Retirement Solutions

Retirement planning: Golden Door to Stress-free Life

bajaj_admin — Mon, 23 May 2022 12:17:19 +0000

Retirement planning: Golden Door to Stress-free Life bajaj_admin Mon, 05/23/2022 - 17:47

Do you wish for a cozy white house surrounded by serene sky, temperate air where the silver orb of the moon reflects right back at you among the most beautiful garden where your grandkids while you are sipping on a cup of Hot Tea? Well, these look to be happy “Retirement wishes.”

RETIREMENT is that time of life when a turbulent waterfall adjoins a calm river of stillness when you bid farewell to your 9-5 hustling life behind to enjoy your newfound passion and check out the boxes off your bucket list. With the increased life expectancy, which has prominently risen from 60 yrs. from 2000 to 70 yrs. in 2020 there has also been a rise in the Per Capita income (with only a small blip due to the unprecedented aftermath of the pandemic) of increasing simultaneously. As India continues to progress at a robust pace, the life expectancy is further expected to be rising.

India GDP Per Capita 1960-2022

Source:https://www.macrotrends.net/countries/IND/india/gdp-per-capita

With the increased life expectancy, there are more years to accommodate for, and it is important for Retirees to equip themselves financially to ensure their money outlasts them. Nothing is scarier than running out of money when you are no longer in a position to earn in old age. With the lack of funds, one might have to constrain the lifestyle.

Post-retirement and this can only be prevented only by ensuring that you don’t eat out your retirement corpus. Keeping your Retirement corpus intact is a tough nut to crack as it needs a strategic approach to maintain it. With Inflation and falling interest rates, this becomes even more difficult to achieve. Hence proper planning for Retirement through judicious asset allocation is the need of the hour.

Why do most of us fail to do Proper Retirement Planning?

All our lives, we strive to keep our families happy and content. For the maximum part of our lives, we strive to fulfill goals that will secure the future of our family and loved ones. Saving money for one's home, children's future education, children’s marriage, etc., are all life goals for the happiness of our immediate family. However, the only goal that we keep for ourselves is Retirement which is often overlooked. And by the time you are on the verge of Retirement the need to accommodate the expenses of retired life comes up. Only a handsome retirement corpus that is generated keeping in mind the needs of the retired life can support Retirement years without making any changes in the lifestyle. Let’s take a case study.

Case Study

So it will be wise to say, the likelihood of your retirement dreams coming true depends on the efforts you make in your younger years that ensure a steady stream of income post-retirement after you have said au revoir to your nine to five endless juggling hours. And this is possible only through proper retirement planning. Let’s see how?

What is Retirement Planning?

Retirement planning is defined as the process of planning one’s post-retirement income goals and accomplishing them with required prompt actions and decisions. It also includes analyzing your financial requirements, objectives, the current financial state, and the anticipated future cash flows to develop and harness a comprehensive road map to a secure, jolly and calm period of time coined as “RETIREMENT”.

A judicious retirement plan is the best-support one can have for a relaxed post-retirement life as it helps you plan and provide for the following:

1. Provide for monthly cash flows to meet living expenses

2. Protection from Taxes

3. Shields you from Inflation

4. Protection from falling interest rates on Bank Deposits

5. Medical Expenses

6. Investment in schemes that are best for Retirees i.e., Government-backed funds.

1. Provide for monthly cash flows to meet living expenses: Unlike developed countries, private-sector employees in India do not have the cushion of a state-sponsored pension, meaning that an individual is basically on his own post-retirement.

Retirement Planning helps you save, invest and build an adequate corpus in your working life and then invest it diligently after Retirement so that it provides you with the necessary cash flows to lead a financially relaxing post-retirement life.

2. Tax -Savings: Tax and Inflation are the two mammoth enemies that can curtail financial health. With the constant rise in age comes the need for regular health check-ups, preventive health programs, or that requires the attention of the best medical facilities. The mere thought of spending on such expensive treatment can make a person overwhelmed; however, catering to these expenses is a necessity. That’s why everybody needs to plan their Retirement accordingly so that such unforeseen expenses do not put a strain on their financial chart post-retirement.

3. Shields you from Inflation: Today's scenario in Global politics is shaping the world in a way that is putting a strain on everybody's pocket. Be it the Afghanistan Crisis or Russia- the Ukrainian war, or the Sri Lankan economic crisis, each of these global adversities has brought a tremble in the world economy and, as a butterfly effect, has increased the prices of common commodities drastically. The annual inflation rate in India increased to 6.95% in March of 2022, the highest since October of 2020, and above market forecasts of 6.35%. Food inflation accelerated for a 6th straight month to 7.68%, a new high since November of 2020, with the cost of oils and fats (18.79%), vegetables (11.64%), and meat and fish (9.63%) recording the biggest rises again.

Source: Ministry of Statistics and Programme Implementation (MOSPI).

https://www.mospi.gov.in/

4. Protection from falling interest rates on Bank Deposits:

The interest rates offered by banks have been unpredictable and might not give returns as they would have done earlier. For instance, the interest rate offered by a popular bank for bank FD fell from a high 9 % to a medicore 5% in the present day scenario, which makes investment in these as not the best way to increase money. Thus not relying on one source while Investments are done prudently, keeping in mind the needs, time horizon and risk appetite of the retiree is the way to earn stable returns.

5. Medical expenses: With the inevitable rise in age, there comes a time when every human is subject to illness, health care routines, preventive health check-ups, etc. As a result, in the years post 60, there are often increased visits to the doctor, and the need for medical treatments might also increase due to the declining age. This again puts a burden on the Retirement corpus as frequent visits to doctors will put pressure on the Retirement Corpus. With the rise in medical Inflation the amount of expenditure on healthcare automatically rises, hence the need for a Proper Retirement Plan.

Rise of private health expenditure per person in India 2000- 2018.

Source: OurWorldinData.com

https://ourworldindata.org/grapher/private-health-expenditure-per-person?tab=chart&country=~IND

6. Investment in schemes that are best for Retirees i.e. Government-backed funds-

While there is a small cushion of regular income post-retirement for the government employees in the form of Pension, there is no comfort for the people in the private sector or running their businesses to accommodate expenses post they stop working. Even the pension fund is mostly insufficient to cater to all post-retirement expenses. It is only through a properly planned Retirement Plan devised as per the Retirement needs of an individual can these requirements be fulfilled. Proper Retirement Planning also allows for choosing the best investment options for retirees, i.e., Government Backed funds to take care of this requirement.

Ways to achieve your desired Retirement Corpus through Prudent Investment options

Investment in Debt Mutual Funds and opting a SWP

Another great investment option for short to medium duration is an investment in Debt Mutual Funds while choosing a Systematic Withdrawal Plan ( SWP) to enable regular cash flow for the retirement years. A Systematic Withdrawal Plan ( SWP) is a convenient facility by which an investor can withdraw a pre-decided sum from the existing investments in mutual funds at a pre-decided interval ( i.e., on a weekly, monthly, quarterly, semi-annually, or on a yearly basis).

Moreover, mutual funds investments provide two options to withdraw money- the Dividend Option or the SWP option. The dividend earned from mutual funds investments were made taxable in Union Budget 2020, and this has lost its sheen. On the other hand, SWP option provides several benefits to the investor, such as:

Gives Predictable Cash Flows- The Dividends are paid out of actual returns by the fund and not from the capital. At the same time, SWP is similar to regular redemption i.e., withdrawal of principal plus profits. An Investor can ask the AMC to allocate and redeem a particular amount periodically to him on a fixed date; this continues until the Investor instructs the AMC to stop this.

Tax Efficiency- SWPs are much more tax-efficient than the Dividend option. Dividends from mutual funds are taxable, while for SWP, tax is paid only for the Capital gains portion and not on the principal amount. When the Capital gains portion increases, the gains will be treated as Long Term Capital Gains are taxed at a very marginal rate.

Flexible- SWPs give great flexibility to start and stop as per the choice of the Investor and also choose the interval to receive withdrawals.

Other great schemes for retirees are PMVVY, SCSS, RBI floating rate bonds, etc. While timely Retirement Planning is the right stance to secure the golden years, choosing the right tools by way of right investment options for retirees is the tool that is needed to give the right shape to it.

“The joy of retirement comes in those everyday pursuits that embrace the joy of life; to experience daily the freedom to invest one’s life-long knowledge for the betterment of others; and, to allocate time to pursuits that only received, in years of working, a fleeting moment.”

– Byron Pulsipher

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Retirement Planning- The Strategic Approach To Happy Retired Life

bajaj_admin — Thu, 19 May 2022 05:25:47 +0000

Retirement Planning- The Strategic Approach To Happy Retired Life bajaj_admin Thu, 05/19/2022 - 10:55

“ With the advancement in scientific technology, innovations in medicine, and happiness indexes, the average human life expectancy has been prolonged, and our Retired Life is quite longer than we imagined it to be.”

Everybody dreams of a beautiful, serene life full of roses and doves when approaching the golden years of life. So many of us are quite relieved by the fact that this day seems quite far away from our present reality. But little do we know that we are rattling at a faster pace towards our Retirement than we primarily imagined.

As per the recent data from the Ourworldindata.com, the average life expectancy for India is around 69.7% by the year 2015, which is an increase of almost 15 years from what it was originally in the year 1960s.

Life Expectancy India- 1960- 2015

Source- Ourworldindata.com ( https://ourworldindata.org/grapher/life-expectancy-at-birth-oecd?tab=chart&country=IND)

This inclusion of a longer lifespan opens a new, great, and unanticipated ocean of possibilities in front of us. One of them is the increased span of retirement that is gradually approaching us briskly. Majorly implying the fact that we need to put in additional efforts in planning our retirement more prudently, and devising a Grand financial plan that maps all our required expenses to sustain us lavishly in the post-retirement state no matter what the situation is.

Thus, our retirement planning needs to be concrete-proofed to protect us against all the prevailing discrepancies and problems that have the potential to blow our picturesque retirement into a million pieces.

"Give me six hours to chop down a tree and I will spend the first four sharpening the axe"

This famous quote by US President Abraham Lincoln rightly lays out the importance of planning for the future. Taking his personal life into consideration, no other US president had ever faced a series of challenges as presented to Abraham Lincoln.

Had he not judiciously spent time planning and placing sensitive pieces in his corner, it’s possible that we would be living in a very different world today since US politics has always had a major influence on the world socially, politically, and economically.

Keeping this excerpt in mind, you need to work ahead of time to lead a life you only dreamed of. Thus, retirement planning should be your topmost priority, and you should never neglect the time and effort necessary for due diligence before action, because every today has a tomorrow, and you need to be prepared to enjoy that tomorrow, not repent it due to a lack of proper planning.

Who Should Plan for Retirement?

To retire means to rewind, relax, and rejuvenate in the most cherished years of your life.

But the question we usually ponder over is whether retirement is a need for all. Yes, it is imperative for all to plan for their retirement.

Many people have this conception embedded in their minds that merely salaried individuals should plan their lives ahead as they might not get a hold on the required supply of income once the faucet of regular income has been turned off. It is a fact that salaried individuals who have mandatory Employees’ Provident Fund might still have some corpus, though it is highly inadequate to fund the lavish lifestyle each one of us has envisioned for ourselves to rely upon post-retirement. Let’s see how each individual irrespective of his work/profession needs a definite Retirement Plan:

Non-salaried/Self employed individuals- Professionals such as Actors, Athletes, who are mostly working on an assignment basis or have a confined lifespan to their careers needs to think very critically on how to suffice the needs of the Retired life. Proper planning in the prime years is the right step for secure the future.

Salaried Individuals- Salaried Individuals who are either in government jobs or in private sector jobs will also need regular income once they retire. For most government employees the provision of pension is a source of some income, however this is not available for the private sector individuals. Moreover, the pension fund also might not also bear the burden of all expenses of the old age.

Business Owners- For people running their own business, the need for a corpus to support the family is there once the business owner retires. Though businesses usually pass on from generation to generation, still the ups and downs in a self owned business might put a huge burden on the shoulders of the bread earner of the family. Hence the need for proper planning and a good retirement corpus is a must.

Different phases in Retirement Planning

Accumulation Phase

The phase of Retirement planning that includes a time period when an individual is currently earning, saving and investing to build an adequate corpus by the time of retirement is usually coined as the Accumulation phase. Simply put, the time from the beginning of your career till retirement is included in this phase.

The major objective of this phase is to fatten the kitty, in this case to expand your limits to maximise your retirement corpus to enjoy a jolly, resplendent and peaceful life post-retirement. As the popular saying goes on “The beginning is always NOW”, one must always strive to fulfill this accumulation phase sooner than emancipated as an early planning can provide you the needed jump-start to land a better yielding time for your investment with the magical power of Compounding and debark the benefits in the form of preferable Retirement Corpus.

In this stage, an individual undergoes a plethora of thoughts which include the following:

How often should you choose to save for retirement?

How much should you choose to save for retirement?

What investment vehicles you choose to use?

How do you wish to diversify your financial holdings?

And countless other investment variables that keeps fluctuating with different mindsets and market conditions.

The moment an individual comes across their first investment for retirement marks the onset of Accumulation Phase of every individual’s Wealth Creation journey. Now this age might vary from an individual to another, for some it may be as soon as their 20s and for some it can also mean planning just before the party pops in their late 40s. This age remains a variable factor that largely influences any individuals post-retirement corpus. The better understanding of this accumulation phase is the key to maximise your Retirement corpus and lead a content life during your twilight years.

Although one cannot always predict the numerous possibilities of either a fortuitous future or a rather abrupt future. However, one can always prepare in advance by analyzing their financial goals with a finance expert to plan ahead by including expectations for items such as inflation, market declines, health care etc to keep you on the right road ahead and lead them to euphoric elysium.

Some of the good Investment options in this phase are:

1. EPF:It is a government-sponsored savings plan aimed at organized-sector employees. It is a retirement scheme that falls under the EEE (exempt- exempt- exempt) tax category. It is the major scheme that falls under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, and is governed by the Employees' Provident Fund Organisation (EPFO).

2. VPF:VPF is a traditional savings plan that falls under the umbrella of provident funds. VPF, however, allows for a fixed contribution amount made to the scheme on a monthly basis to be decided by the contributor.

3. PPF:PPF is another option that is popular with risk-averse investors. It is a great Tax-saving investment option. PPF offers a lock-in period of 15 years and gives an option of extending your account in 5 years. It is a great option for salaried people as it offers a greater interest than Fixed Deposits. For salaried individuals who often consider FD’s a great option, PPF is a great option and usually provides higher returns to FD’s.

4. National Pension System:The National Pension Scheme (NPS) is an Indian government-run programme for subscribers to provide retirement benefits. On average, NPS offers a 9–12% interest rate per annum on the contributions made for the current fiscal year.

5. Systematic Investment Plan (SIP's) in Equity Mutual Funds: Regular investment of a smaller sum helps in gathering a substantial amount of corpus by the power of compounding in the long run. It is rather simple and convenient route into investment discipline to fulfill your long-term financial goals and is used as a good accumulation investment option.

Distribution Phase

This Phase in Retirement planning begins with the onset of your RETIREMENT.

Post-retirement, an individual faces his worst nightmare; there comes this time when you no longer possess a continuously flowing stack of money, or in simpler terms, you do not have a hold over a regular source of income post-retirement. This is the point in life, an individual is solely dependent on the investments they made during their investment years and reap the benefits of that prudent investment made, which is more than capable of funding our needs for our remaining life and of accommodating our imagined fancy lifestyle with numerous arousing desires.

A sudden shift from the Accumulation phase to the distribution phase might seem tricky when the paychecks stops coming by, and you find no other source dripping any additional income. Although we cannot rewrite our life’s history what could be done is to plan prudently during our Accumulation phase to amass the rewards of your retirement planning efforts. Our monthly social security benefits, potential pension corpus and planned income are all supplements from the multi-hued investments that we made our younger/ investment years. Some of the good Investment options in this phase are:

1. Senior Citizens Saving Schemes: Senior Citizens Saving Scheme (SCSS) is geared towards senior citizens over the age of 60.s. Long-term savings can provide a steady income stream while saving taxes for the investors.

2. Systematic Withdrawal Plan (SWP) from Debt Mutual Fund: SWP (Systematic Withdrawal Plan) allows investors to withdraw a predetermined amount from their existing mutual fund investments at predetermined intervals (i.e., weekly, monthly, quarterly, semi-annually, or annually).

3. PMVVY(Pradhan Mantri Vaya Vandana Yojana): Pradhan Mantri Vaya Vandana Yojana is a retirement scheme offered by the Government of India. Under this scheme, investors can avail of regular pensions from it and are guaranteed a rate of return on their investment, regardless of the frequency be is monthly, quarterly, or yearly.

4. Immediate Annuity Plan: An annuity is a pension plan that helps you to get lifelong, regular, and guaranteed income post-retirement for life against a lump sum investment. In an immediate annuity plan, income starts rolling immediately after you invest in an annuity plan.

5. Floating Rate Saving Bonds: Floating Rate Savings Bonds are Debt Instruments issued by the government that provides an investment option that is tailor-made for risk-averse investors and investors looking to diversify their portfolios. They provide a source of Fixed Income to Investors with periodical and regular income in the form of interest pay-outs. These floating-rate savings bonds are fully taxable, non-tradable, and transferable to the nominee.

A famous quote attributed by the former US President Dwight Eisenhower goes by, “A plan is nothing, but planning is everything”. This quote seems to be monumental in terms of planning your Retirement. A financial plan that you have drawn up today may not be particularly relevant or might not align accurately with your financial goals at the given period of time. However, after 10 years, we might find ourselves in the most gleeful hour. This may be the case when the facts become clearer in hindsight that our Financial portfolio is flourishing immensely despite the ongoing discrepancies, economic situation, inflation etc. What is essentially required is a constant, ongoing process of reviewing what you have saved and invested vis-a-vis what you need and that on-going process is what retirement planning is all about going parallel.

The need for an Early Retirement Planning

The idea of early Retirement Planning is getting popular day by day, and this is not because it is some trending term it is because of the value that planning early adds to the retirement corpus. And planning this is also not difficult but is definitely strategic. The first step is to decide an age when you want to retire say 50 years, to ensure you do not run out of money. Basis that the amount to secure these years can be calculated. Once this amount is correctly estimated then comes the task to plan the savings and investments to reach it in the given frame of time. Timely portfolio reviews and re-balancing are then needed to remain on track for the happy journey to the golden years.

Retirement investment portfolios today are no longer designed to get you to retirement; they must endure retirement.

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Retirement Planning: Addressing Key Challenges

sanjeev.kumar — Mon, 24 Aug 2020 11:25:14 +0000

Retirement Planning: Addressing Key Challenges sanjeev.kumar Mon, 08/24/2020 - 16:55

Retirement Planning, though prevalent in the western world since long, is a relatively new phenomenon in the Indian society. The joint family system where a son took care of his parents, obliterated the need for retirement planning. A competent son used to be the best investment Indian couples made for retirement.

However, this has changed with the advent of urbanization, employment-led migration, nuclear families and rising aspiration levels of young Indian couples. Retirement planning has become a necessity in Indian society today.

Retirement Planning typically consists of two phases –

1. Accumulation Phase

2. Distribution Phase

Accumulation Phase, as the name suggests, is the period before retirement, when a person accumulates or builds the corpus for his / her retirement, known as Retirement Corpus.

Distribution phase is the period after retirement when the accumulated retirement corpus is invested in a manner that assures safety of capital, liquidity and a regular, guaranteed stream of lifelong income that can grow with inflation.

While enough literature is available on the accumulation phase, not much has been said about the distribution phase. We shall primarily deal with the Distribution Phase in this article.

The Indian retiree faces some challenges while investing for the distribution phase -

1. Generate post-tax income that is enough to cover expenses, regular and ad hoc, from guaranteed sources

2. Make sure that the income grows at a pace enough to cover inflation

3. Mitigate the Reinvestment risk in an environment where interest rates are declining

4. Ensure that one doesn’t run out of money during the lifetime i.e. there is enough capital at all times to keep generating required income

THE CONUNDRUM - SAFETY OF CAPITAL, GUARANTEED INCOME, LIQUIDITY, REINVESTMENT RISK & INFLATION

The most important thing for a retiree is to never run out of capital. Income can be generated only if there is enough capital. Capital erosion due to exogenous factors such as volatility in market, credit defaults, etc. can be dangerous. A considerable part of the investments in Regular Income portfolio thus need to be in non-market linked instruments that provide safety or guarantee of capital like government sponsored savings schemes/ bonds, fixed deposits, post office instruments, etc.

On the flip side, such non-market linked instruments do not allow the capital invested to grow in line with inflation and hence may be insufficient to meet income needs in future. Also, such fixed income bearing securities are inflexible i.e. one cannot increase or decrease the cash inflows frequently. Plus, they can also be illiquid i.e. have fixed lock-in periods and are also susceptible to reinvestment risk in a declining interest rate scenario.

I know a person who had enough money in bank deposits yielding 7.5% p.a. three years ago, to take care of his monthly expenses (his income was 125% of the expenses at that time). He is in a precarious situation today as the deposit had to be renewed at 5.5% recently. His income has fallen by ~27% - for no fault of his – while expenses are up by ~12%, leaving a gaping hole of 18% per month. This is what falling interest rates can do in an inflationary environment.

Market linked instruments such as debt mutual funds do help in managing issues on growth, liquidity, flexibility and reinvestment risk to some extent. Though they are subject to market volatility, they provide scope for capital growth, a careful selection of the right funds can help mitigate these issues.

In a falling interest rate scenario, they tend to appreciate in value (as bond prices rise) and compensate for the loss in yields / coupon for some time and to some extent. For instance a debt mutual fund with yield to maturity of 7.5% and modified duration of 3, will appreciate by ~6% if yields fall to 5.5%. This can partly compensate for the loss of income. Also, debt mutual funds are highly liquid, allow the investor to benefit from rising bond prices and allow flexible withdrawal options through the Systematic Withdrawal Plan (SWP) route.

A balanced approach is thus needed to allocate between such fixed income bearing, inflexible yet safe instruments, and, market linked instruments such as debt mutual funds.

BEATING INFLATION – A DUAL APPROACH CAN HELP

The biggest challenge for retirees is to make their retirement savings last a lifetime in an inflationary environment. Your retirement corpus may be enough to meet your expenses today. But what about 10 years from now? At an inflation of 4% p.a., a monthly expense budget of Rs. 1 lakh today will grow to Rs. 1.48 lakhs in 10 years and Rs. 2.2 lakhs in 20 years. Assuming that you retire at the age of 60 years, by the time you turn 100, you will need a monthly income of Rs. 4.8 lakhs to meet your expenses at this rate of inflation.

Look at it from another angle - if you have a retirement corpus of Rs. 2 crores - invested at 6% p.a. - and withdraw a monthly income of Rs. 1 lakh growing at 4% p.a., you will run out of money after 20 years. How are you going to manage the rest of your life?

This conundrum can be resolved by bifurcating your investment in 2 parts – Regular Income Portfolio and Growth Portfolio. While Regular Income portfolio provides liquidity, regular income and safety of capital, the Growth Portfolio takes care of inflation and reinvestment risk.

The Growth portfolio is generally invested in hybrid dynamic asset allocation mutual funds that invest in a combination of equity and bonds, the allocation between the two being managed dynamically in line with market valuations. This allows the fund to participate in the upside of equities while protecting the downside to a great extent.

Historically, such funds have given an upside capture of 55%-60% and downside capture of 45-50% w.r.t equity indices. Over medium to long term, these strategies have managed to beat inflation handsomely, generating returns similar to equities at half the volatility.

The Growth portfolio can be used to replenish the Regular Income Portfolio whenever the latter falls short of capital due to higher income withdrawals (needed to meet higher expenses as a result of inflation). By adopting this approach, one can have a safe, liquid and flexible regular income generating Retirement Portfolio that also provides for inflation and capital appreciation.

HOW DOES THE DUAL APPROACH WORK?

Tough times and evolving needs demand a dynamic solution. Being fixated on a few government-sponsored savings schemes or generic retirement plans will not help you realize your retirement goals. One size doesn’t fit all. A tailor made, well-planned, well-diversified and dynamic approach, such as the one shown above, is the need of the hour. Last but not the least, nothing beats regular reviews of the plan or portfolio. The only thing that is constant in markets is “Change”. Why shouldn’t your plan change too?

STEPS IN RETIREMENT PLANNING - SUMMARY

Author: Alok Agarwala

Published: Investor's India Magazine, August 2020 Edition

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