In every class on retirement planning one question which I always get a wrong answer is: “Will you buy big assets like house, car, etc. AFTER you retire?”

It is met with an “obviously no. why do you even ask”. Well the obviously no is said and ‘why do you even ask is in the body language.

I tell them, if you get used to using a car for, say 3 years, you have a problem, do you not?

Let us say you retire at the age of 55 (highly probable) and live up to the age of 90 (sad, but again possible). This means you have about 35 years in retirement. If you use a car for say 5 years (instead of 3 at present) you will need to buy at least 5 cars (assuming you drive till 80, then, start using a driver). Also buildings that are constructed today may not last 35 years. So if you have bought a house when you are 45 years of age, that may last say for 35 years. So at your age of 80, you will have to BUY a new house!

My father bought a house in Pune - Athashree (see www.paranjapebuilders.com) - which is a beautiful place for senior citizens to live. It has fantastic assisted living facilities. My mom’s brother bought a place for himself in Coimbatore. My Mom’s sister bought herself a nice house in Bangalore - where they liked the weather compared to their Chennai residence. All of them were above the age of 70 when this 2nd house purchase was made. The funding came from their mutual funds, ppf, sale of equity shares.

All of them had kept their primary residence - just in case they had to come back!

So in your post retirement age you will end up buying at least one house, a few cars, a few mobiles, a few white goods appliances, a few vacations (optional), medical care, assisted living, long term care, etc.

The question is no loans will be available for these purchases. You will pay cash - and the cash will come from redeeming your mutual funds, ppf, ulips, equity shares, etc. So apart from providing for your food, medicines, etc. provide for purchase of all these assets.

How can a Doc retire early?

Docs start earning quite late in life – at least the big bucks come at a late stage. So is it really possible for a Doc to retire early?

It really looks difficult. Docs unless they are super specialized and have created some kind of aura about their capabilities do not really earn the mega bucks of sports star or a film star. However, they do have a lot of flexibility in their profession. They can be on their own, be in a partnership or grow it like Dr. Reddy of Apollo Hospitals.

Having established that it is a good idea to retire early, and to never stop, how does one go about doing this?

Investing early and well, normally means the doc can retire early and well. If things are done properly then by, say, age 55, or whenever the kids are coming off the doc’s financial hands, the income from investing starts to exceed the income from the practice. This is a great position to be in, particularly if the income consists largely of unrealized, and hence un-taxed, capital gains. Also given our current tax structure where there is no INCOME TAX on dividends, the doc may be in a good position to retire.

Interestingly, most docs continue to practice even when they are at this point. But thankfully they can skip the long hours, choose lesser locations, and work more sensibly. They can also decide to and take many more holidays and long weekends. And there is a huge difference between the doc driving to work because she wants to, and the doc driving to work because she has to. One is happier than the other.

The major issue here relates to the costs of general practice. Unfortunately Docs do not have much training in considering Fixed Costs, Variable Costs and Marginal Costs! Not all costs fall just because the doc is doing fewer sessions. Many costs, for example, rent, some wages, depreciation of equipment and so on, stay the same regardless of how many sessions are completed each week. These costs are called “fixed costs”. This is because they are fixed irrespective of how many sessions are completed each week. It is also called a Period Cost. At the end of the period, the cost has to be paid – immaterial of whether the equipment or place got used. A common mistake is to assume that there are no fixed costs. A doc completing, say, 7 sessions a week (only Mornings) and making Rs.15,00,000 a year may reason that his income will fall to, say, Rs.950,000 if he cuts from 12 sessions a week. Sadly this is not so. More probably, because fixed costs stay the same, profit falls by much more than this, say down to Rs.700,000, if not less.

How can he avoid this? There may be some options which he can consider:

1. He may start teaching at a Medical college including doing sessions on how to handle customer psychology. Lady docs are sometimes preferred because of better soft skills.
2. The doc can stop practising solo or in a group practice where costs are shared equally irrespective of the number of sessions.
3. The doc should try to change to a practice structure where all costs (or virtually all costs) are variable costs not fixed costs.
4. The doc can join a friend who has similar ideas and become a partner. One of them could used the infrastructure in the morning and the other person in the evening.
5. The doc could also get into an arrangement with 2-3 junior docs who will use the geography of his practice are – and split the fees.
6. One more alternative is to sell a portion of his practice to a deserving junior and get into a fee sharing arrangement.

Many of these arrangements may look difficult, and in many cases involves the DOC selling all or part of the practice to younger Docs. In at least one case I know the doc used his practice till his age of 81, but sadly many of his customers had gone away. He had to just sell his premises to a dentist. The practice fetched him nothing.

Surely retirements could have been better planned.

In every financial planning class I need to do a post lunch session. To keep them awake I ask them to do a simple exercise - calculating how much money they require for retirement.

Unless they are at least 32-33 years of age, they have no clue as to how much they need for retirement. Once they see the figure (let us say Rs. 4 crores) they get into a DENIAL mode. Immediate reaction is to say “my father did not need this much amount” or “my expenses will reduce after retirement” or “my children will take care of me”.

Once they cool down, they sit and work out how it can be put together.

What most people do not realise is that the figure looks very big because we are seeing it from a very long tunnel. If I were to tell you that YES you do require Rs. 4 crores to retire, 30 years from now. HOWEVER if you were to invest just Rs. 100 a day for 30 years in a SIP which gave a SENSEX rate of return, you will have Rs. 4 crores in your retirement kitty.

So the important lessons in retirement planning are simple - make an estimate of your needs, adjust them for time value, compute the amount that you need to invest on a monthly basis, THEN START TODAY. Do not let the power of compounding go away - harness it when you can. Simple.

Americans do things in style. So whether it is getting into a financial debt trap, chapter 11 bankruptcy claims, or living far beyond their means, they have a term for all of that. Like subprime. Like lending $700,000 to a person earning $ 17,000 per annum. They create products like “interest only”, “balloon repayments” or “increasing mortgage” - it does not matter!

One such term they have created is Lifestyle creep.

What is lifestyle creep?

It is about people increasing their standard of living with temporary income - thus not being able to maintain it when the income suddenly disappears -Lifestyle creep is particularly a problem to those individuals approaching retirement. People, a few years before retirement are typically in their peak earning years, but at the same time many of their earlier expenses, such as paying off a mortgage, or raising a family have vanished. Suddenly with a new found surplus of cash, some people use it to buy more expensive cars, more expensive vacations or possibly a bigger home.

Since the goal in retirement is to maintain the lifestyle enjoyed in the last few years before retirement, these retirees require more funds to support their new, more lavish lifestyles. Unfortunately, they don’t have
the resources to do this because they spent their surplus cash flow.

This is somewhat akin to the ant and the grasshopper story - the advice somebody can give them is “if you were singing during the summer, go and dance in the winter”.

So suddenly you have people who have “upped” their lifestyle with temporary income (come on, you knew it will end on the day you retire) and now they can now wonder how to continue this “temporary addictions”!

Financial planners, mutual fund sellers, bank RMs, all of them have a knack of racking up a large number when it comes to your retirement corpus! Normally they do this so that they can galvanize the client to act. However, from what I have seen it normally has a negative effect!

When people look at a huge number - say Rs. 5 crores - the immediate thought is “Oh, my God!” I cannot do anything about this! However this is not true, nor desirable.

You as a customer (client) should understand that this is a nice round figure, but if you do reach Rs. 4 crores, it is not the end of the world. Also you need to understand that if you start to save, say 30 years in advance, you may need to invest only Rs. 80 a day to reach there. However if you start 5 years before retirement, you may need much, much, much more - say Rs. 6 Lakhs a month (or Rs. 20,000 a day!!).

So instead of killing your adviser, start, albeit with a small amount. Starting is more important than the amount with which you start. It is like getting a root canal treatment done - do not try doing 12 teeth at a time!

Are you in Denial mode regarding your retirement financial needs?

I cannot comment for every one, but too many people are in denial about their financial needs for retirement. Most of us do not want to accept that we will buy 3-4 washing machines, air conditioners, refrigerators, maybe about 2-5 cars, at least one or two houses during our retired life!

And all this buying will happen with our own money – i.e. by selling our mutual funds, unit linked plans, shares, etc. and from our pensions!

Strong financial planning is the key to a comfortable retirement
If you’re planning to spend your retirement in comfort, you’ll need to rely on some pretty strong financial planning. You’ll want to take into account your current financial position and your anticipated retirement income, preparing for contingencies and unexpected expenses along the way. Then you’ll need to develop a strategy for setting aside money on a regular basis to fund your retirement financial planning and choose wise investments so your money will build as much as you need. It’s kind of a daunting task, and it’s no wonder that so many people planning their retirement are worried about the quality of financial planning available in the country.

Benefits of the top financial products for retirement planning - Critical need for Long Term Care Insurance
There is a critical financial aspect of retirement planning today. If you lose the capacity to take care of yourself and require either in-home assistance or be transferred to a nursing home, all the financial resources you set aside when planning your retirement may be spent in just a few years on the cost of health care. Long term care insurance will cover the cost of your medical needs without jeopardizing the wealth you’ve accumulated for retirement or want to pass on to your heirs. Unfortunately no such insurance is available in India as of now.

Choosing the right type of life insurance is also part of planning for the financial circumstances of retirement. If something were to happen to you before you retire, you likely would want your spouse to still have the lifestyle and financial security in retirement you envisioned in your planning, and the right life insurance policy can ensure that.

Keep reading……

Investors face all kinds of risks in the financial markets.There is credit risk – the risk that a borrower will default on an obligation. Liquidity risk – the possibility that you will not be able to convert a security into cash when you need the money. Market risk – the likelihood that the share market will decline in value.But the biggest risk of all is shortfall risk. This is the risk that you’ll outlive your savings. And it is quite real.Thanks to better lifestyles, improved nutrition and advances in health care, people today are living longer than ever. People retiring at 58, 60 or even 65 face the serious prospect of spending up to three full decades in retirement.That means investors using an ultra-conservative approach, investing in RBI Bonds, Bank FDs, Money market mutual funds, are often taking a bigger gamble with their portfolios – and their retirement lifestyle – than they realize. This is especially true when you consider the thief that robs us all, inflation.

All Signs Point to Higher Inflation

The “headline” consumer price index (CPI) for the year ending in January was up 4.3%, the third consecutive monthly reading above 4%.Of course, the “core” CPI, the one that excludes volatile energy and food prices, shows a 12-month rise of 2.5%. That’s not yet dramatic enough to grab the headlines. But there is likely more bad news on this front dead ahead.

Why? Let’s start with the strong rupee. The gushing in of foreign exchange reduces the cost of imports, and making consumption easy. That’s inflationary.Then there is the great P Chidambaram. He does an Enron with the Indian balance sheet (without even a drunk Arthur Anderson for oversight!).The core inflation rate is above its so-called comfort zone. Yet, transfixed by the credit crisis and the housing slump, the Fed has brought rate down 200 basis points. And stands ready to cut rates further. P C while ignoring fuel prices (he unfortunately controls all aspects of this industry), “requests” cement, steel, pharma, industries to control prices. This, too, is inflationary. And then there are banks who are regularly “requested” to reduce interest rates. God bless the shareholders of banks, and oil companies. The gold market is signaling higher inflation, too.

The “barbarous relic” has been hitting one new all-time high after another lately. And it’s not just a short-term phenomenon. Gold is up more than 225% over the last eight years.Some consumers shrug and say, “What difference does it really make if inflation bumps up another point or two?” Don’t make that mistake.

With a 4% inflation rate, an income of Rs.100,000 is worth only Rs.70,000 after nine years. After 17 years its real worth is cut in half. After 30 years, it only has the purchasing power of Rs.30,000.Investors planning for retirement might be unpleasantly surprised to see the Rs.100,000 investment income they counted on generating only Rs.30,000 worth of purchasing power. And that’s before taxes. And we are talking of inflation of 6%, 8%…as it effects you.

Don’t Bail On Shares  - So what do you do? First off, don’t let the bears scare you out of the market. Shares can be nerve-wracking in the short term. And they can always go lower before they go higher. But shares are an incredible wealth-building machine over the long term. For time periods measured over a decade or more, nothing has beaten the returns generated by a diversified portfolio of high-quality shares.

As I’ve been telling FAIDAA (see www.faaida.com) members, internationally junk bonds sport attractive yields now, too. A raw materials fund that tracks the performance of the Commodity Index is not a bad idea, either. And gold-mining shares are another fine hedge against inflation. (Oops, there is only Deccan Gold, listed on the BSE if you are reading this post in India)But don’t bail on your shares portfolio. If you jump out of the market, where will you put all that money to work? In Bank deposits yielding less than 7%? In money markets whose yields drop with every rate cut by the Fed / RBI? Into real estate, which is in a downward spiral? (ok not yet in India, but deals have frozen – just not happening!)

I’m not saying these investments don’t have a place in your portfolio. But you have to maintain a balance – and a decent weighting in equities.In short, if you want your retirement years to be truly “golden,” common shares are still your best protection against shortfall risk, the biggest risk you face as an investor.

Happy retirement, happy investing! 

Retirement Mistakes.

Retirement, purportedly is the most important goal for most of the readers of this column. At least that is what most of the mails that I get say. Yet, looking at the numbers, it is clear that many investors are undermining their good intentions with unfortunate actions. Or inactions should I say? All their good intentions mean nothing if there is no action. Here are ten mistakes to avoid if you want your retirement dreams to become a reality.

1. Consuming you retirement corpus much before retirement: A study by OASIS found that most employees cash in their provident fund when they switch jobs. Most of them withdraw the money for various reasons like marriage, festivals, consumption, etc. In other words, they take the money — rather than leave it in a retirement account. That’s no way to build the retirement of your dreams. If the amount in your provident fund at retirement is Rs. 24,000 (Oasis report), I seriously wonder how long you wish to be in retirement? 30 days? This amount will perhaps be enough only until you reach your retirement destination – say from New Delhi to Trivandrum. After that, what?

When you change jobs, you can transfer the money in your employer-provident fund to a government run scheme that will allow the money to continue growing tax-deferred. You might also be able to leave the money in your old plan or transfer it to the plan at your new job, depending on the plans’ rules. If you are self-employed, there are mutual funds and life insurance companies, which will have nice schemes in which to accumulate this amount.

2. Postponing / Procrastination:  Cashing in your provident fund at a young age is not the only way for your retirement fund to meet an early demise. Not saving enough in the first place will guarantee that your retirement will be painful. Of course, no one wants to be told to “save” — it is so boring and perhaps not gratifying at all. It is all about choices – if you choose pain now, pleasure will come later on. If you choose pleasure now, pain will follow!

This is what low-savers (and non-savers) are really doing: They are spending their retirement now — which may mean they will not be able to retire at all. Buy that Plasma TV now, or buy time in retirement tomorrow. Take a cruise this year, or take time off several years from now. Those are the choices you have to make. Building a nest egg is not a decision of whether to consume, but when to consume. Do it now and you will not be able to do it later without having to work for a salary. Translate all your needs into “number of day’s effort” and you will realize the real cost. If that dream house is Rs. 72, 53, 000, and your take home pay is 8, 00,000, it means 9 years of your life is for your shelter on a gross basis. On a net basis (i.e. the savings per year, it is perhaps 18 years effort). How to arrive at the cost of the house? Just multiply your EMIs with the number of installments. You might surprise yourself in how expensive your house is!

3. Having no clue about how much to save/ invest. According to a survey by a newspaper, many employees have not calculated how much they need to retire. However, you cannot get to where you want to go if you do not know how to get there. You will find interesting calculators, which might show you a financial mirror. If you do not like what you see, instead of logging out do something about it! Check google for such calculators or look at the websites of mutual funds, life insurance companies and independent websites like myiris.com, moneycontrol.com, etc. 

4. Spending your retirement savings too fast. If you have made it to retirement, congrats! You have done the first part. Now check how much you have. Nevertheless, you cannot take it too easy. Because you will receive, a severe pay cut if you deplete your portfolio too fast. How much can you take out each year and be almost certain that you will not outlive your savings? Just 6% a year. That is the withdrawal rate that would have sustained a mix of shares and bonds over most 30-year historical periods. Sure, if you retire on the eve of the next bull market, you can take out more. However, if you quit working right before the next bear market, then taking out more than 6% a year could have your portfolio beating you to the grave. Of course, if you have been in the markets for the past 4 years only, you might laugh at this figure, but please get realistic. The corpus has to feed you, clothe you, cure you, protect you and keep you in your shelter while keeping pace with inflation.

5. Asset allocation! What is that?  Almost all the people I meet let too much money lie in their savings bank account. Too many young people keep too much money in debt instruments like nsc, ppf, endowment policies, etc. Nothing can kill a retirement like bad investment decisions, whether it’s owning too much of one share, letting emotions take over, chasing the latest fad, or letting short-term events affect your long-term strategy. Or being too lazy to move money from a savings account to an investment account.

You basically have two choices: You can be a master share-picker like Warren Buffett or Peter Lynch or Vallabh Bhansali and try to find the next Wipro, or decide whether a dividend yield makes a company a good share. Or you can broadly diversify your assets, mostly via low-cost index fund. Or look for good mutual funds or unit-linked policies. This way, you enjoy exposure to shares like ITC and SBI — and smaller growth firms such as Gillette and Kotak Bank. But until you have established your skill at finding great investments, keep the bulk of your assets in a broadly diversified, regularly rebalanced portfolio.

6. Letting the taxman eat your investment. There are many types of investments and investment accounts, and they all have their own quirks when it comes to taxes. Not knowing all the rules can lead to too much taxation — and less money for retirement.

Profits from shares or mutual funds that are held for at least a year will be taxed as long-term capital gains — a rate currently NIL. Interest from bank deposits, on the other hand, is taxed as ordinary income — a rate as high as 35%. Yet investors keep their moneys in bank fixed deposits, RBI bonds, nsc, etc. That just does not make sense. Asset location can be just as important as asset allocation. Even if you wish to have liquidity for some portion of your money, you are better off in an income fund, FMP, or a floater fund rather than a bank FD or RBI bond.

7. Not looking after your health – physical and financial! Every time you eat out check, whether you are putting enough money into your retirement investment accounts. If you eat out today, you will eat out 30 years hence, and ensure that you have enough money to do that. Every time you eat, promise to take it off the next day at the gym. Remember, as you get older, you will eat out, go to the gym, go to the doctor, etc.  8. Paying too much for help. There is nothing wrong with getting financial advice. But every time you wondered who was paying the bills for your adviser, fund manager, banker to make those foreign junkets and drive those long cars; remember it is you. Many mutual funds, insurance plans, pms schemes and other collective investment schemes have not reduced their fees inspite of their assets growing at a fantastic pace. Paying too much for advice (especially if it is bad or conflicted) does a lot for your broker’s retirement, not yours. Paying just 1%, a year on a Rs.1,000,000 portfolio over 20 years could result in your forking over more than a MILLION RUPEES in fees. That’s a MILLION RUPEES that could have been in your retirement plan. Of course, if the advice you received had your portfolio performing better than what you could do on your own, then the price might be worth it. But if you are paying 2% or 3%, a year to lose to an index fund — as most mutual fund managers did last year — then you’re better off taking control of your own investments. Or shifting to a simple, low cost, low tracking error index fund.

9. Retiring when you needed a break. If you are in your 50s, you should plan to live at least another three decades. Can you stand full-time leisure for 30 years? Sure, it may sound good now, but many retirees find they get pretty bored after a while. Look around in your family to see how long you will live. If your dad, mom, uncles, aunts,  are all traveling around in their 80s, and living in their 90s, so will you! Before you decide to retire fully and permanently, discuss a phased or gradual retirement with your employer and/or business partners. Explore your options before you no longer have them

10. Hoping that your kids will take care of you: Not that they will not. Maybe they cannot. Do you expect your recently bereaved 64-year-old son to take care of you? What about your daughter who wants to spend 4 months with her daughter in the US of A? It is a physical impossibility for many Indians who now lie scattered around the world. A day care centre is a reality. So go and provide for day care too!