4 mistakes that can hurt your retirement planning

Capitalstars Investment Advisor

Mistakes in Dealing with other related areas can, in fact, derail otherwise careful retirement planning.
Retirement planning is not just about how much one needs to save for retirement and where it should be invested. Mistakes in Dealing with other related areas can, in fact, derail otherwise careful retirement planning.

Here are four mistakes that you should avoid while planning your retirement. Some of these relate to other financial goals and working after retirement.

Ignoring other goals

While planning for retirement is critical, do not ignore planning for other goals. “Along with retirement planning, one should also plan for any pending expenses such as kid’s higher education, wedding, etc.,” says Gaurav Mashruwala, a Sebi-registered investment adviser.

If you do not plan for such goals, you may jeopardize your retirement. “If you don’t plan for other critical goals, you may end up dipping into your retirement corpus to meet them. This diversion of the retirement fund is proving to be a big worry,” says Sumit Shukla, CEO, HDFC Pension Funds.
It can be difficult for parents to deny higher education opportunities to their kids because their retirement kitty may be compromised. Besides kid’s education, people tend to withdraw money from their EPF to buy a house, for a child’s marriage, medical emergencies, etc., leaving a very small corpus to meet retirement needs.

Not planning for regular income

Generating regular income is essential to securing one’s retirement. Gradually withdrawing money from the accumulated corpus may not be the most suitable option. Investing in an annuity can help you earn a regular income. But their annual return is low—around 6.5%—and they are also taxable. However, experts advise people to invest a part of their retirement corpus in an annuity. “Annuity is a guaranteed income for life. It makes sense to invest some of your funds, even if the return from the annuity is a bit low,” says Balram Bhagat, CEO, UTI Retirement Solutions.

Anil Lobo, India Business Leader, Retirement, Mercer, concurs: “A guaranteed regular income can generate a lot of comfort for retired people.” Though most may be able to manage their money at the age of 60, it may become difficult in later years. “Since the return from annuity is low, and it is also taxable, one can’t fully depend on it.

So it makes sense to park a small portion in an annuity to have guaranteed income and the rest in regular interest bonds or mutual funds and go for systematic withdrawal plans (SWPs),” says Lobo. One also needs to invest the remaining money in growth-oriented assets so that the corpus lasts longer.

No post-retirement planning

Experts say that retirement planning should not stop at the age of retirement. It should include planning for the period after retirement as well. “Planning for the post-retirement phase is critical. The financial requirement is like the three stumps in a game of cricket—liquidity (for contingencies), regular income, and growth of the remaining corpus (so that it lasts longer),” says Mashruwala. Also, just like during one’s earning phase, a contingency corpus that can take care of 5-6 months of expenses is a must after retirement too.

Retreating from all work

Keeping oneself engaged in some activity after retirement is critical. The chance of falling sick is higher, if you suddenly shift to a sedentary lifestyle, say experts. Fighting boredom during retirement can be tough and lead to stress. “Though opportunities are less for senior citizens in India, you can still find some work, and retired people should take it up,” says Lobo.

रिटायरमेंट कोष के जोखिम रहित निवेश के लिए अपनाएं पांच सूत्री रणनीति

Capitalstars Investment Advisor

* टैक्स भी बचेगा, ज्यादा ब्याज भी मिलेगा, नियमित आय भी होती रहेगी

* बुजुर्ग लोगों के लिए निवेश पर अच्छा रिटर्न के साथ मूल पूंजी की सुरक्षा भी बहुत जरूरी है

अगर आप रिटायरमेंट के करीब पहुंच चुके हैं या रिटायर कर चुके हैं, तो आपको भविष्य की आर्थिक सुरक्षा के लिए एक ठोस निवेश रणनीति पर काम शुरू कर देना चाहिए। आपकी रणनीति ऐसी होनी चाहिए, जिससे आपके रिटायरमेंट फंड की पूरी सुरक्षा भी हो। टैक्स भी कम देना पड़े। बैंक के एफडी से बेहतर रिटर्न भी मिले और नियमित आय भी होती रहे। इसके लिए वरिष्ठ नागरिक इस पांच सूत्री रणनीति पर विचार कर सकते हैं।

1. सीनियर सिटीजन सेविंग स्कीम
टैक्स4वेल्थ के सीईओ और संस्थापक हिमांशु कुमार के मुताबिक वरिष्ठ नागरिकों के निवेश पोर्टफोलियो में सीनियर सिटीजन सेविंग स्कीम जरूर होनी चाहिए। यह सरकारी योजना है। 60 वर्ष से अधिक अवस्था के लोग इसके सदस्य हो सकते हैं। यदि किसी ने 55 से 60 साल की उम्र के बीच वॉलंटरी रिटायरमेंट लिया है, तो वे भी इसमें आवेदन कर सकते हैं। मिलिट्री जवानों के लिए अलग प्रावधान है। उनके लिए उम्र सीमा 50 वर्ष के आसपास होती है। इस योजना में 1.5 लाख रुपए तक के निवेश पर सेक्टशन 80 सी के तहत टैक्स डिडक्शन का लाभ मिलता है। यानी आपके टैक्सेबल इनकम में से इस योजना में निवेश की गई 1.5 लाख रुपए तक की राशि को घटाने के बाद बची हुई टैक्सेबल आय पर ही टैक्स देना होगा। इस योजना में 8.3 फीसदी का ब्याज मिलता है, जो काफी आकर्षक है। यह भुगतान तिमाही आधार पर होता है।

2. पांच साल वाला फिक्स्ड डिपॉजिट
बैंक के एफडी में आमतौर पर सीनियर सिटीजन को 0.5 फीसदी ज्यादा ब्याज मिलता है। पांच साल वाले एफडी में 80सी के तहत टैक्स बचत का लाभ भी मिलता है। टैक्स सेविंग के लिए यह योजना अच्छी है। इसमें आंख बंद करके डेढ़ लाख रुपए लगा सकते हैं। इससे ज्यादा पैसे इस योजना में न लगाएं। क्योंकि अन्य योजनाएं भी हैं, जिनमें बिना जोखिम के इससे ज्यादा रिटर्न मिल सकता है। लेकिन यदि आप टैक्सेबल स्लैब में नहीं हैं, तो इसमें निवेश करने से पहले सोच लेना चाहिए। क्योंकि इस योजना में निवेश करने का मुख्य लक्ष्य टैक्स बचाना होता है।

3. नॉन कन्वर्टीबल डिबेंचर
नॉन कन्वर्टीबल डिबेंचर (एनसीडी) में निवेश भी एक अच्छा विकल्प है। कई लोग कहते हैं कि एनसीडी में निवेश करने पर जोखिम है। लेकिन यदि आप एएए रेटिंग वाले एनसीडी में पैसा लगाते हैं, तो जोखिम 99 फीसदी कम हो जाता है। एसबीआई या बड़े कॉरपोरेट हाउस के एनसीडी में कोई रिस्क नहीं है। साथ ही एनसीडी की ब्याज दर एफडी से हमेशा ज्यादा होती है। एनसीडी में हालांकि एक परेशानी है। आपको डीमैट अकाउंट खोलना पड़ता है। लेकिन एक घंटे का समय निकालकर डीमैट अकाउंट आसानी से खोला जा सकता है। डीमैट अकाउंट से एनसीडी ले सकते हैं। इसे खरीदने के लिए किसी लोकल एजेंट को भी बुला सकते हैं। लेकिन यह जरूर ध्यान रखें कि एनसीडी हमेशा एएए रेटिंग वाला ही होना चाहिए।

4. कॉरपोरेट एफडी
कॉरपोरेट एफडी में भी एफडी से ज्यादा ब्याज मिलता है। बहुत तरह के कॉरपोरेट एफडी हैं। कॉरपोरेट एफडी में भी यह ध्यान रखें कि यह अच्छी कंपनी का ही हो।

5. पूरी तरह से रिटायरमेंट कोष पर निर्भर नहीं हैं, तो थोड़ा जोखिम ले सकते हैं
यदि आप अपने रिटायरमेंट फंड पर पूरी तरह से निर्भर नहीं हैं, तो आप थोड़ा जोखिम ले सकते हैं। कुछ पैसे म्यूचुअल फंड में लगाएं। कुछ पैसे ईएलएस में भी जरूर लगाएं। लेकिन यदि इसी पैसे से आपका जीवन चल रहा है, तो इनमें पैसे न लगाएं। चाहे कोई भी आपको कितना भी ज्ञान दे।

Old age dependency ratio getting worse in India underlining need to save for retirement

Capitalstars Investment Advisor

Retirement is not the same anymore. Not saving enough while there's time could leave you to a dreadful fate.

Employment trends indicate that during their working life, individuals will increasingly have multiple jobs interspersed with periods of self-employment and voluntary or involuntary separation from the job market. Life-long employment with the same employer is losing relevance as the nature of jobs and job security is changing. Increasing female participation in the organized workforce is crucial for increasing the growth and efficiency of the economy. Therefore it is imperative to promote her long-term savings for the period where she may choose to be outside the workforce for reasons such as to bring up a family.

Life expectancy beyond working life is also on the rise. There is a rapid increase in retirees who will need to sustain their post-retirement savings over a longer period of life expectancy. The old-age dependency ratio (i.e., the ratio of population aged 65+ years per 100 population 20-64 years) has increased substantially. It will be increasingly difficult for children to look after and support parents over their extended life expectancy.

So the goal of public policy should be to promote tax-sheltered savings instruments that are flexibly tailored to the new working life and to take care of life after retirement.

We therefore, need to address specific savings behaviour which promotes (a) savings for working life exigencies and (b) savings for retirement. The primary mode of savings for major working life exigencies and for retirement are insurance schemes and pension funds with contributions by both the employer and the employee. There is unanimity in views that tax incentives can be gainfully employed to promote savings in such funds. The income-tax incentives for these funds can apply at the different stages of contribution, accretion, and withdrawal from the fund:

* The income of the fund (as an entity) can be exempted from income tax

* The contribution made by the employer to the employee's account in the fund can be allowed as a deduction for computing income-tax liability

* The contribution made by the employer to the employee's account can be excluded from the employee's income for computing the employees' income tax liability

* The contribution made by the employee can be deducted from the employee's income while computing the employee's income tax liability

* The annual accretion to the employee's account in the fund can be excluded from the employee's income for computing the employee's income tax liability

* The withdrawal by the employee of his accumulated corpus from the fund on retirement (or on a specified work-life exigency) can be excluded from the employee's income for computing income-tax liability.

*The extent of the tax incentive at all the above stages can be total or partial.

The major financial instruments available in India for such long-term savings are the Employees' Provident Fund (EPF) for those in the non-government, formal sector. For government employees, it is the National Pension Scheme (NPS) Tier I Account. Both schemes envisage contributions from employer and employee and have significant tax incentives attached to them. However, these schemes (and the associated tax incentives) do not fully address the savings needs of individuals who are self-employed or who may be temporarily out of the workforce.

The NPS Tier II account run by the Pension Fund Regulatory and Development Authority (PFRDA) under a statutory law along with its attendant ecosystem of a single identifier and cross-country service providers, could, with modifications, be an ideal instrument for long-term savings for all individuals, especially those who may not be part of the organised workforce. We suggest a taxed-exempt-exempt (TEE) mode with modified withdrawal norms for a revamped NPS Modified Tier II Account which would help address the savings profile of the workforce of the 21st century. "An 'NPS Modified Tier II Account' in the TEE mode available to all taxpayers with the following contribution rules and tax treatment:

*Contributions to the account will not get any tax deduction or benefit annual income accrued and accumulated in the account will not be taxed

*The subscriber can withdraw his principal contributions (but not the income which has accrued in the account) without any taxation

*The subscriber can withdraw his entire accumulated balance without any taxation if he is 60 years or older and he has had the account for 5 years or longer

*Besides this, for specific life emergencies and exigencies such as disablement, etc. the subscriber can also withdraw his entire accumulated balance without any taxation even if he is less than 60 years old, subject to his having held the account for at least 5 years.

*The EPF, NPS Tier I and the 'NPS Modified Tier II Account' (with attendant income tax incentives) would help cater to individual savings, keeping in mind the different employment situations an individual taxpayer might encounter in his working life. This would help in the public policy goal of promoting long-term savings by individuals in a changing work-life environment.

Your retirement investments should be in these financial instruments

Capitalstars Investment Advisor

If you are saving for retirement, the portfolio should be a mix of various investment instruments.

Saving for your retirement is possibly one of the most important financial goals. You need to invest in a good mix of financial products to make sure that you accumulate enough to live a comfortable life after you retire. Your job of investing should not end once you retire, you need to have a good mix of investment products even while living in retirement. As usual, there are many factors you need to consider while selecting the right products. And chief among them is taxation. Not taking into account how something is taxed, can be a costly mistake. Here is a look at the products you need to have in your retirement tool kit and how these products are taxed.

When saving for retirement-

Tax-free instruments:

1. Provident fund

This is the bulwark of the retirement savings of salaried people in the organized sector. Mandatory contributions fatten the corpus while tax-free status adds to the attraction. Works best if you don’t withdraw when you change jobs or dip into the corpus before retirement.

2. Public Provident Fund (PPF)

Those not covered by the Provident Fund should opt for the PPF. Otherwise, the Voluntary Provident Fund is a better alternative to this tax-free option.

3. Insurance

Not the best way to save for retirement, but many people are pushed to invest in these. Maturity is tax-free.

Partially taxable instruments:

1. NPS

A low-cost market-linked option that gives tax benefits not available elsewhere. Up to 60% of the corpus can be withdrawn on maturity and will be tax-free. But investors should not get turned off by the compulsory annuitisation of the balance 40%.

2. Equity and balanced funds

Equity-oriented instruments can be very rewarding when saving for a long term goal. Don’t let the volatility of the share market deny you the opportunity to build wealth.

When living in retirement-

Tax-free instruments:

1. Equity-oriented mutual funds

One needs equities to beat inflation. Allocate at least 10-20% of the portfolio to equity linked investments. Returns taxable only above Rs 1 lakh.

Partially taxable instruments:

1. Senior citizens’ saving scheme

Offers assured but taxable returns. The Rs 50,000 tax exemption to interest income has made this attractive. Also, investments get tax benefits under Section 80C.

2. Fixed deposits

Taxable but assured returns. Income up to Rs 50,000 is tax-free. Unlike SCSS and PMVVY, there is no cap on investment.

3. Debt-oriented mutual funds

Give returns roughly equal to fixed deposits but are more tax efficient. Use of systematic withdrawal plans reduces the effective tax rate to 3-4% even for those in 30% tax bracket.

Fully-taxable instruments:

1. Annuity

Offers assurance of pension for life, but takes away liquidity for the investor. Experts say don’t allocate more than 50% of retirement corpus to this option.

2. Pradhan Mantri Vaya Vandana Yojana (PMVVY)

Offers assured but taxable returns. No tax benefits on contribution.

पेंशन उत्पादों के लिए पीएफआरडीए बनेगा नया नियामक: बंदोपाध्याय

Capitalstars Investment Advisor

केंद्र सरकार पेंशन कोष नियामक एवं विकास प्राधिकरण (पीएफआरडीए) को सभी पेंशन उत्पादों का एकमात्र नियामक बनाने पर विचार कर रही है। यह जानकारी शुक्रवार को पीएफआरडीए के सदस्य सुप्रतिम बंदोपाध्याय ने मुंबई में दी।

धारा 80 सीसीडी (1बी) के तहत मिले 1 लाख की कर छूट

संवाददाताओं से बात करते हुए बंदोपाध्याय ने कहा कि पीएफआरडीए ने आगामी बजट को लेकर अपनी सिफारिशें वित्त मंत्रालय को भेज दी हैं। पीएफआरडीए ने पेंशन कोष में योगदान के लिए कर छूट सीमा आयकर कानून की धारा 80 सीसीडी (1बी) के तहत 50,000 रुपए से बढ़ाकर 1 लाख रुपए करने की सिफारिश की है। फिलहाल पेंशन उत्पादों की बिक्री बीमा कंपनियों के साथ-साथ म्यूचुअल फंड कंपनियां करती हैं। इसके कारण इरडा और सेबी दोनों इसके नियामक हैं। बंदोपाध्याय ने कहा कि पीएफआरडीए कानून में संशोधन के लिए वित्त मंत्रालय से सैद्धांतिक मंजूरी मिल गई है। इससे पीएफआरडीए पेंशन उत्पादों के लिए एकल नियामक बनेगा।

संसद के बजट सत्र में पारित हो सकता है नया कानून

उन्होंने कहा कि प्राधिकरण को पीएफआरडीए कानून में संशोधन संसद के बजट सत्र में पारित होने की उम्मीद है। नई पेंशन योजना के प्रति लोगों को आकर्षित करने के लिये पीएफआरडीए ने योजना के तहत कर छूट लाभ की सीमा दोगुनी करने का प्रस्ताव दिया है। नियामक ने यह भी सिफारिश की है कि सरकार एनपीएस (नई पेंशन प्रणाली) के तहत पेंशन उत्पाद खरीदने के बजाए निश्चित राशि निकासी (सिस्टेमेटिक विड्राल प्लान-एसडब्ल्यूपी) की अनुमति दे।

Investing in good health at young age can help secure retirement. Here's how

Capitalstars Investment Advisor

Focussing on health from a young age can reduce your financial burden in the retirement phase.

Health is wealth is an adage extolled as often as it is ignored. While awareness around fitness has increased over the past few years, Indians continue to fare poorly on several parameters.

According to a study conducted by fitness device platform Goqii, Indians under the age of 45 saw a rise in the incidence of lifestyle diseases in 2018 compared to 2017. Incidence of diabetes rose to 5.1% from 3.6%, high blood pressure to 9.4% from 4.9%, high cholesterol to 12.1% from 5.4% and thyroid to 6.1% from 4.4%. A Cigna 360 wellbeing survey this year found that close to 82% of Indians suffer from stress, with work, health, and finance-related issues being the major causes.

Health is wealth

What if maintaining good health directly translated into monetary rewards? Would that induce more Indians to work on their fitness levels? Some health insurers think so. Insurers like ManipalCigna, Max Bupa and Aditya Birla Health offer products that monitor and incentivize fitness activities. “These benefits range from simple health check-ups that help you take precautionary measures to rewards and discounts that enhance coverage or reduce premiums,” says Mohit Agarwal, Employee Health, Benefits and Affinity, Marsh India.

According to experts, constant monitoring and proactive action can postpone the onset of lifestyle diseases. “Today, many individuals are diagnosed with diabetes at the age of 25-30. It can be easily delayed by 10-20 years and in many cases prevented altogether with the help of diet and physical activities,” says Abhishek Shah, Co-founder, and CEO, Wellthy Therapeutics. Take the case of 63-year-old retired banker Mahesh Nailwal. He has been practicing yoga for the past two decades. “Regular expenses can spiral out of control if you have diabetes or other ailments. I barely need to spend money on medication thanks to my daily practice,” he explains.

Besides the cost of hospitalization, diabetes can also reduce your productivity. “It can lead to disabilities, heart issues, and eye-related concerns, dragging down your earning capacity,” adds Shah. Therefore, it is best to keep lifestyle diseases like diabetes and hypertension at bay by adhering to a healthy regime from a young age, instead of taking action at a later stage.

The earlier you start, the higher your chances of being in a healthier state over the long-term. “It is never too late to start, but as your body clock keeps ticking, you will have to invest more effort to extract the same amount of benefit,” says Shah. Much like investing in equities, it pays to start early, be systematic, dig in your heels and stay put over the long-term instead of looking to invest a lump sum closer to retirement.

Health insurance plus

A large health insurance policy is no substitute for good health. Even if you have purchased health insurance at a young age, the premium could spiral out of control by the time you need it during retirement. “At the age of 60 or 70, health premiums can shoot beyond affordable limits. Renewal premium for a Rs 5 lakh cover can rise to Rs 70,000. Many tend to terminate their policies at this stage,” says Pankaj Mathpal, Founder, Optima Money Managers.

As a result, they are left without a cover at a vulnerable stage of their lives. “It is important to build a separate health kitty for retirement during your working years,” he adds. Also, remember to replenish this corpus regularly. Unlike the health insurance sum insured which is available for use every year, once your kitty is exhausted, rebuilding it from scratch will not be easy.

This is exactly what retired government employee Bhuwanchandra Joshi, 76, has done. Out of his pension of Rs 50,000 per month, he sets aside Rs 10,000 in a liquid mutual fund every month to meet contingency needs. “This is needed irrespective of whether you have health insurance or not,” he says. It can foot bills for expenses not payable under your health policy and partly replace your unviable health policy if the need arises.

Beyond physical health

While planning for retirement, you not only need to identify recurring as well as one-time large expenses like hospitalization but also activities that can keep you fruitfully occupied. This need is often ignored as finances take center stage in a typical retirement planning strategy. Octogenarian J.P. Dhondiyal, a retired railway official, extended his career by 12 years after retirement by taking up assignments with leading corporates.

Beyond physical health

While planning for retirement, you not only need to identify recurring as well as one-time large expenses like hospitalization but also activities that can keep you fruitfully occupied. This need is often ignored as finances take center stage in a typical retirement planning strategy. Octogenarian J.P. Dhondiyal, a retired railway official, extended his career by 12 years after retirement by taking up assignments with leading corporates.

Both Nailwal and Joshi, too, keep themselves busy by engaging themselves in social and community service activities. Hobnobbing with others and contributing towards charitable causes can boost your overall well-being quotient, potentially reducing health ailments and thus, medical expenses.

How can individuals nearing retirement prepare for economic slowdown?

Capitalstars Investment Advisor

InDon’t panic. The immediate step should be to secure near-term liquidity needs.

If you are on the verge of retiring, the ongoing slump in the economy couldn’t have come at a worse time. That nest egg you are counting on for support may suffer a crack or two in the face of an extended downturn. How should individuals nearing retirement prepare themselves?

Financial planners say those nearing retirement should not fret. “Many forget that retirement planning doesn’t actually end upon retirement,” says Suresh Sadagopan, Founder, Ladder 7 Financial Advisories. “It is an ongoing exercise that extends for 20-30 years. From the longer term perspective, the current scenario doesn’t really matter,” he insists. Planners say individuals need to assess their personal situation and not be influenced by how the market is shaping up.

The immediate step should be secure near term liquidity needs, says Rohit Shah, Founder & CEO, Getting You Rich. “Start building a liquid position in your portfolio to cover your needs in the initial years after retirement,” he says. This money can be kept in liquid funds. Retiral benefits like Provident Fund or superannuation corpus can be partially directed towards providing a steady income. Those with rental or pension income will be in a better position to address immediate liquidity needs.

With the rest of the retirement corpus, one should continue with the asset allocation approach. “The key is to maintain discipline in asset allocation,” asserts Tarun Birani, Founder & Director, TBNG Capital Advisors. It is advisable to gradually bring down allocation towards equities as one nears retirement. However, taking equity out of the equation altogether can be counter-productive.

Notwithstanding the current slump, equity is the only asset class that can convincingly beat inflation over the long run. “There is no need to shift entirely to fixed income. While more protection is prudent, your savings should also grow enough to outlast inflation over the next 25 years or more,” Birani says. Depending on the risk profile, individuals may persist with 20-30% allocation towards equities. “One can start getting defensive within equities,” suggests Shah. “If you have taken an aggressive approach so far, consider moving partially into lower volatility equity funds,” he adds.

Sadagopan suggests retirees stick to equity hybrid funds, with some presence in large- or multi-cap funds. “Don’t venture into mid- or small-cap funds if you are nearing retirement,” he cautions. It would also be wise to be cautious within the debt segment. “Stay out of the credit space. Stick to banking & PSU funds that boast the highest grade credit quality,” suggests Birani.

Individuals who have planned for retirement through prudent asset allocation should face no major hiccups. Only those who expected aggressive returns may have to go back to the drawing board. For instance, investors who estimated 15% or higher annualised return from their equity funds will have to do a reality check.

Here are 3 investment plans to make savings last during retirement

Capitalstars Investment Advisor

One of the biggest challenges that retirees face is how to make their retirement savings last a lifetime. Even if one has saved diligently throughout one’s working life and accumulated a sizeable nest egg, it may not be able to generate enough to sustain monthly expenses over the long term. This is mainly due to three factors: longer life spans, early retirement and falling interest rates.

According to a report of the UN Population Fund, life expectancy at birth in India has risen from 60 years in 1994 to 69 years in 2019. That’s the average. Lifespans are longer in urban centres with medical facilities and among socio-economic classes that can access them. It is not uncommon to see people in their 80s and 90s, and things will only get better in future. As a result, the average upper middle-class urban retiree must have enough to last 20-25 years in retirement instead of 15-20 years earlier. At the same time, it is now common for people to leave full-time employment while in their early fifties. This means they have fewer years to accumulate their nest egg and more years to spend it.

All this is happening at a time when interest rates of fixed income options have come down and the investment landscape has changed drastically. Fixed deposits are offering senior citizens around 7% returns. The Senior Citizens’ Saving Scheme, the most lucrative option for retirees in the small savings stable, currently offers 8.6% but this could soon change.

Small savings rates are linked to government bond yields and are reset every three months. With the 10-year bond yield falling sharply to 6.5% in the past three months, the government is likely to cut the rates on small savings schemes in the next revision scheduled in October. Analysts say this will allow banks to cut their deposit rates. Banks want to bring down their cost of borrowing but can’t cut deposit rates due to competition from small savings.

This week’s cover story looks at the investment strategies followed by retirees to earn a monthly income in retirement. We have identified three options: the traditional approach that relies solely on fixed income options, a moderate approach that takes a little risk and the bucket strategy that financial planners suggest. Read on to know how the three strategies use a corpus of Rs 1 crore to generate monthly income in retirement.

Keep inflation in mind when you plan your retirement

The ultra-safe conservative retirement plan (see graphic) relies solely on income from annuity and fixed income options that give assured returns. While it is safe from the volatility of the bond market and the vagaries of the stock market, it will not be able to match the incessant march of inflation.

Relies on annuity income and fixed income options that give assured returns

ULTRA-SAFE CONSERVATIVE PLAN

What’s good about this

Investments are almost risk free and returns are assured.

Income will not fluctuate due to interest rate changes or stock market volatility

What’s not so good

Interest rates are not forever. If rates are lower when investments mature, they will be reinvested at prevailing rate to earn less.

Inflation not taken into account. If investor needs Rs 50,000 a month in 2019, he will need around Rs 67,000 a month in 2024 and almost Rs 90,000 a month in 2029.

These are pre-tax returns. Tax will further reduce the income.

What the investor can do

For the first six years, the investment will generate surplus income which can be reinvested. After the sixth year, investor can start liquidating some fixed deposits every month to bridge shortfall in income and expenses.

MODERATE PLAN WITH SOME RISKS

Uses a mix of market-linked and fixed income options with a dash of equity

What’s good about this

Returns not assured but risk is low. Mix of debt funds and fixed deposits cancel out the risks.

Equity portion left untouched has potential to earn higher returns.

Portfolio is more tax efficient than the ultra safe portfolio.

Income can be customised by increasing the monthly withdrawal to account for inflation.

What’s not so good

Interest income is fully taxable. Tax can eat into the returns.

Element of risk in the equity portion as also debt funds. Must choose schemes carefully.

Requires some basic knowledge of mutual funds and how they function.

What the investor can do

After a few years, investor can gradually start shifting the equity portion to the safety of debt.

What retirees can do

Mutual fund houses, stock analysts and financial planners don’t tire of telling us that equities have the potential to give the highest returns among all asset classes. But as we have seen in the past few months, equities bought at the wrong time and at the wrong price also have the potential to churn out the biggest losses. For a retiree who depends solely from income from his investments, even a small loss can be quite disconcerting.

Even so, retirees do need a dash of equities in their portfolios to help them stay ahead of inflation. They also need to invest in market linked instruments that are more tax efficient than fixed deposits and small savings schemes. Pension income and interest from bank deposits is fully taxable. Senior citizens enjoy a Rs 50,000 exemption on interest income but anything beyond that is taxed at the normal rates.

The Moderate portfolio uses debt funds to earn tax efficient returns. Gains from debt funds are taxed at a lower rate of 20 percent with indexation benefit if held for more than three years. Since withdrawals are mix of the principal and the gain, the effective tax on the withdrawn amount is very low. The Moderate portfolio has also allocated 10 percent to equity funds to generate higher returns. 

Three-bucket approach

A more sophisticated strategy is to split the corpus into three buckets. The first bucket is for immediate use and relies on a liquid fund. The second bucket is for the medium term (6-12 years) and uses equity-oriented hybrid funds. The money in the third bucket is for the long term (over 12 years) and gets invested in equity funds.

Experts say the bucket strategy helps segregate long-term investments from the money meant for immediate use. However, the investor needs to be fully committed to follow this approach. If he panics when stock markets tumble and his equity funds decline, the whole purpose of the strategy will be defeated.

The A.R.T. of retirement planning

Capitalstars Investment Advisor

It is imperative to start early and invest regularly, re-evaluate the financial situation periodically and be realistic in expectations

Building wealth for a secure and early retirement is actually a simple two-step process. The first step is personal planning, which will determine your satisfaction with your retirement lifestyle. The second step is financial planning, which involves identifying sources of income and expenses and establishing a retirement budget, based on your personal plan.

The mantra for a successful retirement plan is an A.R.T.

• Amount you invest

• The rate at which you invest

• The time period for which you invest

The challenge isn’t in having this knowledge, but in translating it into meaningful results. Let’s take a look at these three aspects.

Amount You Invest

Most of us are prudent in our financial lives—we save for the rainy day, spend within our means, pay off credit card dues and loan installments on time and invest for future needs.

To be on top of finances, a good way to start is to prepare a budget. This will be a record of money coming in from sources such as salary, rental income, interest income and others, and payments to make, such as rent, mortgage, and insurance premium.

One could simply write down all these details on a sheet of paper, or use an Excel spreadsheet. There are also various online budgeting tools available. Such tools available with banks pick information directly from your transactions. Whichever method you choose, the aim would be to record all inflows and outflows.

While making a budget will help you save, the next step is to invest those savings. The rule is to save money and build assets. The sooner you begin and the more you save, the earlier you will be able to retire with enough wealth.

To successfully grow savings, have a road map—a financial plan with clearly defined goals. Without a plan, saving and investing may become directionless. Goals could be marriage, children’s education, buying a house or creating emergency funds. To achieve these, individual risk appetite, the time required and the rate at which savings will grow, play an important role.

The Rate At Which You Invest

The second principle in wealth accumulation is the rate at which savings grow. Most salaried individuals will have three sources of income after retirement:

New Pension System (NPS):

 This retirement product has delivered annualized returns of around 10% in the past four years. NPS also provides tax benefit in the form of deduction under section 80C (of the Income-tax Act, 1961). Being a retirement product, it is mandatory to purchase annuity worth 40% of the corpus accumulated through NPS at the time of retirement. One can choose between active or passive styles of investment, and there are equity, debt and liquid funds to choose from.

Employees’ Provident Fund (EPF): 

This is another popular retirement saving instrument in India. Though it was introduced as a retirement product, not many see it so. The current rate of return from EPF is fixed at 8.75% per annum. It offers deduction up to 1.5 lakh limit under section 80C; interest is tax-free and so is withdrawal if there is a continuous service of five years.

While these two products are meant for retirement planning, they may not be enough to meet all of one’s post-retirement needs. Hence, it is prudent to look at other products as well.

Personal investments: 

These would include fixed deposits (FDs), recurring deposits (RDs), mutual funds (MFs), and other products.

Whenever one talks of long-term savings instruments, FDs are the most popular. These are considered as one of the safest instruments for the risk-averse investor group, but post-tax and inflation-adjusted returns are low. Some other options allow higher flexibility, while investing in a phased manner—RDs and systematic investment plans (SIPs) by fund houses.

RDs require an investor to put a fixed sum every month for a minimum of six months and thereafter in addition of three months, up to a maximum of 10 years. Unlike an FD, a lump sum amount is not needed. RDs, being bank deposits, have low risk and returns are fixed though they vary with tenure of the deposit.

Through SIPs, too, one can invest at regular intervals. This is considered to be the safest way to invest in equity and debt markets as the investor is not trying to capture the highs and lows of the market, but average the cost by investing at regular intervals. In an SIP, when the market falls, the investor gets more units, and lesser units when the market goes up. This means that the investor buys less when the price is high and more when the price is low. This way, the average cost per unit falls over a period of time.

Time Period For Which You Invest

The third principle in saving and investing for retirement is the amount of time you give for the savings to grow. The golden principle is that the longer you stay invested, the more is the probability of generating a positive return. If you start investing six years later, and the assets grow at 12% annually, you will have half as much money when you retire, compared to starting today (assuming equal contributions over one’s working lifetime). If you wait for 12 years, you will have only a quarter as much when you retire.

The power of compounding is an invaluable wealth-building tool because money grows geometrically instead of arithmetically—but only when you give it time to work.

To summarize, it is imperative to start early and invest regularly, understand the effect of each financial decision, re-evaluate the financial situation periodically and be realistic in expectations.

There are various retirement products available and one should start allocating funds towards them at the earliest. The ideal time to start would be 1-2 years after the first job. If you have not started yet, now is a good time to do so.

For millennial parents, concern for kids' financial future key trigger to buying term insurance: Survey

Capitalstars Investment Advisor

The survey found that as compared to the national average of 47%, awareness of term products is comparatively higher at 50% among millennials parents.

India is an under-insured country, however, more and more young people are becoming aware of the importance of insurance. A recent survey conducted by Max Life Insurance in association with Kantar IMRB found that while getting a lump sum at a future date for their child's education was a term insurance buying trigger for about 44 percent urban Indians, at 48 percent it was the biggest trigger for millennials with kids.

It also found that as compared to the national average of 47 percent, awareness of term products is a comparatively higher at 50 percent among millennials parents, a press release by Max Life Insurance stated.

The survey

The survey had a sample size of 4,566 respondents and was administered to respondents of different demographics and age groups across 15 metropolitan and tier 1 cities in India. The survey primarily measured their level of knowledge and ownership of various life insurance products, degree of term insurance preference and penetration, primary fears and triggers to life insurance purchase, preferred channel of policy purchase, and roadblocks to owning life insurance.

Awareness of term insurance products

"There are several key milestones in parents' life that they go through which children are growing, right from nurturing values, to good quality education in the early days and then to supporting their higher education and matrimonial plans. To achieve such milestones without any hassles, it is important to undertake financial planning judiciously. It is reassuring to see that young India understands the need for owning term insurance to secure their family's future. Birth of a child is the biggest trigger for millennials to buy term insurance, which confirms that children continue to be the fulcrum of financial planning for Indian households," Aalok Bhan, Director, and Chief Marketing Officer, Max Life.

Families with children consider term insurance their first preference

About 36 percent of families with children consider term insurance as their first choice when it comes to buying life insurance. "This indicates that millennial parents understand the risks of life and the need to protect against those risks by buying a term plan," the release stated.

At 52 percent, term insurance awareness among families with children is almost twice as compared to the awareness levels of 29 percent, among families without children. Understandably then families with children have a higher term insurance ownership of 24 percent, while only 12 percent of families without children own term insurance.

Millennial parents' priorities

The survey found that while nearly half of urban Indian millennials in the age group of 25 - 35 years believe in spending more on travel/ luxury and are not even thinking about financially protecting their families, millennials with kids are far more conscious of creating a corpus to support life stage goals related to their children. It found that 79 percent of millennial parents save for their kid's education while 55 percent save for their kids' marriage.

With regards to their own retirement planning, almost 54 percent India saves for old age security and retirement, millennials with kids prioritize savings for goals related to their children over their own selves with 50 percent of them saving for old age security.

Start retirement planning early and save corpus for a 90-plus lifespan

Capitalstars Investment Advisor

Human life expectancy has been increasing rapidly because of better health care facilities, hygiene, ample food, and increased access to life-saving drugs. The number of persons aged above 80 nearly tripled globally over the past 30 years and stood at 143 million in 2019. It is expected to triple to 426 million by 2050 and then double again to 881 million by 2100 (Source: UN World Population Prospects 2019). By the end of the century, one out of every 12 persons in the world is expected to be above 80 years of age. While planning for retirement, most people usually assume a life span of 70-75 years. The average life expectancy at birth is 69 in India. While this assumption may appear reasonable, the devil lies in the detail. Life expectancy rises to 76 years for urban dwellers in the top quintile based on income (BMJ Global Health 2019). Also, if a person belongs to this group and is already 60 years old, his life expectancy rises to 81 years. About 30 percent of people from this socio-economic group are expected to cross the age of 85. Based on these numbers, it seems reasonable to plan for expenses until at least the age of 90.

Start early to win financial independence

To live the lifestyle that you desire during retirement, earning financial freedom is of utmost importance. This goal will only be achieved when one begins to plan for it early because income growth tends to plateau in the mid-forties for most people. One needs to save and invest aggressively during the working years. Sources that will generate steady income during retirement also need to be created.

How much corpus will you need?

A person who is currently 30 years old and has a monthly expense of Rs 1 lakh will spend Rs 6.7 lakh each month to maintain a similar lifestyle when he retires at 60. He will need a corpus of Rs 18 crore to meet his expenses over a 30-year retirement span. If he is investing through mutual funds, he will need to run a monthly SIP of Rs 36,800 to generate this corpus, assuming an annualized SIP return of 13.3 percent.

Plan for large capital expenses

Housing is one of the biggest capital expenses. If one plans to stay in the same city that one is residing in and already owns a house, then there is not much planning to do. But if one plans to move to another place away from the city, one needs to plan in advance for purchasing a house there. A roof of your own does provide peace of mind after retirement. Include this in the list of financial goals and start investing for it.

Buy adequate insurance

Buy a pure term plan rather than unit-linked insurance plans (Ulips) as the former can help you get adequate life cover. Those in the 40s should buy a plan that will cover their families for the next 20-30 years. With age the need for life insurance cover reduces. By then the children would have grown up and become financially independent. You would also have built up an adequate corpus. Once you feel confident that no dependant will be affected financially if you are not around, stop paying the premium.

With the rising cost of medical care, adequate health insurance has become essential. More than 50 percent of a person’s lifetime health care costs arise in the last year of his life, and more than 75 percent in the last five years.

Liquidate fixed assets if children live outside India

If your children are settled outside India, they will not have the time to come, manage and maintain properties in this country. Liquidate your fixed assets gradually. Invest in a dollar-denominated or hedged corpus so that the children are eventually able to use the money. Traveling to visit the children and grandchildren is common during retirement. Many people also want to go on vacation with their spouse. Expenses like these have to be planned for and managed through investments made in advance.

Pay off liabilities before 60

Aim to be debt-free by the time you retire. Income tends to be lower during retirement. Having to pay interest will act as a drag on that diminished flow. Senior citizens who own a house and need a regular income flow may explore the option of a reverse mortgage. Many banks, including the State Bank of India and Bank of Baroda, offer this facility.

Write a Will

Diseases like dementia, Alzheimer’s, and transient global amnesia are common mental disorders that come with age. Though they are not fatal, they impair one’s faculties. Hence, prepare a Will well in advance. The courts should not be the ones that decide how your assets should be distributed. If you have kept regular track of your assets and liabilities, writing a Will becomes easy. After writing it and appointing an executor, the dependants and other beneficiaries should be informed of its existence.

Longer life spans are becoming a reality. The sooner you accept it and plan for it, the more tranquil your sunset years will be.

The 3 main challenges in retirement planning and how to overcome them

Capitalstars Investment Advisor

The real problems in retirement planning are not about corpus. If we have an aggressive saving habit and have enough income to not touch it while working, we are all likely to retire with enough wealth.

Do I have enough money to retire? This is easily the most asked question in retirement planning. When I wrote about the need to take charge of your 40s, friends asked for a method to evaluate whether they have enough. Let’s consider some pointers. How much is enough is a tough question to answer. The easier approach is to look at the current spending levels and assume that the same lifestyle has to be maintained in retirement. If someone spends Rs 50,000 a month on an average, in current rupee terms, and if we assume that such a person will live 30 years into retirement, we can use a thumb rule to ask if they have a retirement corpus of Rs 50,000 x 12 x 30, or Rs 1.8 crore.

Purists will argue we have not considered inflation. We can counter-argue we have also not considered the growth in the corpus. Since we are not going to use up the Rs 1.8 crore in one shot, but use only a part of it, we would invest the rest and thus it will appreciate it. The Rs 100 we have saved today will grow in value if it is invested.

The real problems in retirement planning are not about corpus. If we have an aggressive saving habit and have enough income to not touch it while working, we are all likely to retire with enough wealth. In this day and age when most middle-class incomes leave behind a surplus for saving, building an adequate amount of wealth to be able to retire comfortably is not a challenge.

There are three primary challenges in retirement planning. The first is whether our corpus is invested well to grow aggressively in value. The second is whether our income needs in retirement are well thought through and provided for. The third is whether the amount we draw from the corpus and the amount we keep invested is well balanced.

Consider the retirement saving challenge. Many believe that the contribution to PF is a good way to save. The best thing about PF is the employer contribution. When our saving is matched by the employer, we have more money to work for us. However, the biggest pitfall of this investment choice is that it is a long-term investment meant to appreciate in value over time, but is mistakenly invested in income assets that generate a defined return.

This mismatch of objectives has not been adequately addressed due to misconceived notions about risk and diversification. Even the NPS has not been able to popularise the simple idea that an index fund invested in equity shares of the largest listed companies would have provided a better return on investment. This shortchanging of the longterm interests of the saver is unfortunate.

While we may not able to change the PF rules, we can apply the principles of diversification to the rest of our savings. A simple index fund or ETF —a Nifty-based or Sensexbased product—is the simplest, easiest and lowest cost route to building a default retirement corpus. There is no need to select a fund, monitor it, and chase returns. Simply investing in the index is adequate to build a decent retirement corpus that leverages the power of equity to enhance its value.

Second is the question of income needs in retirement. Many of us believe our retirement will mean a more frugal lifestyle. That may not be necessary, nor should it be the objective. We may have made specific plans to keep our expenses in check. Owning a house by the time one retires is a good plan to keep rents in check.

The mix of expenses will change in retirement: you might spend more on new interests; on travel and tourism; on health and medicare; on gifts and giveaways. It is not always easy to estimate these expenses, and some of them may be unexpected. Many of us are not used to severe budgeting and planning exercises and are rightly spooked about running short. The limit to our expenses is set by the third factor in that list.

The third element in retirement planning is the much-feared drawdown. What this means is the amount of the corpus we will actually end up spending in retirement. The simplistic assumption many make is that they will invest the corpus, and live on the interest it earns. That is harmful thinking in at least three ways: One, you leave the corpus unchanged in value, investing it to generate income for a long period of 30 years. Such a long-term asset should be invested better.

View your corpus as one large pool. You draw some of it—income or growth won’t matter—and you let the rest stay invested and grow in value. Your expense as a percentage of that corpus should be a small single-digit percentage. If your corpus is Rs 1 crore and your annual expense is Rs 6 lakh, you are drawing down 6%. That is quite a large number, and you may run out of it as you age. Keep that number small, at 3-4%.

That thumb rule at the start is based on this math: When you apply that simple rule of 30 times your spend as your corpus, ensure it is available to use as we just elaborated. If that wealth is locked in your house, you save on rent but earn no income. That won’t help. Hence that 30% rule: 30% of your money in the property you have anyway bought; 30% in equity for appreciation and inflation protection; 30% in income assets for your expenses and 10% as a buffer. Most of us should do well with these rules.

These five steps will help you toward a safe, secure, and fun retirement

Capitalstars Investment Advisor

Retirement planning is a multistep process that evolves over time. To have a comfortable, secure — and fun — retirement, you need to build the financial cushion that will fund it all. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you’ll get there.
Planning for retirement starts with thinking about your retirement goals and how long you have to meet them. Then you need to look at the types of retirement accounts that can help you raise the money to fund your future. As you save that money, you have to invest it to enable it to grow. The surprise last part is taxes: If you’ve got tax deductions over the years for the money you’ve contributed to your retirement accounts, a significant tax bill awaits when you start withdrawing those savings. There are ways to minimize the retirement tax hit while you save for the future — and to continue the process when that day arrives and you actually do retire.

We’ll get into all of these issues in this Retirement Planning Guide. But first, start by learning the five steps everyone should take, no matter what their age, to build a solid retirement plan.


1. Understand Your Time Horizon

Your current age and expected retirement age create the initial groundwork of an effective retirement strategy. The longer the time between today and retirement, the higher the level of risk your portfolio can withstand. If you’re young and have 30-plus years until retirement, you should have the majority of your assets in riskier investments, such as stocks. Though there will be volatility, over long time periods stocks have historically outperformed other securities, such as bonds. The key word here is “long,” meaning more than 10 years at least.


2. Determine Retirement Spending Needs

Having realistic expectations about post-retirement spending habits will help you define the required size of a retirement portfolio. Most people believe that after retirement their annual spending will amount to only 70% to 80% of what they spent previously. Such an assumption is often proved to be unrealistic, especially if the mortgage has not been paid off or if unforeseen medical expenses occur. Retirees also sometimes spend their first years splurging on travel or other bucket-list goals.


3. Calculate After-Tax Rate of Investment Returns

Once the expected time horizons and spending requirements are determined, the after-tax real rate of return must be calculated to assess the feasibility of the portfolio producing the needed income. A required rate of return in excess of 10% (before taxes) is normally an unrealistic expectation, even for long-term investing. As you age, this return threshold goes down, as low-risk retirement portfolios are largely composed of low-yielding fixed-income securities.


4. Assess Risk Tolerance vs. Investment Goals

Whether it’s you or a professional money manager who is in charge of the investment decisions, a proper portfolio allocation that balances the concerns of risk aversion and return objectives is arguably the most important step in retirement planning. How much risk are you willing to take to meet your objectives? Should some income be set aside in risk-free Treasury bonds for required expenditures?


5. Stay on Top of Estate Planning

Estate planning is another key step in a well-rounded retirement plan, and each aspect requires the expertise of different professionals, such as lawyers and accountants, in that specific field. Life insurance is also an important part of an estate plan and the retirement-planning process. Having both a proper estate plan and life insurance coverage ensures that your assets are distributed in a manner of your choosing and that your loved ones will not experience financial hardship following your death. A carefully outlined plan also aids in avoiding an expensive and often lengthy probate process.


The Bottom Line

The burden of retirement planning is falling on individuals now more than ever. Few employees can count on an employer-provided defined-benefit pension, especially in the private sector. The switch to defined-contribution plans, such as 401(k)s, also means that managing the investments becomes your responsibility, not your employer’s.