16 April, 2016

How to realign investments after you retire…

Retirement is a bitter sweet experience. Many have been looking forward to it. But when it is round the corner, one does get jittery. If you have retired & want to know what you should now do, you are reading the right piece. Go on…
Questions loom…  Have they saved enough? Where is the regular income going to come in from? Are the current investments in the right places? Are there changes that need to be done now?
These questions may be keeping you awake at night more effectively than a double dose of caffeine! Also all these days there was fixed routine. Much as you may have hated it, it was there. After retirement, you now need to figure how to spend all that time, from morning to night.
At first flush, it seems easy. We all tend to think, we’ll go for a invigorating morning walk, have breakfast on the way in that tony joint, come home to a cup of coffee, read papers & magazines, catch up on music, watch TV, visit friends etc. All these may happen and still there will be huge chunks of time to fill. Plus, one may not be able to do all these everyday.
So, you need to think through what you would like to do after retirement and not just assume that you can read newspapers, do some social work & dreamily see the world go by. Most people find this surfeit of time – maddening!
Now, let’s confront the first problem, which lends itself to tackling more easily.  Let’s break it up & solve it in parts.
Estimate expenses - The first thing to do is estimate expenses in the retirement phase.  This includes the regular living expenses, medical, travel, insurance & other such expenses. Some people want to relocate to their home town or to another place.  This has to be factored as well & the probable expenses in the new place should be considered. A tip – travel expenses tend to be high in the first few years of retirement as one would want to visit relatives & friends, see places which somehow eluded during their working days as well as catch up more on family events, functions etc. This extra expense needs to be budgeted for.
Setup an income stream -  The comfort of the salary cheque ( for most people ) is now history & just a fond memory!  Surprisingly, the workplace which one went to work & sometimes hated, now looks like a wonderful place!  Many of those colleagues ( including the prickly accountant ) look like chums, in the rear view mirror.  You could hardly believe that you cursed your employer & even hated some colleagues while working!  That’s what nostalgia is all about.
But coming back to terra firma, a proper income stream on a regular basis is vital. One needs to check whether the expenses will be supported by the corpus or not after accounting for inflation. There are many calculators available online that can tell you that. That will soothe the jangling nerves a bit. 
Risk Assessment -  Before deciding on where to invest for that, you need to get the asset allocation right.  What I mean here is that you should get to the right mix of various assets to be invested. For doing that, you need to look at your Risk tolerance. Not all of us are risk takers. Some of us are aggressive & some of us ultra-conservative. A lot of us are in between. It is important to know where you fit in, on this continuum. Once this is known, assets can be allocated accordingly.  Risk assessment tools are available on the net which should give you an indication. We use validated tools in our Financial Planning practice, when we do the planning exercise.
Setting up an income stream -  Based on the results of the risk tolerance analysis, investment candidates can be chosen.  They should be chosen such that some of them would be useful to setup cashflows immediately, as a steady income stream needs to be setup.
The following is a list of products which will help here –
  1. Tax Free Bonds – which can give steady, tax-free income for long periods – upto 20 years.
  2. Systematic Withdrawal after investing first in debt funds – this also ensures steady stream of income & is very tax efficient.
  3. Investing in Equity oriented MFs, which can give regular dividends, which are tax free
  4. Investing in Senior Citizens Savings Scheme / PO MIS for steady income. However, the interest income derived from this is taxable as income, which may not be very useful for those in higher tax slabs.
  5. Investing in FDs – both banks & corporate. Again fully taxable, but is a simple product that is relatively low risk
  6. Debentures, Bonds etc. on merits
  7. Annuity ( pension ) products to derive steady income. Again may not be very efficient on taxation front as annuity is taxed as income.
  8. Rental income – for those who have properties. Again, rental income is taxable
Investments for the future -  Ideally, you should invest some portion of your retirement corpus for the longterm.  They would be needed some time in future. Equity oriented investments should be invested for the longterm as they tend to perform well over longer time horizons. Even debt investments, which are not required right away should be invested in the cumulative mode, so that it accumulates over time. Properties should be consolidated and only one or two properties should be kept aside for receiving rental income. Too many properties would be a hassle to manage. If there are many properties, they should be liquidated and invested in financial assets, which can offer uninterrupted returns.
Medical Insurance – It is ideal to have medical insurance in place well before one has retired. If  not, one should look at the possibility of getting a medical insurance cover, at least to cover to some extent. A cover of about Rupees three lakhs atleast is recommended, if one can get insurance at this stage. The other option is that seniors can be covered by their working children, under their employer given group medical insurance cover. Group medical insurance even covers preexisting illness and would be a boon, if available.
Contingencies -  It is ideal to set aside some money for contingencies. Medical contingencies are the obvious one. There could be other contingencies that may need to be provided for.  According to requirements, a contingency amount may be kept aside in a debt fund or fixed deposit.
Diaper check!  -  After doing all these, one needs to review one’s investments on a regular basis. Expenses also need to be monitored, from time to time.  Keep a tight leash on them. Discuss with spouse when expenses balloon & get a buy-in to keep it under check.
Any “amazing investment ideas” need to be thoroughly examined before investing.  Also, you need to look askance at any “fantastic returns” some scheme is offering – if the proposition looks too good to be true, it probably is. Give it the skip. 
Resist the temptation to pass on most of one’s assets to one’s children or other worthy beneficiaries. Small gifts are fine.  Also, one should not allow one’s properties to be pledged as this can shake the foundations of Retirement planning itself.
In a nutshell, allow your common sense to reign supreme. Stay within the plan. Play safe. And enjoy your retirement. It is a well-earned long holiday!
Please also look at my earlier articles on Retirement...
Article on Retirement mistakes that people make. 
Another piece on approach to take for a well funded retirement
Hope you like these posts.
Article by Mr. Suresh Sadagopan, first published on Linkedin.

Approach to take for a well funded retirement

This is the second instalment on Retirement. This piece talks about what you need to do for a well funded Retirement.
At every point in life, we are seized with what appears to be supremely important preoccupations to us.  During the twenties, the gadgets take centre stage. Living it up, partying & a bit of travel would seem like primetime activity, with quite a bit of money sapped in these. In the thirties, marriage, house, vehicle, white goods  etc., come under focus & suck up available cash. In the forties, children’s education, vacations & home loans would be some of the major expenses.
Most people have not thought about a thing called retirement till this point. Retirement seems far – beyond the horizon. And thinking about retirement, makes one feel old, almost ancient.
But, we all need to think about it – sooner, than later.  The sooner we think, lesser the money that needs to be saved per annum, till retirement.  That amount can be mind-numbingly large, if you start late.
An illustration - For instance, if one starts putting aside about Rs.4000 from age 25, till retirement at 60, the amount at retirement ( @10% returns ) would be Rs.1.5 Crore. To reach the same figure if one starts at 45 years, the saving per month would have to be Rs.36,200 – or over 9 times !
Let’s look at it another way – If one saves Rs.4,000 from age 35, one would reach Rs.52 Lakhs – one-third of what it would be had one started at 25!  That’s the power of compounding at work for you.  Rabbits can never hope to beat the tortoises that have started early – a signal lesson from Panchatantra!  Starting early is the first lesson.  Just because Retirement is Beyond Visual Range, it cannot be ignored.
Lock them up & forget them -  Choosing good instruments to invest in is important. Choosing those which are also difficult to dip into is even better – atleast from retirement planning standpoint.  Instruments like EPF, PPF & NPS come to mind.  All the three are notoriously difficult to access money from. One can dip into it ofcourse, under certain conditions; but it is not easy to just redeem them out like in the case of a FD or Mutual fund schemes. This inbuilt rigidity is a plus as it stays out of bounds!
Contribute well into these funds & forget that you have invested there. Even if you meet the conditions to draw out some money, resist it.  It’s money for your Golden years. You cannot take a loan for that. You may not be able to go back to work then – you may not get one & health may not permit. You need to do this for yourself.  Don’t dip into this cookie jar.
Take risks early on, think longterm -  Start off with equities/ equity oriented funds early in life.  They may be volatile. But they perform over time.  Start a monthly investment in a couple of good Equity Mutual Funds for the longterm. Review their performance, say once a year. Change only if absolutely necessary – if they have become laggards; or if you need to switch to another category, say Multicap funds ( from Largecap funds ). The allocation in equity & within equity is based on Risk tolerance levels of a person. Get that allocation right. Seek professional help, if necessary.
Equities have delivered over the longterm – Sensex has given 17%+ returns, over 35 years.  There have been periods when the returns from the stockmarket have been low – for 3, 5, 7 even 10 years. That’s precisely why you need to give it time. Investing early & staying invested for long periods really helps.
The much vaunted property investments work just for that reason. Just because price discovery is difficult, it is illiquid, there are taxation issues etc., people keep it for a longtime – and then they gloat that they have got great returns from property. Equities, if held for such long periods as properties, would beat the daylights out of them, 8 times out of 10.
Thinking beyond FDs -  For a lot of people, FD is the weapon of choice for all situations. For shortterm, they will invest there; for children’s education they will invest there; for retirement too, they will invest there.  The problem with FDs is that the interest rates are modest, made far more modest as it goes through a shredder called income taxes. Most FDs are offering just 7.5% pa now. A person in the 30% tax bracket would just end up with 5.18%.  That would not beat inflation.
Fixed Maturity Plans  - We need to somehow circumvent the shredder & limit that haircut, as much as possible.  Fixed Maturity Plans ( FMPs)  [these are debt mutual funds schemes with a tenure ] with three years or more maturity period, will be eligible for indexation benefits & long-term capital gains tax treatment.  In simple terms, suppose a FMP is offering 8% return, even post tax, it will be very near that figure! Also, in case of FMPs, they invest in instruments whose maturity coincides with the maturity period of the scheme and hence one is insulated from interest rate fluctuations that may happen in the next three years.
Debt funds & setting up SWPs -  Other Debt funds also enjoy the indexation & capital gains tax treatment after three years. Hence, it would be great to invest in them too. Debt funds are open ended & can be liquidated, if there is an urgency. Some of us are not comfortable with debt funds because the returns are not fixed. The reason is that there are many underlying debt investments, which are all traded and hence NAV can fluctuate. But, they will largely mirror the interest rate in the system. The advantage here is the beneficial taxation ( beyond three years ).
We can setup Systematic withdrawals from Debt funds in retirement. Systematic Withdrawals Plans ( SWP ) is drawing down a specific amount on a regular basis ( say monthly ), for a period of your choice. This is like setting up an annuity as per your convenience & drawdown requirements.  If we setup a withdrawal which would be less than the annual interest, it can be sustained in perpetuity! 
They are again super tax-efficient as withdrawals are treated as redemptions. One needs to pay taxes on the difference between the purchase price and sale price of the units – hence it is very low – as low as 2-3% effective tax!  SWP  is hence a very useful & effective retirement income setup tool
Tax-free Bonds -  The other tool of choice is a tax-free bond. Tax-free bonds were available for subscription this year ( and in some previous years ). This was available in some previous years too. This year it has offered between 7.2% – 7.65% pa returns. The good part is that there is no tax to be paid on this.
It will offer regular income for between a 10-20 year period, which is a major plus. Hence, with this instrument, one is insulated from the interest rate fluctuations & can hope to get consistent income for a long period. This is especially useful to take when one is nearing retirement or is retiring.
Immediate Annuity – One may consider purchasing a pension option ( called immediate annuity ) with a portion of the retirement corpus. This will offer sustained income. But the annuity is entirely taxable as income. So, if one is in the lower tax brackets or not in the tax bracket, this will work.
We have discussed the instruments one could invest in the runup to retirement as well as  near retirement.  One can use a combination of these instruments to come up with a bouquet that will suit them the most.
Just remember to rein in the excesses of the youth ( moneywise! ).  Remember that Retirement is somewhere beyond the horizon. You will get there one day. You can choose to be prepared for a fully funded retirement. 
Now, start counting the beans you can put aside for retirement!
Authored by Suresh Sadagopan |   published first in Linkedin |

14 April, 2016

Avoid these mistakes to ensure well funded retirement

Retirement is one milestone people look at longingly & wistfully. For most people, the reason is that they are fed-up with the humdrum routine of going to office, yes-siring the bosses, the stress which comes with today’s high pressure jobs, the toll it takes on one’s health, office politics which are disempowering & other reasons. Hence, for some, retiring early is a priority. However, that is easier said than done.
The reason – If one retires early, the survival period is longer. Hence, one needs a bigger corpus to retire with. However, since one is retiring early, they need to build that bigger corpus much earlier in life, which is a tough ask.
Retirement Planning is serious business. Retiring early is a herculean task, which requires careful planning & adjustments. Read this - http://bit.ly/1OXiLdb
The more plausible solution is to retire at the usual superannuation age of 60 & have a good enough wealth accumulation so that it may see one comfortably through the retirement years.
In this article, I’m going to discuss retirement planning options which are avoidable if one is not to end up in penury in the golden years.
Annuity option - The latest budget has put the focus on annuity ( from one portion of the EPF ). But annuity is hardly a good solution. Annuity rates are around 5.5-7%. Also, annuities are taxable as income making them a poor choice.  The same is the case with all pension plans from Insurance companies. Traditional plans can offer 5.5-7% returns.  ULIP plans can offer potentially higher returns, but the risks are borne by the policy holder. But in all cases, annuities are taxable. Also, annuities remain the same throughout life, making them less meaningful as time goes by.
Hence, if your predominant vehicle for retirement funding is through annuities, you can never hope to hold your head high ( unlike the Sar uthake jiyo pitch of pension plans ).  Annuities are at best a secondary option – not the best.
Read this piece on the flaws in annuities as they exist today -  http://bit.ly/1TYN9f6
Laddering option – Insurance agents offer laddering as a solution. They may suggest 20 endowment policies which will mature every year in retirement, ensuring that there is income coming in every year. While that looks fine on the face of it, there are problems with that. Firstly, endowment policies tend to offer 5%-7% returns. The returns are tax free. But, as you can see the returns are low.
The problem is there from the start. One would be getting into low yielding insurance products & would invest continuously for a long period. Investing in a low yielding product for the longterm would actually create a much smaller corpus at the end. For instance, if one were contributing Rs.10,000 pm for 20 years & one product yields 6.5% & another 10%, the corpus at the end of 20 years would be – Rs.49 Lakhs & Rs.76 Lakhs respectively. The difference is Rs.27 Lakhs! The corpus in the latter case would be 55% more!
Also, when one is putting money into insurance, there is no flexibility. One needs to pay consistently for a very long period, which can be a positive too. But with life being as fluid as it is today, we need flexibility to invest more or less in a year – or even skip payments, if necessary. The other problem is that all investments here are in debt products. One may be better served by a bouquet, which we will change as per the unfolding future – in which case the investment would be better aligned to one’s needs.
Even in the decumulation phase, the life insurance policy will mature, as per the policy tenure. Suppose lumpsum money is required at around retirement, that is not possible in an insurance plan. To sum it up, it is better to avoid setting up an income stream through insurance plans for they are rigid, inflexible, low yielding & without possibility of diversification & hence a concentration risk.
Relying on Fixed Income products alone -  Many make this classic mistake. They want all their money in FDs, Bonds, Small savings and the like, which are low on risk. But, these instruments will offer returns which are all subject to tax. Post tax returns hardly are able to beat inflation. In future, inflation makes things very hard if one is relies on such instruments alone. These people wrongly believe that in retirement, they should not take any risk. The biggest risk in retirement is not taking the required level of risk, so that the corpus lasts the lifetime.
Real Estate -  Many people invest in real estate so that they may fund their retirement. There are many ideas here. Some people buy land, which they would like to sell for a handsome profit later to fund significant goals, including retirement. While this is fine on the face of it, there are problems here too.
Land appreciation is overhyped. While some land parcels have appreciated very well, it is not true across the board. Also, land is prone to encroachment, as many people do not keep tabs of their land closely.  Residential & commercial property are better in that respect. But again the appreciation is not good across the board and one could get caught on the wrong foot.  For instance, in the past five years, properties in Hyderabad have given a negative return, which would come as a surprise to many. Nor is this an isolated case. Several areas across India have offered anemic returns, making property investments not such a great option.
In case of properties, one may spend on interiors, upkeep, taxes, brokerage etc. which are generally not factored in the final returns. After factoring all these, the final returns may not be all that great when the property is sold. Further, there are taxes to be paid on sale. The other intractable problem is the illiquid nature of property. One may not be able to sell property when needed, making it a difficult asset class.
If one keeps the property for rental returns, residential property can offer about 2-3 % returns on the market price and Commercial property can offer 3-6 % on market price, all of which are taxable. Hence, the yields are nothing much to speak about.
Simple financial assets may work far better in terms of returns, liquidity, predictability, taxation etc. The first thing to do is to avoid making these mistakes. In the next dispatch, we’ll see where to invest to make retirement a period of enjoyment & not one of chronic stress.
Published first in Linkedin. 
Author - Suresh Sadagopan   www.ladder7.co.in

01 April, 2016

Zen & the art of maintaining pretences

The budget has come and gone and has left a lot of people disappointed – not even farmers are happy – they are disappointed as there is no loan waiver!

EPF taxation is sorely disappointing. After paying taxes for a lifetime with nothing received in return, this is below the belt stuff. You can save the tax only if you opt for annuities, which are anyway taxed. But understand this – Government wants to ensure your security, by setting up a pension –pretty white of them!

A good article on EPF withdrawal & the taxation at superannuation…

The budget looked like they are preparing for elections in the next three months!

Service tax has gone up by 0.5% - smile & pay it – it is for the benefit of our farmers.  If you have unaccounted money by the sacksful, they have the right scheme for you. Described as fair & lovely scheme by “reluctant prince” ( congi acolytes call him that ) in a stinging rebuke, for going after black money. Can’t blame “Pappu” ( detractors call him thus ) for being sore as a gumboil – their coterie has “Made in India” & stashed abroad!

If you are earning a lot ( over Rs.1 Crore ) & the colour of your money is white, you would presumably be happy paying 15% surcharge instead of 12%, to keep the tricolor flying high – very high if Smriti’s plan materializes! Remember, we are socialists, where we would like to bring everyone down to a low common denominator ( as pushing up everyone higher up the ladder is difficult, almost impossible ). We may exactly shout "Bharat ki barbaadi" slogans - but we are all leftists at heart, to varying degrees.

Middle class has fallen through the cracks – none of us know the Zen & the art of organised, violent protests – as happened in Gujarat & Haryana recently… nor are we unionized ( we don’t even have a fleeting acquaintance with the staple - Inquilaab  Zindabad, much less the fine science of hartaal ).  We are not a section ( like farmers or somehow backward ) that can hope for munificence from a socialist government. Inshort, we don’t figure at all – except when there are tax proposals. We are well off people, you know!

Enough of this grumpiness - hold your head high – Acche din aa chuke hain. If you don’t believe, ask Mark Mobius! ( Read this -http://bit.ly/1QvDj1I )  

Robinhood would have approved this budget and would have celebrated with his merry band!

Article by :   Suresh Sadagopan, Founder, www.ladder7.co.in