By Kamal K Sharma
Although Retirement Planning is the most important aspect of human life but yes, in India this is most ignored subject as well. No one wants to leave this wonderful planet so early. “Ayushmaan Bhav” means living long, is most desired and maximum distributed blessing, still no one actually plans it the way this deserves to be planned…..think for a while, what if you live till the age 90 plus years.
Alok is 43 years and getting paid about 30 lakh a year (Rs.2.50 lakh salary a month) from his Govt/Corporate job. His position entitles him to have a driver, domestic help, free access to Golf Course, Caddy is at his disposal, His officer’s club gives him comfort of parties and social gatherings at a very reasonable price. God has blessed Alok with a wonderful family, his caring homemaker wife & two children.
12 years from now i.e 2037, Alok is looking ahead to his Retirement. Ideally his Salary of today will be his pension of 2027. Confused? go back to 2012-13, your salary was just half of what you are getting today, given that your pension will be Rs 2.50 Lakh/PM and you will not have the luxury of a Driver, Gardner, Caddy, Domestic help, in fact post retirement you will be requiring these services as a bare minimum necessity but at a good cost. All these services in a metro city like Delhi – Banglore – Mumbai – Pune – Chandigarh – Indore cost about Rs. 30000-40000 a month today, don’t feel surprised if your monthly services bill is beyond Rs. 1 Lakh/PM in 2037 & beyond, remember if all goes well, you will have to carry on paying for these services for next 30-35 years. That’s not the only case, if your post retirement so called golden period stretches beyond 30 years dont be surprised that your Electricity bill might be 25-30000/PM, Petrol – 250/Litre, Hair Cut Rs 750 and a liter of milk at about Rs. 250 a liter……I know its sounds little unrealistic but if you rewind back to 30 years i.e in 1995, you bought petrol at Rs 16 a litre, now at 100. Electricity bill at about 200-300 now at about Rs. 5000 a month, haircut at about Rs. 10, now at 150 and milk at Rs. 6-7 a liter now at about Rs. 70……oh!!! I did not mention Gold which always remains close to your heart, was at Rs. 3800/10 Gram and now at close to Rs. 1 Lakh/10 Gram. I am not scaring you with other costs like Medical Bills, Emergencies, Air Travel, Holidays & Marriage Shagun’s in cash.
If you actually want your Golden Period to be truly glittering gold, there needs to be a serious plan around this. I am sure everyone is very forward looking these days but I am yet to come across very many people who have adequately planned. No doubt, in personal capacity, everyone feels having good Retirement Corpus build through GPF – DSOP – Insurance Maturity -FDs – NPS but its like umbrella kept in your home or car for last couple of months and when you take it out on a very rainy day, you realize that size of umbrella is not adequate and you reach home completely drenched. Whom you blame that time, the rain, the god, your driver, your friends or your neighbors….obviously, you will curse yourself only. Rain is onetime experience but how you will feel at the age of 78 years when you find that your Retirement Fund is not adequate enough……I pray to god that no one faces such kind of crises in their Golden Years.
Thumb Rule is your Retirement Corpus should be big enough to generate two and half times of your Salary as of today i.e if your Salary is Rs. 30 Lakh a year as of today, your retirement corpus should be able to generate about 75 Lakh a year (Including your pension) which is roughly around Rs. 6.25 Lakh a month. This much of cash flow is good enough to make your Golden Years truly glittering gold. This actually means, anyone having a salary of Rs. 2.50 Lakh in 2025 need to build a Retirement Corpus of about Rs. 8.0 Crore to generate about Rs. 4 Lakh additional cash flow for rest of your Life. This amount + Pension put together will become your best buddies to take care of your old age.
While Planning for Pension, there are few very important aspects that derail whole effort.
Life expectancy: Yoga, Healthy eating & Superior medical facilities have increased the life expectancy in India. Earlier, post-retirement life was about 15-18 years but Now, one needs to plan for 25-35 years plus of life after retirement, failing which, financial dependency may increase at a time when you are no longer able to earn.
Inflation: Despite the RBI’s low CPI-based inflation numbers, inflation for senior citizens is much higher, particularly in shape of Travelling to keep connected with your Children, Gifting for Grand Children, Cost of living, additional support being a senior citizen and on top of it on medical expenses. Medical expense inflation averages upwards of 14 per cent p.a. and is likely to remain higher.
Asset allocation: Most of people play very safe & allocate almost the entire retirement corpus into fixed income like FDs, Post Office MIS, annuities with assured cash inflows. Allocation to equity is negligible owing to its inherent risk. Meanwhile, some people with not so adequate Corpus in order to get better returns invest almost the entire corpus into equity linked instruments thinking they will cover the shortfalls. Asset Allocation process in Retirement Planning is well thought process and should not be done without consultation from experts.
Inadequate Insurance: Insurance is still seen by many as an investment product, Insurance as a product finds utmost misselling in our country. True form of Insurance is Term Insurance with min cover kept at 7-10 times of your annual income and Health Insurance cover at min two and half times of your annual income. Anything lesser then these limits is pure eye wash.
Tips for retirement planning
Start early: Retirement planning should be a part of financial planning from the very beginning, with specific allocations to instruments designed for building a calculated corpus.
Succession planning: It is advisable to hold one’s assets in one’s own name and use them first for one’s own requirements. Make a will that will ensure a smooth transition of remaining assets to the next generation post your death. Do not live poor and die rich.
Balanced asset allocation: While some financial planners completely avoid equity, some are completely moving out of fixed income securities because of poor returns. The trick is to balance between the various asset classes. Just like a balanced diet, a balanced portfolio becomes even more important after retirement.
Adequate health insurance: Ensure that you are adequately covered for medical emergencies, even if it means paying high premiums.
Focus on leading a happy life: Add life to your years. Do all that you couldn’t while you were busy working. Build all of that into your retirement plan.
Retirement planning is not just about generating higher returns. It is more about stability and assurance. If you have 30 Years to create Retirement Fund, stay aggressive with Midcap & Small Caps, If you have 15 Years to build a Retirement Fund, have the combination of Large Caps & Midcaps, if period left to create Retirement Fund is between 7-12 Years, strict your Investments to Large Caps & Hybrid Funds, but if you are left with less than 7 years to build a Retirement Corpus, you just need to stay Invested in Balanced Funds.
Few basic Rules while Investing your Retirement Corpus is
1. Safety of capital -Your Capital should always stay Safe
2. Liquidity – Money should not have any lock in period, it should be very high on Liquidity.
3. Tax – Returns should be very tax efficient. LTCG is okay to pay.
4. Returns beat inflation :Â Return on your Investments should be able to beat inflation by about 5%
Retirement Planning has to be your top most priority, if not already planned, time is NOW, tomorrow is too late. Financial Matters are very emotional to everyone & you are getting ready to a period where flow of your finances will be extremely personal to you. Even you will hesitate talking to your spouse & settled down children for that matter because they will have their own life troubles. Its better to have a dependable advisor, a buddy who can be trusted and be a friend for life to count upon and guide you through.
Kamal K Sharma is a Financial Professional, Visiting Faculty to BSE (Bombay Stock Exchange) Institute and Author to the bestseller The Piggy Bank Billionaire.
