Retirement
Planning
All of us have seen brochures for pension plans
showing old couples laughing and playing in the park with their grand children;
or an old couple walking in the beach, hand in hand; or enjoying with their
friends at a party. Pension plans are sold that way. Most people have the
morbid fear of having not enough money in old age and depend on their children
for money. Today, no one wants to be in that situation.
That is why “Sar uthake jio” was such a hit campaign. It talked to
the innate desire in every one of us to be independent, self-reliant and
respected. But, unlike what the advt. was trying to sell, there are several ways
of accumulating a retirement corpus, than just going for random pension plans.
Understanding the importance of retirement funding
: Most people do not give retirement the importance it
deserves. Infact, this does not figure as a priority item at all in
a lot of cases till they are in mid forties.
Today, the retirement corpus required would be quite huge. Inflation in
the past four years have been alarming. The latest Consumer Price Inflation
(CPI) figure for Nov 2013 is above 11%. We need to bear the effect of inflation
in mind as this an ever pervasive demon which undermines one’s spending power.
If one wants to maintain the same standard of living in future.
The figures are daunting. Assuming that a person is spending just
Rs.20,000 pm now, his expenses at the time of retirement in about 20 years
would be Rs.77,300+ pm, assuming 7% inflation throughout. Normally
expenses come down in retirement. Assuming a 25% reduction in expenses in
retirement, the expenses would still beRs.58,000+ pm, in the first month after
retirement.
Assuming that 7% inflation prevails throughout and he is able to
generate a real return of 1% above inflation in the retirement phase, the
corpus requirement assuming a survival period of 25 years in retirement, is Rs.1.5
Crores. Mind you, this corpus will be entirely used up in these 25 years, with
nothing left. For other tenures & expense levels, please refer to the
table.
This shows the amounts involved are fairly large and one needs to save
for it, for a longtime. If not, the amounts to be saved at the end would be
rather huge. For instance, for Rs.2.5 Crores corpus, one needs to save in
excess of Rs.60,000pm, if one has just a 15 year period. If one has 30 years to
do the same, the amount to be saved per month becomes a far more manageable
Rs.11,000 per month! Hence, starting to save early for retirement is
imperative, if one wants to pace it properly and not be overwhelmed in the
later years.
Basic principles to keep in mind : Firstly,
we need to understand that retirement funding is a very important goal,
which cannot be compromised. Since retirement is a long way off in most
cases, the seriousness of disciplined funding for retirement is not realized in
lot of cases. Normally, retirement funding is subservient to various
goals like children’s education, marriage, vacation and the like. This is
completely wrong. Secondly, some of the goals can be funded with loans. For
instance, education can be funded with loans, which can be paid back by the student
himself/ herself instead of using a part of the retirement kitty for that.
Retirement on the other hand cannot be funded by any other means. Thirdly,
regular funding for retirement starts much later in life, say when a person is
in his/her forties. As seen earlier, the longer the tenure of
contribution, the lower the amount required. For instance, if a person is
going to contribute to the retirement corpus for 35 years for a target amount
of Rs.2.5 Crores, s/he needs to contribute just Rs.6,500/-pm!
Strategy for saving for retirement : For
someone in their twenties and early thirties, they should contribute
aggressively into equity / equity funds as these assets have good potential for
long-term returns. For instance, people in this age group can have as high as
75% in equity assets. Apart from this, they could invest in PPF. If they are
employed and there is a EPF contribution, so much the better. Only that, they
should not withdraw it and use it up when they move jobs. They should instead
transfer the kitty into the new account.
The other good investment option for them would be National Pension
Scheme. For those between 35-50 years of age, their equity assets should be
anywhere between 55-70%, depending on the years to retirement. They could also
contribute in PPF, NPS & long-term Debt funds. Those above 50
years are nearing retirement. Their asset allocation should be rebalanced to
between 40-50% in equity assets. They should now have substantial amount of
assets in debt instruments of all types. They should have a good PPF kitty, EPF
in case they are employed, FDs, debts funds, NCDs etc.
Strategy for income in retirement :
Nearer retirement, their kitty should be about 40% in equity. Also nearer
retirement, one should set up avenues to get regular monthly, quarterly, half
yearly cash-flows. Depending on whether one is coming into the tax slab or not,
the investments need to be structured. For instance, Senior Citizens Savings
Scheme (SCSS) would be a good instrument for someone who is not going to pay
tax. For someone in the 30% tax bracket, getting 6% plus after tax, is not very
exciting.
Debt funds could be another instrument that could work very well for
those in the higher tax brackets. One could invest in the growth mode and set
up systematic withdrawal plan for the amount required, looking at the
sustainability, based on the corpus size and the returns the debt fund is
giving. This could be a wise strategy as the effective tax on debt funds could
amount to just 5-6%, due to capital gains tax treatment, after a year.
Depending on the tax slab one is in, one could also look at the desirability of
setting up an immediate annuity for a part of the corpus. This will ensure
sustained income, though that income is taxable as on date. This is however
expected to change in future. Tax-free bonds also offer annual income on
a sustained basis, for 10-20 years and could be a good income planning tool.
In conclusion, retirement is a goal which needs to be addressed on
priority. It is important that everyone takes this seriously and start
saving up for their comfortable retirement.
Article published in December 2013 in Business Standard;
Author : Suresh
Sadagopan;
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