18 July, 2015

Have you taken retirement planning seriously yet?

Retirement is something that’s a long way off…so long that most of us don’t give a thought to it. But, this is the single biggest goal that we all have. Yet we neglect it and make it subservient to the flimsiest of desires, like going for a vacation or buying a fancy gaming laptop etc.

Himalayan numbers - We would probably not do that if we understand the enormity of the goal. This goal is really big.

Let’s take a case to illustrate. Ram is 35 and spends Rs.40,000 per month on regular expenses and another Rs.2.5 lakh on annual expenses. There is another Rs.1.25 lakh premium he pays towards his various insurance plans. Approximations indicate that his expenses would be about 70% of today’s expenses in the first year of retirement. Taking into account 7% inflation in this period, the monthly expenses in the first year of retirement is expected to be Rs.2.4 Lakhs! If the survival period is 25 years and he needs a corpus (which also grows at 7%) which will meet his needs in this period, the amount is Rs.3.4 crore!!!

Don’t get deflated… diligence & regularity will help you scale this summit too!

Saving for retirement – Let us look at how to achieve such astronomical numbers. It becomes a lot easier when one starts saving early in life for retirement. That also presents an opportunity to invest in assets like equity, which can offer best long term returns, though they may be volatile in the short term. The earlier one starts investing for retirement, better is the benefit of compounding and higher the possibility of reaching desired corpus.

Here is an example – Ashok (25) starts Rs.2,000 per month SIP and keeps it at the same level till 29. At 30, he increases it to Rs.5,000 per month. Every five years he increases by Rs. 5,000 per month till age 55 and he contributes at this level till 60 years. Sound unremarkable right? But this would swell to Rs.2.16 crore (assuming 8% returns ) at his retirement, when he is 60 years!

Now, let’s say Ashok missed investing from age 25-34 and spends the amount of Rs.4.2 lakh, which he would have otherwise invested in this period. But from age 35 onwards he invests as in the previous example. The corpus at the end would be lower by Rs.45 Lakhs!

If Ashok realizes later in life and wants to start saving only from 45 for retirement (as many do), the amount to be invested to reach Rs.2.16 crore would be about Rs 56,000 per month!

Compounding was called the eighth wonder of the world. Allow it to work for you.

Never touch this corpus – Since retirement is seen as something far into the future, most people withdraw money from their retirement fund. They dip into it for celebrating anniversaries, vacations, children’s education, home renovation, loaning to relatives etc. The result is that retirement corpus at the end of the period tends to be a rather small number, which would mean a life of penury, in the golden years.
About 80% of employee provident fund corpus at retirement has Rs.20,000 or less.

It’s difficult to mend it later – In case of most goals, you can rework it or even drop it. Education goal can be scaled down and the child can borrow money. Foreign vacation can be dropped, if warranted. The type of car going to be bought can be brought in line with one’s cashflows.

But, in case of the retirement goal, it obviously cannot be dropped. Some amount of scaling down & adjustments can at best be done. Beyond that – nothing.

Hence, retirement planning needs to be approached with all the respect and caution it deserves!

Also Read: Never dip into retirement funds for other needs

No loans for this goal - Think about it… this is probably the only goal for which you cannot borrow your way out of the problem. For a home, car, education etc., one can always borrow and pay later.

So, this is a goal which calls for a big corpus & something for which you cannot borrow too. That makes saving from the beginning for this goal, important.
Some people nonchalantly think that their kids might take care of them in their old age, since they have invested so much in them. But that can be a serious mistake as how the future will pan out is not known. Things have changed substantially from the time when this was entrenched thinking. Now, we should all be prepared for fending for ourselves. That makes this goal a really unique and a very important one and we need to give it mind share!

You cannot borrow for sure. Begging & stealing is not what I would suggest, to make ends meet!

Living too long – Paradoxically, this is going to be a major problem for many. The survival period is going to be in decades and not just a few years. The longevity is not in one’s hand. People tend to joke that they may live for 10-15 years.
How long we live is in God’s hands, we say. But we can hardly persuade God for a communion after 10 or 15 years, can we?

What do you do if you have insufficient funds at retirement? – There are some small ways in which one can make amends.

Seek employment - At least for some time, maybe as a consultant. This may not be easy to land & may not be feasible for many, given the health condition at that age. Others can look at internet based jobs which does not require them to travel.

Relocate – One can always consider relocating to another town to bring down costs. Selling off properties in big towns/ cities may release some money, even after buying a home in the smaller town. Also the cost of living could be lower in a smaller town, which can help. But here, one may have to leave behind a known place & friends – which is a difficult decision to make.

Cut down on expenses – One can cut down on expenses by scaling down one’s requirements. This may mean a comedown in terms of life style. This may be an option where none other exists.

Reverse mortgage – There are many senior citizens who are asset rich, but cash poor. For these people, their home is their biggest asset. Such people can borrow against their home equity. An annuity can be setup for upto 15 years, which can help greatly. Also, they can continue to live in their homes for as long as they live.
Let’s hope we don’t have to resort to any of these. Let’s give fiscal prudence the pride of place in our lives and avoid Grecian tragedies!

Where do you invest for retirement planning? Investments for retirement are equated with pension plans. Retirement planning is important; but doing it through pension plans is inefficient. For one, pension annuities are taxable. Also, if one goes for a traditional pension plan the corpus grows at a measly 5-6% rate, ensuring a small corpus buildup. Commutation of pension is possible between 25% - 33%, without tax. Beyond this it has to be converted to annuities, which are taxable.

so, if one goes for a traditional pension plan the corpus grows at a measly 5-6% rate, ensuring a small corpus buildup. Commutation of pension is possible between 25% - 33%, without tax. Beyond this it has to be converted to annuities, which are taxable.

Also, it may be a much better idea having a bouquet of products, all of which together help in achieving the desired corpus at retirement. This may be desirable as asset allocation needs changes over time which can be easily accommodated if one is investing in a bouquet of products.

Retirement planning done mainly with pension plans is bound to give a lifetime of tension!

A secure retirement - One needs to have a good health insurance in place. Many have group medical insurances till, they are employed. They should take adequate cover a few years before retirement so that any pre-existing illnesses too will get covered from the time they retire.

The other important thing to keep in mind is the requirement of a good medical contingency fund, which could come in handy if the medical insurance were inadequate or does not cover certain portions of the expenses.

The other fund to be kept aside would be a liquidity fund which one may use for any spikes in expenses or other unplanned expenses. Expenses themselves should be kept in check, the portfolio reviewed from time to time & any adjustments made in the asset allocation, if necessary.

With this knowledge half the battle is won. The balance half is putting this advice to action. The ball is in your court now!

The article was published in MoneyControl.com on 7th July’15

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