Of course one answer that is brilliant is…”I have bought a pension plan where I am putting Rs. 10,000 per annum as a premium”.  Cross your heart and tell me “what is happening to that money?”. Not sure, but the accumulation in this plan is likely to pay for your morning newspaper and perhaps a cup of tea! You bought that a few years ago because somebody told you there was a tax break. Correct?  Now that is your tax-plan, not your retirement plan dude!

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 INDEPENDENT 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.

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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!

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About the Book : – To most people retirement is an age. It of course depends on your health, the company you work for etc. However in the first chapter I would like to introduce you to the concept that retirement is an amount of money! After all, if you have that magical amount why not retire early?

The second chapter takes you through the steps and importance of planning, and to the dangers of not planning.

Like any financial goal, retirement is also a goal and has to be approached in a financial planning mode. So Retirement Goal Setting becomes a very important and is perhaps the first step in Retirement planning.

How much money is adequate for a person to retire? Here is a generic answer telling you what are the factors to consider while trying to answer this question. This chapter has many pointers and a calculator which leads you towards the answer. Remember this is dynamic.

Can you really retire by investing an amount as little as Rs. 40 a day? The answer is yes it is the power of compounding. If you do have or time on your side, it is possible to create a retirement corpus on an amount as small as Rs. 40 a day. And the fantastic thing is that this small amount can be got by making very simple changes in your life style.

If you have accumulated money for your retirement, you should also know how to withdraw. Here we deal with what is annuity, what are the methods of creating annuities, what options are available, and the works about annuity.

Retirement savings and investments are invested in various instruments. A book cannot really do justice to all the schemes that are currently available- neither has the author attempted that. There are books specializing in information about investment products which are updated regularly – like In the Wonderland of Investments by Mr. Shanbag.

A few chapters are devoted to answering how much and what type of insurance should you look at during retirement, the attitude of the Indian family to retirement, the need to make a will, some retirement blunders, etc.

What is interesting are the tables at the end of the book telling you how much to save and invest – and case studies about portfolio make over for retirement.

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PPF , PF, EPFO , Mutual Fund Pension Schemes, Retirement Planning products from Insurance Companies, bank fixed deposits and post office schemes. A very small part of the population created its own customized Individual Products. This could be a couple of extra properties creating rental income, shares creating dividend income etc. Many people of the earlier generation would be dependant on their children – willingly, unwillingly, happily or unhappily.

Welcome the NPS -  the new Avatar for Retirement Planning. Created by the government of India it has Some major advantages of the NPS. Let us look at them.

Costs Involved:
i) The total costs involved in terms of % are minimal – cheapest in the world.
ii) The charges are under various heads such as CRA Charges, PoP Charges, Custodial Charges and Fund   Management Charges.
iii)  Flexibility to choose the fund manager, Flexibility to choose the asset allocation.
iv) Portability across the geographical location, Transparency.

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This conference was at Shimla and 450 students had gathered from all over the country (and a few outside the country too)- and during the day they were to have parallel sessions – on environment, education, financial literacy, …etc..

What I saw was disturbing. The program which was supposed to start at 9.30 am started at 11.30 am – because the previous night was a ‘scullying’ party – the biggest drinker wins! The program was organised in the canteen – so the lunch break was from 1.30pm to 3.15pm. Obviously on the fly, most topics were dropped!

So here were 450 students (tomorrows businessmen and political leaders) who could not stick to a time-table. It is just that simple lack of discipline.

Many students were smoking – I have nothing against it – (as a shareholder of ITC, I actually benefit commercially) but was shocked that there were parents who were throwing so much money at kids that a 20 year old could afford to spend Rs. 200 a day (repeat Rs. 200 a day) on cigarettes – for self and friends. I hate extrapolation, but surely you can add. The smoking and drinking was there to see – and the lack of discipline was visible in how the hotel was abused. The common toilets were not usable. And these were rich kids – it takes money to reach and stay in Shimla especially if you are coming from Bangalore and Chennai!

Though most students wanted to do their higher studies with borrowed funds, most would be funded by an ATM called ‘DAD’ or “MUM”. It is time parents told their kids “You will get admission in a college for which you have the marks and not a college which MY money can buy”. Somwhere parents tell children “I will buy you admission”. I guess either it is too much money which the parents have or the children’s ability to squeeze every bit from their parents that allows children have so much money. Children from less affluent households seem to behave much better.

Obviously because I have not said anything nice about the event (some other things were unprintable) I will not reveal the umbrella under which they had gathered. If my daughter mentions that name to me, I will faint. Parents who want to know the name of the organisation will have to send me their cell phone numbers, surely will whisper in their ears.

By the way did they ‘hear’ me out? Yes. 1 kid was working for Max New York Life Insurance and one was pursuing CFP. 2-3 girls paid attention to what I said and about 12 boys took notes understood, asked questions, asked for my blog, email id, cell number, etc. and promised to keep in touch. They may or may not. However there were 50 people in the class. 30% attention after a scullying night is not bad. Only if I had known it in Mumbai that this was the crowd I would have pretended that I was busy and would have avoided the arduous Chandigarh – Shimla drive for a 1- night trip. That is all!

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Unless they are at least 37-38 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

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So let us start.

Step 1: If you have a financial plan include retirement planning into that plan. It helps to start early, and I have no clue how to convince anybody in their 20s to plan for their retirement! Imagine asking a person collecting the first salary to think of investing for retirement. It is tough. However it helps. Like any budget retirement budget starts by estimating your income and expenditure during your retired life. The most important estimate is how much will be your retirement expenses be – both day to day expenses and big chunky investments.

It is very likely that you will buy at least one house, a few cars, white goods, tours and holidays, nursing and care etc. during your retirement. Apart from these capital draw downs that you do, you will have to estimate the expenses on food, shelter and clothing too.

How much you will spend in retirement is a function of your standard of living and how long you expect to live! If your parents (or grandparents) have been living to the age of 90 years, chances are you will hit a century!

Make a realistic estimate of help that you may need for day to day living – say nursing, assisted living, old age home, inflation, un-insured medical expenses, medical insurance expenses – these are what we can call the ‘non-negotiable’ expenses. Then there are expenses like travel, fun, eating out, entertainment, – called the ‘discretionary’ expenses. These expenses will happen if the body listens to the mind!

Next draw up your list of things you own and the amounts you owe! Estimating how much you really have is an excellent exercise which you may or may not have done. This statement will tell you about all your assets and liabilities – and your ‘net worth’. Your net-worth is the mathematical difference between your assets and liabilities. Many people forget to add the cash value of their life insurance, their provident fund, etc. in their net-worth. Ensure that you include all your assets, and all your liabilities like home loan, car loan, personal loans, etc.

Your retirement life should be distributed into at least 4 parts, if not more. In case you retire at 55 and live till the age of 95 years. Your lifestyle (and therefore your expenses and income) will be different in 4 blocks as follows:

55-65,     65-75,      75-85 and       85-95.

Once you have decided your ‘blocks’ estimate your ‘retirement income’. From 55 to 65 years you may end up earning some amount by pursuing some activity – right from maintaining accounts for co-operative societies to teaching in a coaching class. Apart from this of course you should identify any income you will have in retirement – pensions, as well as any rental, dividend, interest, or other income.

Systematically withdrawing from your capital is something which you should consider only after you and your spouse reach the age of 72-73. Till then you will have to live within your income.

So make sure your expenses are less than your income!

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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.

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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. 7 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.

However the requirement could be Rs. 20 crores and not just Rs. 4 crores. Not everybody understands how this works, and many people (including some fund managers!!) like to remain in denial.

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.

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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”!

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