Money, Money, Money Always Sunny In The Rich Man’s World!
This famous ABBA number underlines the importance of money in our everyday life and it is very crucial to plan financial investments well in advance to remain solvent. Also, its imperative to take stock of it when people are in their late 40s or early 50s as barely 10 years are left of their professional life.
Anirban Chatterjee, 52, a journalist did not invest much when young as he was the only bread earner in a family of five. With elderly parents, wife and a daughter to take care of, he barely saved enough to invest. “I had to pay for a home loan, car loan, child’s education in a private school besides accumulating money for annual holiday every year” said Chatterjee.
Certainly, it is not easy to save and invest when one has too many responsibilities. But at the same time, saving up is extremely necessary keeping ‘life after retirement’ in view. “My only safety net in terms of savings now is my provident fund and gratuity,” revealed Chatterjee.
However, he is now planning to invest in mutual funds, particularly systematic investment plans (SIP) to grow his money faster.
On the other hand, Amrish Kumar Sharma, 48, Regional Sales Manager, Pall India, has a different story to narrate. He has a family of four -- wife and two children. “I have some investments in the share market. I have a house of my own to stay and an additional one, which I have put on rent. I also have some agricultural land and insurance covers,” said Sharma.
Sharma, a resident of Delhi, National Capital Region, however, is still bothered about retirement as he feels these investments might not be enough to support him.
With life expectancy going up, no one knows how much savings will actually suffice and hence people often remain confused about investment plans. At 50, an individual has to juggle several things. Like funding for children’s higher studies, saving for their marriage; planning for retirement and of course saving up a corpus to meet medical expenses.
“Unfortunately, 50s have become the new 60s when it comes to retiring from active employment. It is not uncommon to see senior employees being frequently offered Voluntary Retirement Schemes. Some IT companies have their official retirement age slated at 55. On the other hand, the average Indian is living much longer than their parents these days. A healthy person can expect to survive well into her 90s which is about 30 to 35 years after retirement. Post 50s, most of us have a bigger risk of living too long rather than dying young,” said Renu Maheshwari, Sebi-registered Investment Advisor, Co-founder and Principal Advisor, Finscholarz.
Things To Do If There Is Not Enough Investment Till 50
“They need to work out retirement requirements in detail. Break them up as basic needs, additional requirements and lifestyle requirements. They should start preparing a corpus, which can at least take care of their basic needs before anything else,” suggested B. Srinivasan, Certified Financial Planner, Shree Sidvin.
But it is always advisable to plan retirement way ahead as Kolkata-based professional Sudipta Majumdar, 53, did. A regional manager with a leading logistics company, Majumdar has planned his finances well to support his retirement. While his wife, a professor at a government college is entitled to pension after retirement as well as medical benefits, he being a private sector employee has been investing cautiously over the years.
While Majumdar’s employer provides a regular EPF facility, he has opted for an additional voluntary contribution towards his provident fund that has been continuing since the last eight or nine years. Apart from that, he has been regularly investing in mutual funds SIPs for the past eight years now. Majumdar also has post office Monthly Income Scheme that has already matured and gives him a regular income.
He stays in a flat in Howrah, West Bengal, for which EMI is paid. He has bought two other smaller properties at the outskirts of Kolkata for retirement purposes. The EMIs of which will end in the next three or four years.
Majumdar’s company provides a health insurance cover of Rs7.5 lakh for payment of a certain premium. Last year when his wife was majorly ill, that helped in bearing the medical expenses.
He is confident that he can meet his retirement goals, as he has all his investments in place and his wife will receive monthly pension after her retirement.
“Better late than never. If you have not started saving yet then start now. With whatever surplus one could keep aside, she could start a regular SIP for her retirement corpus. Over 10 years, it can accumulate a good amount,” said Tejal Gandhi, Founder, Money Matters.
“If there is no planning done till now, then one needs to take stock of all assets. If there are illiquid assets like land, building or any other, then it is better to sell off unused ones. Real estate maintenance cost is high and yield is less. Try to liquidate them. Reduce your debt to minimum. Make sure you get regular monthly returns from the amount you have invested,” said AK Narayan, Founder, AK Narayan Associates.
“Unless planned properly, people often develop psychological problems due to insecurity especially at old age”, said Gagandeep Kaur, Practicing Psychologist, Unique Psychological Services.
“If one has not planned her money well, then expectations from children increases. People become very vulnerable if they are dependent on their children,” she added.
Children’s Education And Their Marriage
“Proper planning with retirement as a first priority will ensure other intermittent goals do not hurt the retirement goal. This principal should be followed from the day an individual starts her professional life. While we work for money in accumulation phase, money starts working for us in the distribution phase,” said Maheshwari.
“Appropriate planning ensures that goals are funded in priority order and not in the order of time line. If funds are not enough for all the goals, it is always advisable to take loan for children’s higher education. The loan can be repaid by the children later when they start working. For other goals such as house, car or even vacation, it is always better to scale down to affordable levels rather than jeopardise retirement,” she added.
Commenting on the same, Narayan said, “Based on the availability of funds, a small sum should be set aside for retired years, which should be continued till retirement. Any investment made with a specific purpose, like education should never be used for any other ulterior motive. When nearing the goal one can take it out and park it carefully in a liquid fund.”
“Higher education is expensive and inflation is also fast in the sector. So, one should start planning for higher education when a child is born. These days, many parents choose to send their children abroad for higher studies, which requires substantial funding. Therefore, an early planning can help parents take care of the expenses at least partially,” said Gandhi.
Despite not being invested very well in his early days, Chatterjee had started saving for his daughter’s education from her first birthday, which is reaping benefits now.
Aim To Repay Loans Before Retirement
Experts are of the opinion that, it is best not to have any debt by the time one retires.
“Ideally, every form of debt should be paid off before retirement. In the order of priority, the most expensive loans should be paid out first followed by others. Since there is approximately eight to 10 years to retirement, even if necessary, curtail regular expenses and repay all the loans prior to retirement. No loans should be carried forward post retirement, as there will be no income in majority of cases,” said Srinivasan.
On the other hand, Gandhi feels, “By this time, major goals like child’s education are accomplished. Also, in some households, children may have started working. So, this gives some relaxation. In case of surplus funds, you may look towards paying off outstanding balance before you retire. At homes where major goals are yet to be achieved, partial repayment can be looked at as an option to clear off debts so that as one is about to retire, there’s no outstanding loans.”
Echoing similar concerns, Maheshwari said debt is not desirable at this stage of life. Though manageable at young age, debt can ruin life if continued to be held till retirement.”
Can A National Pension Scheme Help ?
“While funding, NPS account makes sense because of tax benefits and equity exposure, pension plans provided by insurance companies is totally unwanted. Returns on all these plans are very low. Most of these plans do not give inflation proof income. Numbers projected by deferred pension plans are grossly misleading. Plans available in the market are sold with numbers that are incomprehensible by the common people. Even during retirement, return on pension
plans are no better than returns on fixed deposit,” said Maheshwari.
Health Cover Is Must For Every Individual
It might come as a surprise, but many individuals often neglect health insurance.
“I would rate health cover as the most important one. This is because benefits from health insurance policies are immense. One should never think that it is a waste of money. It is true that mostly one will have a health cover provided by her employer. However, one should have independent policies as after retirement, the company will not provide any health cover anymore,” said Narayan.
The premium up to Rs25,000 for self and family and an additional Rs30,000 for parents are eligible for Income Tax deduction under section 80 (D) of the Income Tax Act from total income.
Regarding general insurance Gandhi commented, “One must have adequate insurance cover for himself and his family, keeping in mind the period from retirement. Assuming it to be 85 after retirement, a good amount of insurance should be taken at an early age so that one does not pay huge premiums at a later stage.”
Is PPF A Good Option For Retirement?
“The Public Provident Fund (PPF) is a great investment product because of tax benefits and it is a safe, secured, tax free return of around eight per cent, though it locks the money for 15 years,” said Maheshwari.
“We recommend a new PPF account at this age only if there is visibility of taxable income for next 10 to 15 years. If the interest rates are in the lower range, PPF is a better option for fixed income segment of the portfolio. An existing PPF account will be dealt with a different parameter, depending on the maturity date,” she added.
Organised saving during one’s professional life and starting to save early is the key to ensure a better life post retirement. Most importantly, do not keep all the eggs in one basket. You never know what life has in store!
Build Your Stock Well
As we are about to hit 50, all kinds of anxieties start hovering over us like the whats and the hows in the next era. Now with life expectancy going up, this fact worries me even more. Today, there is a need to plan better about things that are in our control particularly our health, happiness and investments.
A lot of unlearning and re-learning needs to be done ... After all, how much can we trust Alexa? I believe, in case of investments, it is not the time to take blind risks or speculate but be in a safer zone where the investor gets to know about the maximum possible damage a little early and the cost of coming out is also not very high.
In case of real estate, I would recommend make children aware of the nomination process. In case of a new purchase, ideally it should be in a gated community, which is easily accessible and has some amount of facilities with seniors in mind. Health insurance or medical needs should to be covered. Our back ends need sorting, which means our nominations, bank accounts, legal documentations and will need to be visited in such a manner that in our absence it is easily understood who needs to get what, get those at ease, without too much of legal entanglements.
Few things that you as an individual wanted to do but could not due to lack of time or money, can be done now. Like taking a holiday in a cruise or buying something expensive for your spouse or self. I feel it is time to understand that you need to be more self-secure and less in control of others. It is about following the live and let live approach. Acceptance of the present needs to be higher and expectations from self and others need to be toned down. At this stage, people need more financial independence and security. So less of EMI, borrowed lifestyle and more of having access to easy liquidity, spending for better health, happiness so that the next part of our life is useful.
Seeds of what will be your legacy have been sowed and it is now the time to reap its benefits. No point in worrying too much about entering the departure lounge or retiring to the graveyard rich but enjoying more of each day in the present as this time will not come back.
Naveen Khajanchi, CEO, NKH Foundation
Managing Money While Approaching Life’s Sunset Years
By the time individuals are in their 50s, retirement for them is no longer a hazy, distant concept but an impending reality with typically 10 years or less left to go for their professional life. With retirement age approaching closer, the first step at this stage is to undertake a thorough review of the current state of finances and if they are on track with the financial plan, which may have been drawn years earlier. A number of things may have changed over the years including the actual return from the market, the expected versus actual income earned and the expected versus actual money that has been set aside for retirement.
While doing this review, it is also pertinent to note the prevailing market cycle. For example, if the markets are on an extended bull phase with very strong returns in the last two to three years, it means that the kitty may look much bigger than what it would have been in normal circumstances. Conversely, if there has been a large sell off in the last year or two, the kitty will look depressed. Given that market cycles tend to mean-revert; both these extremes should be adjusted while assessing how the plan is progressing. Once the review is completed it should be used to make adjustments to the financial plan between now and retirement.
In case there is a shortfall, additional savings should be set aside on a regular basis to ensure that the retirement plan is not compromised. In case the going is better than expected, one should not get complacent and retain the discipline of regular allocations since the market cycle can be uncertain in the short-term. This is important given that retirement time is approaching, the ability to recover from severe losses gets limited.
An additional implication of the lower horizon is that the portfolio should progressively look to cut risk through greater allocation to income generating assets while reducing equity allocation.
Ashwin Patni, Product Head and Fund Manager,Axis Mutual Fund
Saving Challenges For The Rich
Craze For Gold, Real Estate Barred Investors From Reaping Benefits
Buoyed by the recent rally in the stock markets, Indian retail investors are investing around Rs1.5 lakh crore per annum in equity mutual funds. Yet, financial assets remained a very small part (five per cent) of their overall wealth, most of which remains invested primarily in real estate and gold (88 per cent combined). Despite India’s steady economic rise, this age-old habit of investing in gold and real estate has often barred investors from reaping actual benefits of investments.
For example, gold has given only two per cent return per annum on an inflation-adjusted basis since 1990. So, `1 lakh invested in gold in 1990 became only Rs1.7 lakh in 2017. Had the same money been invested in stock markets it would have become Rs50 lakh over the same period.
So, why do only two per cent Indians invest in the stock market, especially when Indian capital markets are well regulated and relatively tax-friendly?
This trend can be analysed in a certain way. Indians’ love for physical assets over financial assets arises from three things. First, lack of sound financial knowledge and advice, especially with regards to long-term financial planning for major events like retirement. Second, lack of trust in financial institutions, which have become associated with mis-selling of complicated products, which often have hidden charges. Finally, lack of access to financial or investment tools, which simplifies investment decisions when faced with a plethora of choices.
As advances in medical science help us enjoy longer lives, it is important that we save sensibly for retirement rather than focusing on gold and real estate. Assuming that most of us will live for at least 25 years post-retirement, and assuming that at that stage of life, a couple will need at least Rs30 lakh per annum (post-tax) just to maintain a reasonable lifestyle; even middle class families need to aim for a retirement corpus of at least Rs10 crore (in today’s times). Furthermore, for a couple in their late 40s or early 50s with two children, many of whom might choose to study abroad, need to fund their children’s education in addition to saving up for retirement. In such a scenario, the couple needs to aim for an overall corpus of Rs15-20 crore (in today’s money). However, only a very small percentage of Indians are investing in a manner that can help them build such a corpus.
While each family’s circumstances are unique, we have found that there are a few things that go a long way towards helping most people significantly improve their investment returns without increasing the risk in their portfolio. First of all, not more than 30 per cent of the portfolio should be invested in “low risk” products like bond funds, fixed maturity and liquid funds. In fact, if you really need to have a “low risk” segment in your portfolio, tax-free government bonds and government bond funds are the most cost-efficient way of holding your risk-free corpus.
Moreover, the remaining 70 per cent of the portfolio should be in equities. This equity component of the portfolio can be broken into two broad parts – the first part should go into a low- cost Nifty tracker (which simply hugs the index for a fee as low as 0.05 per cent) whereas the second part of the equity portfolio should go into a dozen or so Coffee Can Stocks.
Coffee Can Stocks are high-quality franchises that consistently sustain their competitive advantages over long periods of time despite being faced with challenges and disruptions at regular intervals. A portfolio of such companies remains resilient even during periods of market stress, thereby generating consistent returns (substantially higher than the broader equity markets) with the volatility of these returns being as low as that of a government bond in the long run.
A portfolio built with the aforementioned mix of bonds and stocks has a high probability of growing at around 15-20 per cent per annum. Thus giving the investor around 4-5x return on his money over the course of 10 years.
Saurabh Mukherjea is the Founder of Marcellus Investment Managers, a PMS provider