24 November, 2015

Perils of retiring at 45

Many detest their jobs. They want to break free at some point and do their own thing - be it strumming on a guitar, indulging in pet hobbies like gardening or travel; or simply not be on a silver string that their corporate bosses can tug. They want out of the rat race. But, things are not as rosy and straightforward as a person envisions when thinking about early retirement. For starters, the guitar strumming and gardening may look wonderful until monetary issues start looming large at some point.

Retiring early has two major implications. One, the period to accumulate the corpus is much lower. Two, the survival period is longer post retirement. Also, if one is retiring early, some important goals like children's education and marriage may not be over; and the person would need to meet these from the savings. This will turn out to be a huge problem, and therefore an individual would need much bigger corpus earlier in life to take care of the longer survival period and other commitments.

It may not sound scary on the face of it, but a look at the calculations might make you think twice. Anand is 35, married with two kids aged seven and three. Employed with an information technology firm, he is doing well for himself. His earnings are Rs 1.6 lakh a month, after taxes and deductions. The family lives in their own home, which is bought on loan and the outstanding amount is Rs 24 lakh. After expenses, equated monthly instalment (EMI) and other commitments, he is able to save about Rs 60,000 a month. His provident fund is Rs 12.5 lakh; is eligible for gratuity; and has investments of Rs 22 lakh, which includes fixed deposits, PPF, mutual funds, and equity shares.

His goals include retirement by 45, after which he would pursue his passion for golf, travel and music. The other important goal is children's education which he estimates at about Rs 50 lakh per child in today's value, for graduation and post-graduation.

To calculate where Anand lands up at 45, we assume that his income grows by 10 per cent every year; expenses go up by 8 per cent and investment returns are 9 per cent. At 45 he gets to a very decent corpus of Rs 3.66 crore. This includes PF and gratuity receivable, after adjusting for taxes.

But, children's education expenses will come after his early retirement. Suppose we provide a lump sum for that at 45; the amount required would be Rs 2.33 crores at that time. The balance corpus available will be just Rs 1.32 crore, which has to sustain him for the next 40-45 years. His expenses can be Rs 6 lakh a year at present if he doesn't have liabilities such as housing loan. A decade later, in the first year of retirement, he would need about Rs 13 lakh to live a similar lifestyle. Assuming his returns after adjusting for inflation, also called as real returns, is two per cent, the corpus will last just for 11.5 years, instead of 40-45.

The situation, however, completely changes if Anand works until 60. After factoring in the expenses for his children's graduation and post-graduation, he will be left with a corpus of Rs 23.5 crore. The expenses of the family would be Rs 41 lakh a year in the first year after retirement. The savings accumulated can last for another 83 years, assuming a real return of two per cent.

Hence, retiring early is not easy, unless one is willing to scale down expectations post retirement. Typically, there are other problems too, that one would face.

Cannot go back to work: The problem in retiring early is that if there is underfunding and one wants to go back to work, it would not be feasible due to age. In many cases it may not be possible due to medical reasons.

Also Read : Looking to retire early? Plan your time well

Commitments after retirement: This does not look like a problem at first. But if goals like children's education and marriage come after retirement, and the amount required for these turn out to be much more than what a person had anticipated, it can be disastrous.

Part time work: There is a lot of time on a person's hand, when he retires. Even when individuals retire at 60, they still have two-three decades to live. If a person retires at 45, it will be three-four decades. After the initial euphoria of retiring and getting out of the rat race, one may start having misgivings about one's decisions.

Many say that retirement at 45 does not mean they will completely stop working. They usually plan to take up consultancy assignments for money and to keep themselves busy. While that may be possible, it beats the idea of retirement. Also, it may be frustrating to work as a consultant and get paid small sums. Many, who have held positions of power and responsibility, would find these consultancy assignments a big come down and even downright demeaning.

An early retirement once put to action cannot be easily reversed. The joy of retiring early can easily become a millstone around the neck, due to money shortage and other reasons.

Rather than taking an early retirement, one can look at sabbatical of one or two years to pursue hobbies and interests after planning for it. Else, a person can take up a job, at a lower pay, which can help to pursue his or her interests.

An early retirement once put to action cannot be easily reversed. The joy of retiring early can easily become a millstone around the neck, due to money shortage and other reasons.

Rather than taking an early retirement, one can look at sabbatical of one or two years to pursue hobbies and interests after planning for it. Else, a person can take up a job, at a lower pay, which can help to pursue his or her interests.
The article written by Mr. Suresh was published in Business Standard on 21st Nov-15

05 November, 2015

Good advice can make all the difference

Everyone worries about their tomorrow and want it pan out in a certain way. This is because the future we dream of is not just for us, but also for our families.
Aspirations build up over time, and we need money to support them. We work hard during our waking hours to live our todays and secure our tomorrows. We spend the prime of our lives—35 years or more—slaving away to ensure that our family goals are met. And what do most people do with the money they have made? Well, they just don’t bother about it that much, even though the purpose of earning money is to secure their tomorrow.

It is true that finance is not a topic that interests many people. It actually scares people, and most would want to brush it aside or postpone dealing with it until absolutely necessary. Most people do not want to go through the brochures, understand the product and all its features—it’s way too boring.
In the end, the hard-earned money is unceremoniously dumped into one scheme or another, to get it out of the way. Most people just ape what a friend or colleague had done with her money. And many times, they follow the ‘advice’ of a friendly agent. The agent scores as she fills up the forms, collects the cheques and gives receipts for tax savings. But during this whole process, the investor’s goals, the suitability of the product to the goal, the risk-return metrics inherent in the product or the risk tolerance level are even not considered. Such a decision is not expected to be aligned with the investor’s actual needs.
Isn’t it ironical that the money we spend all our waking hours earning is given such scant attention? Why are people not ready to hire someone to offer them good advice? One explanation is that either they feel they know enough to take decisions on their own or that they can simply ask their friends. The problem here is that the friend is equally clueless.
What about the ‘advice’ given by agents? There are problems here as well. Firstly, agents generally only have knowledge about the products that they are selling and their area of expertise, and not the entire gamut of financial products. Moreover, they are trained to sell products; the maximum that can be expected of them is that they offer products that are intended for the goals—such as a child plan. These agents are not trained to understand the financial goals of an investor, draw up strategies, study alternatives and advise on optimal strategies to achieve desired ends.
This is where financial advisers come in. They have the client’s interests in mind, and also know the subject well enough to analyse their situation, come up with alternatives and evaluate strategies to achieve desired outcomes and put together a portfolio to do precisely that. But if they do all of that, a lot of their time will be spent. Hence, these advisers will charge for their services.
The Securities and Exchange Board of India (Sebi) had issued Investment Advisers Regulations, 2013. This was done to ensure that there is a set of high quality advisers who are client-centric and can represent them, and will adhere to high benchmarks in terms of qualification and compliance. These advisers can only collect fees from their clients and not have any other source of income so that there is no conflict of interest. This focuses their efforts and makes them work solely for their client’s benefit. They are expected to assume a fiduciary responsibility. Fiduciaries are those who put their client’s interest ahead of everything else, including their own.
Such advisers will charge a fee for their services. Therefore, investors at large have access to unbiased advisers who can be relied upon to do what is in their best interest. However, the fee bit is troublesome to many, as they have never paid for advice. They pay indirectly (which they know). What they are hesitant about is paying a fee directly.
But depending on product sellers for advice can be costly; much costlier than the fee paid directly since what is sold may be a high-expense product. Worse, the product may not be suitable for the person in terms of risk-return, liquidity, and tenure. Having such a product could lead to not being able to achieve goals, coming up short or mismatches on various fronts. Hence, free advice can turn out to be quite expensive, in more ways that one.
If one wants proper advice, one needs to pay a fee for it. And since a fiduciary puts her client’s interest foremost, the investor can have clarity and peace of mind as she can be sure of the direction she is going in.
Most good things in life cost money; you can add good financial advice to this list.

This article is written by Mr. Suresh | published on livemint.com on 5th Nov 2015