not, the investments need to be structured. For instance, Senior Citizens Savings Scheme (SCSS) would be a good instrument for someone who is not going to pay tax. For someone in the 30% tax bracket, getting 6% plus after tax, is not very exciting. 

Debt funds could be another instrument that could work very well for those in the higher tax brackets. One could invest in the growth mode and set up systematic withdrawal plan for the amount required, looking at the sustainability, based on the corpus size and the returns the debt fund is giving. This could be a wise strategy as the effective tax on debt funds could amount to just 5-6%, due to capital gains tax treatment, after a year. Depending on the tax slab one is in, one could also look at the desirability of setting up an immediate annuity for a part of the corpus. This will ensure sustained income, though that income is taxable as on date. This is however expected to change in future.  Tax-free bonds also offer annual income on a sustained basis, for 10-20 years and could be a good income planning tool.

In conclusion, retirement is a goal which needs to be addressed on priority.  It is important that everyone takes this seriously and start saving up for their comfortable retirement.  

Article published in December 2013 in Business Standard;
Author : Suresh Sadagopan;

What women need to know about managing money

What women need to know about managing money

There are many problems that women face today due to their aversion for finances. They need acknowledge their problems, take charge & get counted. 

Men are from Mars and women are from Venus, they say. When it comes to money, the martians seem to have an edge. The beautiful beings from Venus seem to want nothing to do with money.  There seems to be a revulsion about things to do with finances, for those from the shining planet.

A lot of things could be to do with the roles men and women are expected to play in society. There are conscious and subconscious messages which get passed on from birth, that we internalize them and start acting them out.

For instance, the message that women receive is that they are nurturers and their primary role is to maintain a good home and raise children. This infact has been the traditional role. But women have transcended this role and are actively participating in the workforce, in a major way. They have made inroads in most fields and are earning good incomes. When they are now earning well and have become a force to reckon, it is surprising that they do not take much interest in managing their money.

Their vulnerabilities  -  We don’t realize it but the imprinting that women receive from childhood upwards regarding money, creates a barrier, which they find difficult to surmount in later life. They tend to feel that finances are a man’s domain and tend to switch off, when it comes to money.

Due to this, their finances are managed by their father, husband, friend, brother etc., which further puts some distance between them and their money. Since they do not want to know about finances and products in which to invest, they would have to trust the person taking care of their finances, implicitly. That can create problems lots of times. Many times, women sign papers which they have not read, based on trust. Trust is fine, but such blind faith can sometimes lead to malpractices, using the money, siphoning of money etc.

Also, money may not be managed the way it should ideally be and will instead be managed based on someone else’s thinking. Also, this other person may not be an expert on finances himself, which complicates matters further. All this can be traced to the message that money is man’s domain and women need not bother with it.

Specific problems women face -  Apart from the demons that they need to exorcise, they have other problems to contend with. Women pursuing careers find that there are interruptions/ discontinuities there due to marriage, child birth & upbringing, transfer of spouse, care for elders in the family and other reasons. This leads to women leaving the workforce from time to time. Discontinuities in their career impact their career progression, growth & promotions and the time they are able to devote to their jobs itself. To keep up their home commitments, women tend to seek a job rather than a career. They look for flexible work or part-time work, which are near their home and compromise on their earnings if these criteria are met. Hence, their earnings don’t match their potential.  It is safe to say that women earn less in their lifetimes due to the reasons mentioned above.

Also, women who invest themselves, tend to make a beeline for the traditional investments options like FD, RD, Post office investments, Gold, property etc. Due to their lack of knowledge in the personal finance domain, they tend to ignore the newer asset classes like Mutual funds. Also, there seems to be major risk aversion in case of women as a whole as compared to men. Due to this, their participation in equity & Mutual funds is muted. This means that their corpus would be invested in traditional asset classes, which may not be able to beat inflation. The only exception could be property.

So the problem they face is that they tend to earn less and invest in a manner that would yield lower returns. But, women are living longer than men. This is a statistically proven fact. Hence, there is a good chance that they may be underfunded in retirement.

What they need to do -  Firstly, women need to acknowledge the problem. The discontinuities in their career and their earning less due to the flexibility they seek is a fact of life. But, they can address other areas. They need to acknowledge that ceding control over their finances, is a major problem area. They need to get over their aversion for finances, which does not have any logical reason in the first place. Basic knowledge on finances is easy to acquire.

The next thing that they need to do is to seek to understand the products they are investing into and seek out other investment options that may fit their profile.  They need to start looking at products outside of what they are investing today and evaluate for themselves, if that makes sense. They need to understand the basics of planning for their future, which is quite easy. Once they do this, things will start falling in place. They need to have a full compilation of all their investments and should look at it atleast once a year, if not more frequently.

They should look at deploying their surplus amounts in proper instruments, rather than letting it lie around for months on end in the savings accounts.

Risk aversion is another aspect they need to work on. They would need to educate themselves on the risk- reward aspects and understand the need to assume certain amount of risk in the appropriate products, for getting higher portfolio returns.

Conclusion -  The problems that women face are of two categories. Discontinuities in their career and lower earnings etc. cannot really be changed due to their personal situation. What can be changed is their active interest and participation in managing their own finances and ensuring that their future is well funded. An effort is certainly required on their part to start off on this. Most of them should be able to manage on their own. Involve a good financial advisor, if needed, who would be willing to assist and educate you rather than another version of your father or husband. They need to understand these even more today as they would be well prepared even if there are devastating events like death of the spouse or separation, which can otherwise take a very high toll on the person.

Venusians can and should be able to manage their finances competently. There are so many woman CEOs today who manage big financial institutions. Putting their own house in order would be child’s play by comparison. 

Article published in Business Standard on Jan 12, 2014; Author : Suresh Sadagopan ; www.ladder7.co.in

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