Get Started With Your Retirement Planning Now!
Oct 27, 2017 | 14:07 PM IST
Oct 27, 2017 | 14:07 PM IST
An average man's life expectancy is 80 years. However, most of them work only till they turn 60 (Age of retirement in India). An average person lives for 20 years after retiring from his/her day job. Now in a developing country like ours where there is no monetary support for the old-age people from the government, the onus of taking care of yourself lies solely on you! And with the ever rising inflation and decreasing interest rates (savings account and fixed deposits), it will be next to impossible to manage your day-to-day expenses with the money received from Provident Fund (EPF) and gratuity.
What Is The Ideal Age To Start Planning For Your Retirement?
Sooner the better! Some say the day you start earning you should start saving for your retirement. Even if you dont start that early, you should start doing it by late 20s. Retirement planning involves identifying and analyzing your financial objectives, taking into account your current financial position and drawing a roadmap which includes a selection of proper investment instruments, creating short-term and long-term investment goals and fund allocation in a disciplined manner. As retirement planning is a long-term investment, the earlier you start the better results you will get.
REMEMBER - In Retirement Planning Time Is Money!
Retirement Planning is called the cornerstone of all financial planning. It carries the most weightage as it is a long-term goal and most importantly, the margin of error is minimum. One thing that you should keep in mind in retirement planning is that time is both your friend and enemy. For example, if you have drawn a good plan and are doing all the right things you get a long time to nurture your investment and experience compound growth. In this scenario, the time has acted as your friend. However, if you have taken a wrong investment route e.g. insurance or fixed deposit, and you realise your mistake after a long time, here time has worked against you. Hence, exercise maximum caution and remember: in retirement planning time is money.
What Are The Ideal Instruments For Retirement Planning?
Equity Mutual Funds - Is one of the smartest and the most dynamic tools of equity investment. If you are a smart investor a sizeable portion of your income has to be routed to mutual funds on a regular basis. A mutual fund can be a potent tool to meet your short-term as well as long-term goals (retirement). At moderate risk, investors get decent returns and also get to experience the power of compounding.
Public Provident Fund (PPF) - Is the most reliable and trustworthy investment scheme as it is operated by the government. PPF investment comes with certain stern conditions like 7 years lock-in period plus certain limitations on the quantum of investment that you can do every year. But due to tax benefits and compound interest, it has become quite popular amongst investors. Some portion of your income should be allocated to PPF, however, it provides fixed returns and the interest rates get reviewed (read slashed) periodically. Thus this instrument should be inducted in your plan but should get limited weightage.
Direct Equity investment - Many people try to avoid direct exposure to stock investment due to fear and ignorance. But there are means like stock advisory firms to help you reduce risk in stock investment. Over the years, stock investment has given uncapped growth to the investors. Every smart investor should have a stake in equity. As we discussed above, equity not only keeps the value of your money on the equal footing with inflation but, most of the times, a step or two ahead.
A Word Of Caution - Though direct equity investment is the most rewarding asset class, it requires a lot of research and analysis to get the right stocks. Those who dont have adequate knowledge of equity should seek the support of financial advisors or SEBI registered equity research firms.
Common Mistakes Of Retirement Planning
1. Trying to Time the Market & Not Diversifying - For most investors, their exposure to the stock markets is via direct equity investment or mutual fund (SIP). Especially, investors who go via SIP route try to time the market. What they actually do is this - they wait till the market is down and they start a SIP and when the market goes up they see good profits and they stop the SIP. Not only is this a wrong approach but also extremely disastrous to accomplish your retirement objective.
As in SIP, you invest the same amount on a regular basis, when the market is down, you get more units which give better returns when the market goes up. The very objective of Systematic Investment Plan (SIP) is to make you immune to the market volatility. The idea of SIP is devised to get the best average returns from the market. Many celebrity investors like Warren Buffett have advised against trying to time the market.
2. Underestimating The Cost Of Health Care - Many people make a blunder of not making provisions for health care costs. If not planned well, healthcare, in the old age can cause a huge dent in your retirement savings. Rising healthcare cost is a grave risk to retirement security. Hence it is important to know how to plan for this major expense. There are many public and private health insurance available to help you plan. However, the key to getting the maximum advantage is to start early and spend less on premiums.
3. Borrowing Or Cashing Out Retirement Fund - The biggest mistake or shall we say a blunder of the retirement planning is borrowing or totally cashing out your investment for retirement. On many occasions, people face difficult and demanding situations where they need money on a short notice, at such times, many people make the mistake of busting their piggy bank (Retirement investment). This is a blunder. There are always excuses like, "I needed money really badly," or "I had no other source to raise money,". Its not true. If you are a working professional and have a good credit score you can get a loan easily. But drawing from the retirement kitty is more tempting somehow.
4. Looking At Insurance As A Retirement Planning Instrument - DO NOT look at insurance as a form of investment, as the returns you get from the maturing of your insurance policy/policies is usually peanuts. The sole objective of insurance is to safeguard your and your family's interest from the unfortunate and unforeseen events of life. Over the years, insurance companies have misled people into believing that it's an investment medium. Be a responsible investor and don't make a mistake of looking at insurance as an investment instrument.
Always Buy A Term Insurance
The objective of the insurance is to protect you and your family from the unforeseen events of the future i.e. illness, accidents, death, etc. In all these cases, you have to have a robust insurance cover to not only bear the expense but, in case of death, a decent amount that will support your family. Term plan is one such option where you get a big insurance cover at a low premium. Every smart investor should buy a good life cover early in life as to avoid spending on other insurance products.
Any Other Asset Classes? What About The Debt Funds?
Just like the stock market, where equity instruments are traded, in debt market, the debt instruments are traded. It's a different asset class entirely. Debt instruments include government and corporate bonds, mortgages, etc. The debt market, to some extent functions in the same manner as the equity market, however, there are some differences which we ought to look at:
1. When you buy equity shares of the company you become a part owner of that particular company. Whereas in the debt market, the debt of the company you hold doesn't entitle you the ownership of the company or doesnt give you the voting right, it only means you will get the repayment of debt and the interest accrued.
2. Unlike equity market, the debt market is not volatile. It is considered safe and moderately rewarding at the same time.
Is Investing Debt Funds A Good Idea?
As mentioned above debt instruments are not as dynamic as equity. However, one of the salient features of debt is that it is extremely safe. The money invested in government or corporate bonds are considered safe. And at 7 to 10 percent the returns are moderately good too. The downside is that as they offer fixed returns they can't play a pivotal role in building your retirement corpus. However, debt instruments can be put to good use in the following scenario.
Imagine if you are saving for your children's education via equity mutual funds. Your target amount is 30 Lakh and the time frame set is 15 years. Now as the equity market is extremely volatile if you reach your target in just 13 years, which is 2 years earlier than what you planned, should you book profits or stay invested? Considering the fact that market can go either way, it is not worth taking a risk. In this case, the best foot forward is booking the profit and moving the corpus to debt mutual funds where you will keep getting fixed returns up to 10% (Better than FD) for next 2 years.
What Should Be The Bond-Equity Ratio?
The general rule of thumb for the debt-equity ratio is that if you subtract your age from hundred whatever is the remainder you should put that much percent of your investment in equity. For example, if you are 35 years old (35 - 100 = 65), that means you should park 65% of your money in equity and 35% in safer asset classes like debt and bonds.
But you can't draw your financial plan on thumb rules as every individual has different income and different financial requirements. Moreover, it also depends on your risk appetite as to how much equity exposure you are comfortable with.
However, if you are willing to go for equity then let's look at how to strike the perfect debt-equity balance in your portfolio.
Rule # 1 - Equity Is Must - In order to build a robust post-retirement corpus, your best bet is an investment in equity. There is absolutely no alternative to this rule. You cannot build a handsome corpus with help of traditional instruments like fixed deposits, gold and bonds. Hence, equity is your trump card.
Rule # 2 - Start With 100% Equity - It always pays off to go with an aggressive approach in the beginning. Go with 100% equity allocation in the first phase of your retirement planning. By first phase we mean, if you are starting at the age of 30 and are going to keeping working till the age of 60, let's call first 10 years as the first phase. In this phase, you should be all in equity (Direct or Equity mutual funds). Post the first phase, if you feel the need to be on a safer side, you can allocate some portion of your income in debts.
Rule # 3 - Debt Is Not A Wealth Creator - Always remember - debt instruments are just for safety, they are not as powerful wealth creators as equity. You get moderate but fixed and assured returns. However, if you are only focused on safety, you will not be able to generate good returns. Thus it's always better to have the maximum equity exposure and move the funds to the debt only in the latter stage of your career when you have booked the profits.
How To Manage Health Care Expenses
As you grow old your cost of health care grows along the way. Hence, special provisions have to be made for health care in the retirement planning. However, most of the people show extreme apathy towards planning for healthcare. Here are some hard facts which might help you look at the health care planning in the all new light.
1. In India, like in America, we don't have any government program like social security which looks after the healthcare facilities of the retirees and old-age people. On top of that, if you are not a public servant, you don't get the advantage of government's medical care schemes. In short, you have to foot all the medical and hospital bills on your own.
2. According to the data produced by the government, the health care costs have risen by whopping 14% since the year 2010. Also, the rising inflation will only make it costlier in time to come.
So How To Make Provisions For Healthcare In Retirement Planning?
The first step to get an estimate of your post-retirement health care expenses is to look at the present healthcare costs. Take into account your medical history, allergies, age-related ailments like sugar, blood pressure, etc. Do the averaging of 3-5 years' costs and keep adding 10-15% to that sum every year. This will give you at least a rough estimate of the cost you need to plan for.
One also needs to consider factors like longevity and possibility of outliving the corpus saved for the retirement. Hence it is better to save more funds. Also, it helps to scan your lifestyle to find out if it might invite any diseases in the future. Do not forget to include spouse in the calculation.
1. Get a good health insurance at a young age as to keep the premium low
2. Go for a comprehensive plan which covers not just you but your spouse
3. A plan which covers critical illnesses and surgeries
Sounds Difficult? Enter: Certified Financial Planner
While planning for your retirement you will come across many roadblocks which are difficult for a person of a non-financial background to overcome. Risk-reward ratios of certain asset class, managing tax, striking a perfect balance between equity and bonds, whether to invest in pension plans or not are some of the issues that will stare at you. As you need a plenty of hand-holding, it is better to get help from a financial consultant or a financial planner. A certified financial planner can ease your way while treading on this sticky ground and will draw the most rewarding financial and retirement plan for you.