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

Capitalstars Investment Advisor

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.

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, stocks have historically outperformed other securities, such as bonds, over long time periods. The main word here is “long,” meaning at least more than 10 years.

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.

One of the most challenging aspects of creating a comprehensive retirement plan is striking a balance between realistic return expectations and a desired standard of living. The best solution is to focus on creating a flexible portfolio that can be updated regularly to reflect changing market conditions and retirement objectives.

Why assuming the right life expectancy, inflation rate is critical to 'retiring' happily ever after

Capitalstars Investment Advisor

Planning for retirement should ideally start the day you start working. Retirement is that stage of life when you don't have a steady flow of income coming in. Normally, a person retires after he/she has discharged all responsibilities and now looks forward to living peacefully for the rest of the days.

While discussing with your financial advisors about how much money you would need at the time of retirement, he will ask you some questions such as how much are your monthly expenses, what is the break-up of these monthly expenses?

While calculating the retirement corpus required by you, he will have to make some assumptions to arrive at the figure. But the question arises what role do these assumptions play? What will happen if these assumptions go wrong? How does one ensure that one stays on track on the way to building the targeted retirement corpus?

Importance of the assumptions

When your financial advisor calculates the targeted retirement corpus he assumes some of the numbers and some are actual numbers. For instance, calculation of how much your expenses will be by the time you retire is based on your actual current expenses and the assumed expected average inflation rate.

Inflation

The present monthly expenses of Rs 50,000 would cost approximately Rs 2.3 lakh after 20 years assuming average inflation of 8%.

Inflation, while measured as a number, is actually the difference between the amount we are paying right now to buy goods and services and the amount we used to pay for the same goods and services, say a year ago.

Any change in the inflation rate will directly affect your monthly household expenses at the time of your retirement and indirectly affect the corpus accumulated and post-retirement expenses.

Life Expectancy

The inflation rate is not the only important assumption that directly or indirectly affects your retirement corpus. Expected life expectancy also plays a crucial role. Taking life expectancy on the lower side may lead to a situation where you run out of money before you die.

Due to improved medical and health care facilities, a person is easily expected to live above 80 years. However, while planning for retirement one must also keep in mind the increase in medical expenses that will haunt old age.

The real rate of return

The rate of return earned on one's investments plays an important role in building the retirement corpus and also in the post-retirement period. In the pre-retirement period, a low rate of return earned will make the corpus grow at a slower pace which in turn will require additional savings to be made to accumulate the desired amount.

The nominal rate in simple terms can be said as the return which is mentioned on the bank fixed deposit.

When inflation is subtracted from the nominal interest rate, you get the real rate of return. It is the actual rate of return that you have earned on your investments.

Impact of taking a wrong assumption

Any mistake made while making assumptions for calculating the required corpus can have a detrimental effect on your retirement plans. In the worst-case scenario, you can run out of your retirement money at a later stage of life.

Illustration:

A person, aged 25, starts to save Rs. 5,000 per month. Assuming the average rate of return earned is 12% & compounding annually, he is expected to accumulate a corpus of Rs. 2.75 crore by the time he retires at 60 years of age.

How to stay on track?

Well everyone tries to avoid these kinds of situations where they outlive the retirement corpus accumulated by them or the retirement corpus accumulated by them is not enough to give the kind of lifestyle they want to sustain.

To avoid these dangerous situations, one must periodically review the financial goals with one's financial advisor. They should ask all kinds of questions about retirement planning from their financial advisors.

Similarly, while making an assumption for how much longer you will live, it is better to assume you will live long. It is a way to avoid the situation of running out of money in the retirement period.

5 steps to make retirement years happier for your parents

Capitalstars Investment Advisor

As they strive to give the offspring the best, parents often end up jeopardizing their own future. They toil hard to put the children through school and college. Access to summer camps, cricket or dance lessons is encouraged. When higher studies beckon, they pour in more money for the best tuitions. When the admission letter arrives, they happily sign off the cheque or take on a huge loan. At the child’s wedding, money is no object.

Often, the same parents find that their retirement savings do not add up to much. They are left pinching pennies in their sunset years when they should be enjoying the fruits of their labor. If you have aging parents who fit the above description, step in as soon as possible. Are they saving enough? Are they investing wisely? Do they have adequate health cover? Are their documents in order? In the following pages, we will outline how you can help your parents get their finances in shape. 

SHARE THE BURDEN

In India, often earning children live off their parents. In an HSBC survey, 44% of retirees who had not saved enough said continued financial support to children was a reason for the shortfall. If you want your parents to live a comfortable retired life, share their financial burden, starting with higher studies. With children increasingly opting for studies abroad, costs have sky-rocketed. Fees for an MBA or MS program can set you back by Rs 30 lakh to Rs 1 crore, depending upon the varsity chosen. Then there are living costs.

CHANGE THE APPROACH

The next step is to ascertain if your parents have saved or are saving enough. The immediate concern on retirement is replacing regular income with money from investments. If their post-retirement costs can be adequately met through the existing corpus, then you have no worries. But if not, you must look at shoring up their savings. If they have more than 5-7 years to go before they retire, you must convince them to harness the potential of equities.

GET THEM COVERED

The rising cost of healthcare is the biggest threat to your parent’s finances. The best way to protect them is to ensure adequate health insurance cover. “Get your parents covered at the earliest. Without health insurance, their accumulated savings will take a hit rapidly,” warns Chauhan. The employer-provided family health cover may not be sufficient. Several employers have stopped offering health insurance coverage for parents in the face of rising premiums.

UNLOCK VALUE OF HOUSE

If the financial situation of your parents is grim, you may have to explore some uncomfortable options. Downsizing living arrangements is one. Explore the possibility of moving into a smaller, more affordable house in a more affordable locality. This would not only cut down on costs but also fetch a sizeable corpus from the difference in the sale value of the bigger house and cost of a smaller home.

The other option a reverse mortgage on their house, where they would receive a steady stream of income from a lender against the property. This would imply that the parents will not be able to bequeath the property to their children. With each payment, the bank’s ownership of the property increases. After the death of the owner or last-surviving spouse, the heirs can either claim back the ownership by repaying the loan, along with interest or let the bank sell the property.

GET DOCUMENTS IN ORDER

The absence of proper documentation at the time of death of a spouse can leave the other half vulnerable. As children, see to it that both parents are financially protected in the event of a death. “Ensure that assets are not held in single name and without any nomination,” insists Chauhan. Besides, having a Will in place should be a priority, and can go a long way in simplifying life for the legal heirs.

Take the right financial decisions in your 50s to prepare for retirement

Capitalstars Investment Advisor

Capitalstars Financial planners say you should start saving for retirement as soon as you start earning, but this advice usually falls on deaf ears.

In a recent survey by Birla Sun Life Insurance, only 46% of the respondents felt that retirement planning should be given so much importance.

Many people get serious about retirement planning only when they reach their 50s. It’s like running a marathon race and getting serious about winning when you enter the last mile.

Even if you put in a lot of effort, it will be very difficult to change the outcome of the race at that late stage.

As retirement is a lot like running a marathon, investors who take the right steps can effortlessly reach the finish line. But even the stragglers can secure a decent place in the race if they make the right adjustments in time. This week’s cover story looks at smart money moves that pre-retirees should take in the last few years before they hang up their boots.

CALCULATE REQUIREMENT

If you haven’t already calculated how much you need in retirement, do it now. This means taking stock of your current and future requirements, your existing investments and assets, and how long will your corpus last.

TURBOCHARGE YOUR SAVINGS

If there is a shortfall, there are two ways to boost your retirement kitty. You can either increase how much you invest every month, or you can go for investments that earn higher returns. For investors who are very close to retirement, the objective should not be to maximise returns but to maximise savings.

“If retirement is just 3-4 years away, the person can’t afford to take risks. At this stage, the focus should not be on how much you can earn but how much you can possibly lose,” says Kulin Patel, Head of Retirement, Willis Towers Watson.

DON’T GET TOO CONSERVATIVE

This is also a time to review the asset allocation of your portfolio. Take a slightly conservative approach for your investments at this age. “Reduce the allocation to risky assets such as stocks in your portfolio,” says Suresh Sadagopan, Founder, Ladder7 Financial Advisories. Also, do not take unnecessary risks at this stage.

“The cost of experimentation can be high,” says Abhishake Mathur, Head – Investment Advisory, ICICI Securities. A balanced approach (equity 50: debt 50) could also work well for people a decade away from their retirement, say experts.

At the same time, if the investment tenure is reasonably long, it won’t pay to get too conservative. The stock markets have been very volatile in the past few weeks, but H. Srinivasan is unperturbed. Barely 5% of his portfolio is allocated to equities, while the rest sits safely in fixed income instruments.

Our suggestions

1. PF is a good way to augment savings but you need a dose of equity as well.

2. With 12 years to go, start with equity funds and then shift to safer options.

3. If not willing to take risks, go for conservative MIPs that put 15-20% in stocks.

4. Buy health insurance right away to accumulate a fat no-claim bonus by retirement.

While the EPF is the best option among fixed income instruments, it may not be the best option for Srinivasan. A 100% debt-based savings plan will never be able to beat inflation. Headline retail inflation is low at 2.36%, but the actual inflation faced by consumers such as Srinivasan is much higher.

BUY HEALTH INSURANCE

Insurance is one way to guard your finances against rising healthcare costs. Even if you are covered by a group health insurance plan, you need to buy a separate health cover. Don’t wait to buy health insurance after you retire.

You may not be in a position to buy later. Srinivasan plans to buy a personal health cover when he turns 55. “I will have enough time to get past any waiting period before I retire at 60,” he says. This can be a costly mistake.

So, buy a policy when you are healthy enough and renew it continuously for greater benefits. “It is advisable for pre-retirees to purchase a personal health cover by the age of 45 years,” says Prawal Kalita, Director, Benefits Solutions, JLT Independent Insurance Brokers.

Five reasons to buy health cover before you turn 50 :

Avoid stringent tests

After 50, insurance companies subject buyers to a slew of medical tests before selling them a health plan. You can avoid these tests if you buy in your 40s.

Pay lower premium

Health insurance premiums are quite low for those below 50. If you take the tax benefits into account, the cost is not prohibitive considering the protection you enjoy.

Pre-existing diseases covered

Buy a policy when your health is good. After 50, chances of a person contracting a medical condition go up. Insurers avoid those with medical conditions or charge very high premiums.

Accumulate no-claim benefits

With every no-claim year, the extent of your medical cover increases. Buying early means you will have more no-claim years, allowing you to accumulate the benefits.

Buy online without hassles

Many insurers are not willing to sell online if the buyer is above 50. You will not be able to avail of the ease of online purchase if you wait too long.

DON’T TAKE ON NEW LOANS

It is a bad idea to burden yourself with EMIs just before you enter retirement. “It can put unnecessary stress and reduce the savings which may otherwise be available for building the retirement corpus,” says Rahul Jain, Head of Retail Advisory, Edelweiss Wealth Management. The uncertain job environment only adds to the problem. Even if you have a secure job, avoid taking on new debt.

Surrendering a life insurance policy makes sense early in the tenure of the plan, not at the fag end when it is about to mature. You may lose many of the benefits that may have accrued over the years. At this stage, it is best to continue with the plan however low the returns may be.

How to achieve your financial goals in next 10 years

Capitalstars Investment Advisor

Whether you want to save for retirement or prepay a home loan, you can achieve that within 10 years. It's all about how you make your plan.

The 10-year challenge, capturing the change in one’s physical appearance from what it was a decade ago to now, has become a social media craze. While participating in such challenges can make you feel good for some time, there is little beyond that. On the other hand, if you set yourself a financial challenge, it might not garner any likes or comments as it is private in nature, it could make a qualitative difference to your future.

That is what Mumbai-based finance professional Sandeep Singhal, 29 has done. The millennial set himself the challenge of prepaying his Rs 40-lakh home loan, which has a balance tenure of 18 years, within the next 10 years. Instead of paying the prescribed equated monthly installment (EMI) of Rs 37,500, he has decided to direct Rs 70,000 towards this purpose. The probable result? He will successfully ace the challenge if he sticks to his plan over the next six years.

Given his earlier track record of saving for five years in a disciplined manner to arrange for the Rs 19 lakh down-payment for his home in 2016, he is confident of achieving his goal. He attributes his success in acing challenges to strict discipline. “I avoided buying assets that are depreciating in nature. I have seen friends who do not manage money well and end up buying expensive mobiles, clothes, cars or bikes that give immediate gratification, but are of no use after a point of time,” he explains.

The heady, challenging twenties

Singhal’s financial discipline is an example for young individuals in the early stages of their career. They can use the financial independence they have earned to meet important goals, instead of splurging the bulk of the income on frequently replacing mobile phones or other gadgets. “Generally, the millennial generation starts saving very late. They don’t give a thought to savings in the initial years—a big mistake that can come back to haunt them later,” says Puneet Oberoi, Founder, 

Excellent Investment Advisorz.

Build a strong foundation in your thirties

Thirties is when you start getting a taste of the responsibilities, with marriage, kids and house purchase, among other things, playing out over the decade. It is time to focus on your family —your dependents—at this stage. Multiple responsibilities will necessitate thinking ahead and meticulous financial planning to achieve all goals. Take the case of NCR resident Gopal Sharma.

The Forties is the time to multi-task

Like the thirties, the initial years of this life-stage, too, entail juggling several roles. However, it is also the stage when individuals are settled in life, with a clear roadmap to achieve their goals. “In their 40s to 50s, people start to settle into their lifestyle and know they need to start planning for retirement seriously. Usually, it is too late to change one’s lifestyle at this stage. So money needs to be accommodated to the chosen lifestyle,” says Jain.

Countdown to retirement

Now is the time to play safe – adventurism can damage the nest egg you have nurtured over the years. The challenge now is to keep your corpus safe over the next 10 years. “Move your investments into fixed income instruments. Pay off any pending debt including home loans or any major debt and buy a second home if you haven’t earlier to earn rental income,” says Sudheer.

Look for safe instruments like the senior citizens’ savings scheme (SCSS) or the Pradhan Mantri Vaya Vandana Yojana (PMVVY) managed by LIC. It is also time to plan your life postretirement— focus on the non-monetary aspects, too, and figure out how you wish to spend your time during that phase. Make a list of hobbies you wish to pursue to skills you want to acquire. “Many people do not invest in estate planning at all. They should make a will and plan their inheritance planning well at stage,” says Oberoi.

Things to consider while choosing a retirement home

Capitalstars Investment Advisor

Senior living housing projects and assisted living facilities are transforming the way senior citizens live during their golden years.

While many of us have grandiose notions about settling into a cottage in the hills or traveling the world after retirement, the reality is often very different. The need for security and stability trumps all else.

Retirement planning is therefore crucial, but finances are not the only thing to worry about. In 2011, roughly one in 11 Indians were over the age of 60.

According to projections by the Census of India, this figure is expected to grow to around one in eight by 2025. This calls for major sociological changes to accommodate the needs of senior citizens.

What is senior living?

Given that India has no social security framework to offer senior citizens the support they need, both financially and socially, the private sector has stepped in. “Senior living options are definitely on the rise in India, particularly in the past few years, propelled not only by the growth of nuclear families with children living abroad or away from their parents but also by the increase in the number of seniors who are financially independent.

These facilities feature conveniences like security services, cleaning and maintenance facilities, medical care and meals. There are two categories of senior living services: independent living and assisted living. The former includes housing units designed with seniors in mind. These projects have special features like skid-proof tiles, ramps for wheelchair access, grip rails, panic buttons, etc. Assisted living, on the other hand, features round the clock care and is more suitable for older seniors or those with ailments. There are attendants present to assist residents with tasks like eating, dressing and getting around.

A group of niche developers across the country have come up with residential projects aimed at senior citizens. These are typically equipped with facilities like health centers, specialized kitchens, gyms and recreational spaces. Most offer housekeeping, maintenance, and laundry services as part of a service package. Some have doctors, therapists, and dieticians on-site to help their residents with physical and mental health concerns. Needs like a specific diet or exercise regimen are also accommodated.

A wide range of options

The options range from luxury to low budget. While the more expensive can be priced in crores, there are also plenty of reasonably priced options. Ashiana Housing Limited’s senior living projects, Jagriti Dham in Kolkata, Kshetra in Hyderabad, Oasis Senior Living Communes and Dignity Lifestyle Township, in Neral, Maharashtra, and are a few examples. These facilities offer rentals, leases and residential units for sale at slightly higher prices than market rates, complete with a lifestyle element and opportunities to socialize.

Choose carefully

While there are various advantages of moving into a senior living facility, there are also a few downsides that you should consider. For instance, while most such facilities promise medical attention in emergencies, the facility can deny having any direct responsibility for critical care unless otherwise specified in the contract.

Senior living: What are your options?

Facilities offer a choice of renting, leasing or buying specially designed units.

OPTION 1: Rent

Pay a registration fee of Rs 5 lakh. A refundable deposit of Rs 20 lakh. Also, pay Rs 25,000 for services each month.

Our assessment: This option allows you to test the waters before you make a decision. You can choose to have your deposit refunded and leave if the lifestyle or facility doesn’t suit you.

OPTION 2: Lifetime lease

Register with a fee of Rs 5 lakh. Pay a monthly rent of Rs 30,000 for the rest of life. Also, pay Rs 25,000 for services each month.

Our assessment: This is a major commitment. Once you lease the unit, you’re tied in for the rest of your life. It would be wiser to rent first and then migrate to a lifetime lease when you see fit.

OPTION 3: Buy

Pay between Rs 45 lakh and Rs 1 crore to buy 2BHK units. Pay nominal charges of Rs 500 for meals, cleaning. All other services are charged individually.

Our assessment: This gives you complete ownership of the property and you can choose to sell it or pass it on to your legal heirs. However, some facilities have conditions about only senior citizens being eligible to buy or occupy the units. Carefully study the agreement to know your rights.

7 out of 10 Indians expect their children to support them in their retirement

Capitalstars Investment Advisor

While 76% of working-age people in India expect a comfortable retirement, only 33% are putting aside money to fund it, finds the HSBC Future of Retirement study.

Not many of us are financially prepared for our life after retirement. This is something that a recent HSBC survey found. 

Retirement Study found that while 76 percent of working-age people in India expect a comfortable retired life, only 33 percent are actually putting aside money to fund that phase of life. The retirement study covered 1,045 respondents in India. Here are more findings from the survey.

Inability to anticipate future financial needs is the main roadblock to planning.

45% feel it’s better to spend money on enjoying life now than saving for retirement

53% save for short-term goals rather than longer-term plans

56% live on a day-to-day basis financially, setting the stage for problems later

While almost two-thirds of working people have a financial plan in mind.

However, concerns about affording care in retirement are common

64% are worried about the rising cost of healthcare

51% worry about not being able to afford home care

49% feel they have to rely on others for support

51% feel they could run out of money in retirement

58% think they will not be able to live comfortably

Though almost two-thirds of working people are aware of the cost of living in an elderly care home, only 19% are saving for future nursing or care home fees.

Many expect help from the family network in old age

68% of working-age people expect their children to support them at some point in their retirement

30% of current retirees receive financial support from children

Receiving financial support from children may be an unrealistic expectation on the part of many.

Eight out of 10 people have a plan in mind to augment income if needed in the later years of retirement

25% say they will go back to work

25% would start a business

21% would rent out a spare room

19% would dip into savings

19% would diversify investments

15% would sell possessions

13% would sell or release equity from home

10% would seek government aid

Over two-thirds of working-age people expect to keep working in some form in the early and active years of retirement.

Most working-age people feel hopeful about retirement

54% associate it with relaxation

44% with satisfaction

41% with happiness

23% with loneliness

19% with boredom

Despite the lack of certainty and niggling worries, retirement is far from doom and gloom.

The steps to consider while planning for retirement

Moves to make to ensure a comfortable retired life:

1. Think differently

Think of retirement as a chance to pursue your passions and have new adventures. Make the most of it by planning ahead.

2. Visualize

Think about the kind of retirement you want. Having a broad idea about how you would like your retired life to be will allow you to plan effectively.

3. Ask the experts

Use free online advice or seek out professional help to plan your finances in retirement. Don’t be afraid to ask questions.

4. Be meticulous

You need to know where you can save money and how much. Use online tools like calculators and budgeting apps to help identify changes you can make to cut costs.

5. Start a conversation

If you want help from your children, talk to them beforehand. This can help manage expectations.

Who will win the race to retirement: Tortoise or hare?

Capitalstars Investment Advisor

Tortoise and Hare were friends, but as different as chalk and cheese. Tortoise liked to play it safe, while Hare enjoyed taking risks. Both started investing Rs 10,000 a month when they got their first paycheques. And both of them were as different as different can be. Hare was drawn to the stock market. He wanted to invest his money in equity mutual funds and even thought of buying a few stocks. The tortoise was a conservative investor. He put his money in the safety of fixed deposits and opened a PPF account.

The tortoise was unfazed by the jibe. He smiled and shook his head slowly, and continued putting money in the PPF.

Hare watched the market with a keen eye. He acted fast when he saw an opportunity, investing in equity funds through SIPs. He lined his Demat account with blue chips. Whereas Tortoise invested methodically. He increased his investment by 10% every year.

After 10 years of investing, hare looked at his portfolio. He had earned compounded returns of 15% and accumulated Rs 28 lakh. “I’ve come a long way. Now I can indulge myself a little. Go on vacation buy the sports car I’ve been eyeing for age,” thought hare.

However, tortoise thought otherwise. "Hare doesn’t realize what he’s doing. He’ll fall short when he retires if he stops investing now. As for me, I’ll keep putting money away like I always have, and retire comfortably," he said. Tortoise continued to put money in his EPF account, PPF and bank deposits. He had to make some lifestyle sacrifices to ensure that his savings rate didn’t falter.

Meanwhile, Hare was enjoying life to the fullest. He had not put in any money after the first 10 years.

Eventually, retirement rolled around for both. As they chatted about retirement, Tortoise listened to Hare’s grandiose plans for traveling and upgrading his home skeptically. His jaw dropped when Hare mentioned how big his nest egg was.

“But…but that’s almost equal to what I have saved up! How is that possible? I invested regularly, while you stopped. In fact, I increased my investment every year. I made so many sacrifices while you enjoyed life! How can you have as much money as I do?," tortoise said furiously. "Yes, but I invested in the right instruments. My wealth grew at 15%, while yours rose 8%," replied hare.

So, the moral of the story is: It’s good to save regularly, but you must choose the right investments. Low-yield options like FDs and PPF can’t win the retirement race.

How to help the elderly make better investment decisions

Capitalstars Investment Advisor

At times older people find it difficult to sift unimportant information from the more important ones or shift from one objective to another while evaluating something.

We were at a store to buy a blanket for my aunt. To say she was overwhelmed is an understatement. Row upon row of materials, colors, and prices left her exhausted. My aunt told me that age was not on her side. How does aging affect our decision making?

Behavioral scientists say decisions are made using thumb rules and shortcuts, rather than a rational process. As one age, one tends to lean more on “satisficing” solutions while making decisions, rather than trying to optimize. My aunt was willing to take any blanket that seemed fine and was priced reasonably. She did not need more choices.

As we age, we find information overload tiring. This can have important consequences on financial decisions we make. We lean on the familiar, go with past experiences, and invest in choices we are familiar with. What is seen as unwillingness to change is actually a manifestation of the inability to deal with new and complex information.

We don’t stop learning as we age. What we process and how we do it changes. Implicit subconscious memory of events, people and places do not change. My aunt can recount instances from her childhood in vivid detail. Ask her the name of the film we saw the previous week, she would not be too sure.

With age our ability to make the effort and use our working memory to associate specific information with specific people, products or processes deteriorates. Our sematic memory is not susceptible to deterioration. Therefore we find that older people find it difficult to sift unimportant information from the more important ones, deal with complex features of a product, or shift from one objective to another while evaluating something.

The fixation about earning a regular income comes from the association of this investment feature with its performance. A regular dividend paying stock, an interest earning bond, a steady stream of rental income, are all associated with investment features that secure retirement income. The elderly find it comfortable to understand return in terms of income, rather than growth.

When mutual funds introduced the systematic withdrawal plan, they were catering to this target group that liked a fixed amount to be credited to the account every month. However, pandemonium broke when a retired investor walked into our office and demanded to know how liquidating his own investment to pay him was an accepted practice. No amount of explaining that the invested amount has grown in value helped.

We also noticed with dismay that investors were willing to accept single-digit returns on annuities offered by insurance companies, and were willing to stake their retirement corpus in a fixed deposit scheme of an unknown finance company. But robust ideas such as diversification and asset allocation were met with much resistance.

As younger investors began to opt for SIPs and stayed with them through ups and downs of the market, familiarity with risky growth products increased. Such investors were more willing to consider growth investments for retirement planning. The elderly took their time to experience the product, and after making sure that the monthly income plans actually gave out a regular cheque they began to trust the product. Dividend-paying funds are still a favorite with this audience.

The second aspect is the personal relevance of the decision on hand. As we age, we are keen to understand how a decision impacts our life. As our cognitive abilities decline, we are unable to subject decisions to deliberative processing. We rely on simpler interpretations about how it affects us, lean on our experiences, and decide based on our needs. Unwillingness to follow prescribed diets, medication and exercise regimens by the elderly is seen as illustrative of the lack of deliberate processing before a condition gets worse. Elders may not be able to perceive risks in a fixed deposit, as long as interest is being paid their own time.

The third aspect that aids elderly investors is expertise. Those with knowledge and skill about financial products do much better than those who have to deal with the complexities of finance after they retire. There is a great need for financial education for the soon-to-retire population that has to know to save, invest and drawdown.

5-Point Guide To Build A Retirement Corpus

Capitalstars Investment Advisor

Calculate what retirement is: It is a must to know your “retirement phase” or the number of years to be spent in retirement for you to understand when to start planning, how many years to build your wealth for, and the corpus needed. If you want to retire early, the corpus needed will be significantly larger than if you plan to retire at the conventional age of 60 to 65. Miscalculating the retirement phase creates the risk of running out of corpus, which interestingly, as a study in the U.S. showed, is one of the biggest worries retirees face.

Remember the cost of delay: The best time to start saving for retirement is not when you are about to retire, but when you receive your first paycheck. The biggest free lunch in finance is the power of compounding, and any delay in starting just means you have to save harder to accumulate the same amount.

Make the nest egg comfortable: Retirement years are not the right time to be stressed; life before would have given you enough of that! It is important to accumulate enough to comfortably go through this phase, and it is always better to accumulate a tad more than less. How do you calculate what is an ideal retirement corpus? Think about what the right rate of inflation is, what your expected monthly expense is, and critically, what the right rate of return on your investments is. The calculators are many, but the inputs have to be right.

Remember expenses rise: The impact of inflation is hard to sink in. It adds to the cost of living each year, and by the time we hit retirement, we have to spend much, much more than we do today to maintain the current lifestyle. Additional costs also creep in with age, including health-related costs.

Don’t forget asset allocation: Asset allocation is often missed out while planning for retirement. What is the right mix for your portfolio? It depends on when you start. For those who have 20 years to retire, the equity should be a large part of your portfolio. The power of compounding will help you in wealth creation. For those in their 50s and approaching retirement, debt should be a bulk of the portfolio. At this age, risk-taking abilities are much lower. Asset allocation has to shift gradually from equity to debt, with increasing age and retirement proximity.

Don’t forget asset allocation: Asset allocation is often missed out while planning for retirement. What is the right mix for your portfolio? It depends on when you start. For those who have 20 years to retire, the equity should be a large part of your portfolio. The power of compounding will help you in wealth creation. For those in their 50s and approaching retirement, debt should be a bulk of the portfolio. At this age, risk-taking abilities are much lower. Asset allocation has to shift gradually from equity to debt, with increasing age and retirement proximity.

Your exposure to portfolio risk needs to reduce with age and hence you can use age-based asset allocation. For this, you can use the thumb rule i.e. your allocation to debt funds must be equal to your age.

Finally, don’t forget that retirement is a journey and this journey is incomplete without the support of a financial adviser. While retirement planning is not complex, it is nuanced, and involves a lot of variables. It requires constant monitoring, which a professional can handle well. Our survey showed that unfortunately, 77 percent of participants had not spoken to a financial adviser about retirement, and this is one thing that must change, and quickly.

When avoided, downsized or postponed, retirement creates stress, but when planned well, retirement truly fits the adage of “sunset years”. Board this train early, keep track of the stations passing by to ensure you are on the right track and enjoy the journey!

How to ensure your retirement savings outlive you

Capitalstars Investment Advisor

Ignoring or underestimating the effects of inflation on expenses through the retirement period is one of the biggest risks to your retirement savings.

In this day and age of rising medical expenses and inflation, it becomes all the more important that you do your retirement planning properly. It should definitely go beyond just your contributions to the Employees' Provident Fund (EPF) and the Employees' Pension Scheme (EPS). While experts recommend saving for retirement as soon as one starts earning, many people start taking it seriously only when they are in their 40s or 50s. Pushing your retirement planning to a later date takes away the advantage of compounding and many times one is unable to accumulate a corpus big enough to fund their post-retirement life.

While planning, you need to factor in various risks to make sure that your corpus outlives you. Remember that retirement is a long phase (for some of us it can last up to three decades), so it becomes all the more important to consider these risks in the planning stage itself. Here are few such risks and how you can tackle them while saving for your retirement:

1. Medical inflation

Healthcare costs are rising at an alarming rate. And this why ignoring the effects of aging and not adequately planning for expenses related to health can deplete your retirement corpus.

How to deal with it: To avoid such expenses from denting your retirement corpus, having adequate health cover while you are employed help. To buy the correct health insurance you must consider various factors like the reputation of the insurer, claims settlement ratio and so on. Renewing your health policy year after year with a particular insurance provider will help establish an explicit history of your insurance record, which is helpful while making a claim.

2. Inflation

Ignoring or underestimating the effects of inflation on expenses through the retirement period is one of the biggest risks to your retirement savings. Inflation will eat into your corpus bit-by-bit. This will pose a serious problem since life expectancy rates have gone up and the retirement corpus will have to last longer. For instance, if you start saving for retirement at the age of 30 and retire at 60 years, you will have a regular income for 30 years.

How to deal with it: "If you start your retirement planning as early as in your 30s, investing in equities can help you beat inflation. It is a no-brainer. Only equities can give you higher real returns," says Nisreen Mamaji CFP at Moneyworks Financial Advisors.

3. Falling interest rates

It would be worth noting that the interest rate on Employees' Provident Fund (EPF) for the financial year 2017-18 has been cut to 8.55 percent from 8.65 percent. For FY 2015-16, it was 8.8 percent 2015-16.

How to deal with it: Investing in products that yield high returns and rebalancing your investment portfolio is an efficient way to cushion the impact of falling interest rates. "As an investor, you need to be on top of the various investment avenues to augment the income. For instance, considering an AA company deposit over AAA-rated one could be an option, equity-based mutual funds just to give that extra alpha in the portfolio is another option but yes, all these options carry risk. So, a balancing act needs to be done to ensure the fall in interest rates is cushioned," adds Bhatia.

4. Longevity risk

One always hopes to live a long and prosperous life. But to live comfortably in your sunset years, you need to make sure that you have saved enough. Longevity risk refers to living longer than estimated and running out of retirement funds. For instance, if you have planned your retirement till 80 years and you outlive this number by 10 or 12 years, you'll fall prey to longevity risk.

How to deal with it: It usually happens when you have a fixed amount of money to fund your retirement and don't know how long it is going to last. While investing in high return assets from an early age is recommended to counter longevity risk, it is also advisable to give your corpus a little equity exposure post-retirement, which can be met best via balanced funds.

5. Unplanned withdrawals

Unplanned withdrawal from the accumulated corpus at an early stage of retirement may result in a shortfall in the later stages. So, it is important to identify the core expenses and prioritize them.

How to deal with it: Creating a contingency fund is an important rule of thumb in personal finance. It not only saves you from borrowing money during emergencies but it will also prevent you from putting other financial goals in jeopardy. Experts recommend creating an emergency fund that covers 3-6 months of your expenses.

"Financial crisis can hit anybody at any given point in life; be it for children or loss of a job or medical treatment and one may have to jeopardize other goals to counter that situation. So, if you compromise your other goals, be sure to reimburse them later on. However, you must keep a check on your aspirations and not take out money to splurge or indulge in impulsive purchases," suggests Mamaji.

Another watch out while saving for retirement is to avoid withdrawing your PF money while switching jobs. Doing so can prevent you from making a huge dent in your retirement corpus.

With the introduction of UAN it has become much easier. Your UAN remains the same throughout life irrespective of the number of jobs you change.

Why women need to save more than men for a secure retirement

Capitalstars Investment Advisor

Being a woman puts you at a disadvantage when building your retirement corpus as you will need to save at least twice as much as a man.

If you are a 25-year-old working woman, retirement planning is probably the least of your priorities. Yet, it should be the topmost. Not just because it’s a crucial goal but also because you are a woman.

Yes, you read that right. Being a woman puts you at a disadvantage when it comes to building a corpus for retirement as you will need to save at least twice as much as a man. If you are still dismissive about the premise because you plan to get married and, of course, you and your spouse can muster a big enough corpus, think again.

There is a possibility that you may remain single, or the marriage may not work, or God forbid, you are widowed with children. According to the 2011 Census, there were nearly 74 million single women in India— unmarried, divorced, separated and widowed—and there was a 39% increase in single women between 2001 and 2011.

You need to be proactive about handling your finances, especially retirement planning. The three reasons you will need to save more than men are:

Women earn less

The gender pay gap is huge in India, with women earning 20% less than men, according to the Monster Salary Index (MSI). While men earn a median gross hourly salary of Rs 231, women earn only Rs 184.8. The pay gap also increases with experience: while men with up to two years’ experience earn 7.8% higher median wages, those with 11 or more years of experience get 25% more. Little wonder then that India ranked 108 on the World Economic Forum’s Global Gender Gap

Report 2017, while it was placed 136 out of 144 in terms of the workplace gender gap. What this means is that because women earn lesser, they will contribute lesser toward their savings. If a man earns Rs 40,000 a month and puts away 10% of this amount for retirement, he will save Rs 48,000 a year. On the other hand, a 20% less salary means, the woman will earn Rs 32,000 a month and will save only Rs 38,400 a year, resulting in a considerably depleted corpus.

Women work for fewer years

Not only do women earn less, but they also work for fewer years because they usually take time off for child care. On average, they spend about seven years away from work, which means they are not saving anything during this period. Besides, the truncated work experience means that when, and if, they rejoin the workforce, they will start at much lower salaries than their male peers. This is usually only about 30% more than their last drawn salaries. It will also mean that they qualify for low

Higher life expectancy

Add to these the fact that women tend to live longer, with a life expectancy of 69.9 years at birth, compared with 66.9 years for men. At 60, when most Indians retire, life expectancy for men is 77.2 and 78.6 for women. What this means is that the retirement corpus for women needs to be bigger than men so that it can last them longer. More importantly, the health-care costs see a sharp rise, resulting in a quick depletion of the corpus. So the financial fortication for women must be better.

What can women do to overcome these inequities and secure their retirement?

Save more

Women need to save at least twice as much as men. “Instead of 10% of their monthly incomes, they should save 20-25% for retirement,” says Financial Planner Pankaaj Maalde. If it seems hard to do so in the initial years because of the temptation to spend, lock the investments through ECS mandate to your bank account. Another option is to save more in the Provident Fund by opting for VPF (Voluntary Provident Fund) contribution with your employer in addition to the EPF and you can enjoy its tax-free status: tax deduction under Section 80C, no tax on interest or on the maturity proceeds.

Invest better

The best trick to save more, of course, is to invest smart. “Get your asset allocation right. With a long time horizon, investing in debt is more dangerous than saving less,” says Maalde. So, retain a small portion in debt, but invest a larger percentage in equity instruments like equity or balanced mutual funds to ensure you get high returns over the long term. Also make sure that you invest in line with your goal. For this, it is important that you calculate the retirement corpus correctly, taking into account the eroding effect of inflation and the impact of taxation on your investments.

Secure health insurance

“One of the best investment decisions you can make to protect your retirement corpus from depleting is to buy health insurance,” says Maalde. Given the high medical inflation of 12-15% and higher incidence of lifestyle diseases, especially in old age, it makes sense to purchase a health cover because it will stop you from dipping into your retirement corpus during a medical emergency.

Bargain better at workplace

This is another skill that will stand you in good stead. Do not hesitate to bargain for a good increment at the workplace and, more importantly, for a higher salary when you change jobs. Since it’s very likely that you are being paid lesser than your male counterparts, it will not hurt to stand up for your due remuneration. The more you earn, the higher the contribution to the retirement corpus, and it may also reflect in your retirement benefits later.

Work longer

It is a good idea for women to continue working in retirement because there is a high likelihood that they will live for another 15-20 years. Start planning for the post-retirement career during your working years so that the transition is smooth and the corpus can last longer.

5 Ways a New Law Could Affect Your Retirement Savings Options

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The Setting Every Community Up for Retirement Enhancement (SECURE) Act has been folded into the bipartisan appropriation package for the fiscal year 2020, which President Trump is expected to sign to avert a shutdown of the federal government.

Here's how some of the changes might affect you.

Allow you to contribute to your retirement plan longer. People are living and working longer, so the bill will allow people older than 701/2 to contribute to traditional individual retirement accounts (IRAs). The bill also pushes back the age at which you must take distributions to 72.

Help you secure guaranteed retirement income. Employers will be able to offer annuities in their retirement plans, which means guaranteed monthly payments for you and your spouse. If you change jobs, you'll be able to take your annuity to your new employer's plan without paying fees and charges.

Make it easier for companies to offer retirement plans. Small businesses that don't offer retirement plans will be able to join other businesses to create multiple employer plans or MEPs. These plans should be cheaper for small companies because they can share administrative costs. The bill also will give a new tax credit of up to $500 per year to employers to defray startup costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment.

Make part-time workers eligible for employer retirement plans. Currently, you need to be a full-time employee with 1,000 hours of work per year to join an employer retirement plan. The new bill would allow employees who have worked 500 hours per year for three consecutive years to join the company retirement plan. This provision starts Jan. 1, 2020.

Significantly reduce “stretch” IRAs. Under current law, if you name your children as the beneficiaries of your retirement plan, they can spread out payments from the plan over their lifetime – hence the “stretch” nickname. The bill would put a 10-year limit on the time a beneficiary has to take withdrawals from an inherited IRA.

Spouses, people with disabilities or who are chronically ill, and minor children are exempted from the rule. Otherwise, those who fail to withdraw funds within the 10-year window would face a 50 percent tax penalty on assets remaining in the account. This provision of the new law will take effect Dec. 31, 2019. That means you should review the beneficiaries of your retirement account before the end of the year.

In a letter to the U.S. House of Representatives this week, AARP praised the inclusion of the SECURE Act in the year-end spending deal. “The SECURE Act of 2019 will make it easier for the 27 million part-time workers in the United States to save for retirement and for smaller employers to offer a retirement plan to their workers,” said Nancy LeaMond, AARP executive vice president and chief advocacy and engagement officer.

How to calculate the retirement corpus you will need using MS Excel

Capitalstars Investment Advisor

Calculating the present value of an amount gets complicated if the investment generates a series of payments over a period of time.

An ideal retirement corpus should take care of all your postretirement expenses. But can you calculate the amount required? It involves taking into account life expectancy, interest rates, inflation and the time value of money and can be a bit tricky. Here we explain how to use MS Excel to calculate the amount easily. But first, let’s understand some basics.

The concept of the time value of money states that the worth of a rupee received today is more than a rupee received at a later date because of its earning potential. The concept of time value has two elements: Compounding and discounting. Compounding helps to estimate future values whereas discounting helps to estimate present values. For calculating your retirement corpus, it is the present value that matters.

Let us look at an example: An investment product promises Rs 8 lakh in 10 years if you invest Rs 4 lakh today; given interest/FD rates of 8% per annum, will this investment product be profitable? You will have to find out the present value of Rs 8 lakh at an 8% discount rate to arrive at the right answer. Present value is calculated by dividing Rs 8 lakh by (1+r) ^n, where ‘r’ is the discount rate (or interest rate) and ‘n’ is the tenure of investment. be Rs 3.7 lakh. Given that the present value of the amount that the product promises to pay (fund inflow) is less than the amount invested (fund outflow), the product is not profitable. In other words, the net present value of the investment product is negative. The net present value is the difference between the present value of cash inflows and the present value of cash outflows.

If the same Rs 4 lakh is invested in an FD for 10 years, offering 8% annual interest, the maturity proceeds work out to be Rs 8.63 lakh (assuming no tax)— Rs 63,000 higher than the aforementioned investment product.

Calculating the present value of an amount gets complicated if the investment generates a series of payments over a period of time. To calculate the current worth of such an investment, the present value of each payment in the entire series of payments needs to be derived. Technically, one needs to find out the present value of an annuity.

Estimating one’s retirement corpus involves calculating the present value of an annuity. This is because one expects to generate a stream of payments—monthly, quarterly or annually—from one’s retirement corpus for a given number of years at a certain rate. Such a stream of payments seeks to take care of one’s post-retirement expenses—based on one’s current expenses and assumed inflation rate.

A 38-year-old with a current annual expense of Rs 6 lakh can calculate his annual expenditure requirements when she retires at the age of 60, based on an assumed annual inflation rate over 22 years (the period after which she will retire). For instance, at 5% assumed inflation she will need Rs 17.5 lakh—6 lakh x (1+5%)^22. The ideal retirement corpus must generate a stream of Rs 17.5 lakh annually for 25 years after retirement, assuming a life expectancy of 85 years. Such a corpus can be arrived at by adding the present value of each stream of Rs 17.5 lakh discounted at an appropriate rate. The appropriate rate is generally the average long-term (10-year) yield on government securities. Additionally, post-retirement inflation also needs to be taken into account.

Although the methodology appears complex, MS Excel’s NPV function can help you do the calculations easily. NPV requires you to input the discount (or interest) rate and the series of expected inflows or estimated expenses.

At a 7% discount rate and assuming no inflation, the present value of the annuity works out to be Rs 2.04 crore. So, in our example, the working professional will have to accumulate Rs 2.04 crore for his retirement. However, if we assume postretirement inflation of 4.5% per annum, he will have to accumulate Rs 3.12 crore.

One can play with the numbers to see how changes in inflation, discount or interest rates changes the desired corpus.

How much do you need to save for retirement at different life stages?

Capitalstars Investment Advisor

One rule applies to everyone: Once you start with a plan, stick to it. Abandoning it midway will set your retirement planning back by several years.

When a US-based financial portal recently suggested that one should have saved twice his annual salary by the age of 35, it was mocked a lot on social media.

“I think you meant to say, by 35 you should have debt twice your annual salary.”

The sarcastic responses to the article evoked much mirth, but missed the key point: If the figure seems unattainable, the problem could lie more with one’s savings and spending patterns rather than the target itself. ET Wealth reached out to financial planners to understand how much Indians need to save at various ages to ensure they retire comfortably.

First, a caveat: the exercise to determine final retirement corpus —and the ideal savings at various life-stages—will have to be tailor-made for each individual, taking various expenses, dependents’ needs, goals, and other requirements into account. “Even post-retirement goals will vary— some may decide to lead a frugal life while others will have international travel plans, for instance. So while thumb rules can be seen as guideposts, they cannot be treated as gospel,” says certified financial planner Gaurav Mashruwala.

It will also vary as per the individual’s financial discipline. “For instance, a 25-year old who allocates 5% of her income towards retirement since her first job and continues to do so will not have to hike her savings as a percentage of income for retirement significantly later,” says financial planner Suresh Sadagopan, Founder, Ladder7 Financial Advisories. This is because a decent corpus would have been built over time with the power of compounding kicking in. “But another person who has not made much effort to save for retirement will need to start saving aggressively in the forties,” he adds.

The young and restless

The pleasure Twitterati derived out of ridiculing the retirement savings piece seems to reinforce the unflattering perception about millennials—those born after the year 1980 and broadly, youngsters—as a generation bred on a diet of consumerism with little appetite for savings. Given that many in this generation maintain an expensive lifestyle dotted with gadgets, eating out, rent, education loan EMIs and sundry living expenses, retirement planning is generally not high on their agenda. Even for the prudent ones, retirement, understandably, seems years away and imminent goals like buying a house or a car or saving for a lavish wedding are likely to command a larger share of savings in the initial working years. So, realistically speaking, how much should the younger lot allocate towards their retirement goals? “You should start with saving a particular portion of your salary rather than targeting a figure of say 1x or 2x of your salary at a particular age,” says Sadagopan. “A good ballpark figure for a 25-yer old individual 5%. They should look to save at least 5% of their income specifically for retirement.” The period for which your savings stay invested is more important than the actual amount saved. “The key is to start early, even if it means saving and investing small amounts,” says Amar Pandit, Founder, HappynessFactory.in. Even small amounts can add huge value to your final retirement corpus thanks to the power of compounding.

The middle years

This is the age when responsibilities start piling up, putting tremendous pressure on finances. Those between 35-45 years of age may be relatively better at withstanding peer pressure to maintain an expensive lifestyle, but there are other needs and goals that make demands on the income, pushing retirement down the priority list. “You can start with saving 20% of the income, and gradually increase savings to 40-50%, based on your overall financial situation, "says Pandit. Sadagopan feels that those around 35 years of age you should look to allocate at least 10% of their income towards retirement. “From 5% at the age of 25, the savings rate should go up to 10% by the time a person turns 35. You should maintain this retirement savings level till the age of 50,” he says. This does not include the mandatory contribution of the employee and employer to the provident fund.

Retirement on radar

Closer to retirement, it is reasonable to expect responsibilities related to children’s education to be out of the way, leaving more for retirement savings. However, again, this would vary from person to person. “Many individuals who entered parenthood in their late 30s or early 40s are likely to shoulder children’s education responsibilities closer to retirement or even after that,” says Sadagopan. He recommends a retirement savings rate of at least 15% once you cross 50 years. This rate should be adhered to until retirement. “This should ensure a decent retirement corpus to see a couple off in reasonable comfort in their retirement years,” he adds.

6 Types of Retirement Plans You Should Know About

Capitalstars Investment Advisor

The various retirement plans available are easier to understand than you might think, although each is subject to its own limitations. Some of these limitations depend on your modified adjusted gross income, while others involve a cap on the amount of money you can contribute yearly.

1. 401(k) Plans

A 401(k) plan is a workplace retirement account that's offered as an employee benefit. The account allows you to contribute a portion of your pre-tax paycheck to tax-deferred investments. This reduces the amount of income you must pay taxes on in that year. For example, you'd be taxed on $70,000 if you earned $75,000 and contributed $5,000 to your 401(k).

Investment gains grow tax deferred until you withdraw the money in retirement. If you withdraw funds from the plan before age 59½, however, you could pay a 10% penalty, and the withdrawal would be subject to federal and state income taxes. Some plans offer 401(k) loans, however, if you find yourself in a cash emergency. 

2. Individual Retirement Accounts (IRAs)

An IRA is a tax-favored investment account. You can use the account to invest in stocks, bonds, mutual funds, ETFs, and other types of investments after you place money into it, and you make the investment decisions yourself unless you want to hire someone else to do so for you. You might consider investing in an IRA if your employer doesn't offer a retirement plan or if you've maxed out your 401(k) contributions for the year.

You contribute up to $6,000 in 2019. This increases to $7,000 if you're age 50 or older. This limit is an increase from $5,500 in 2018. You'll pay no taxes annually on investment gains, which helps them to grow more quickly.

3. Roth IRAs

Unlike a traditional IRA, Roth IRA contributions are made with after-tax dollars. But any money generated within the Roth is never taxed again.

You can take withdraw contributions you've made to a Roth IRA before retirement age without penalty, provided five years have passed since your first contribution. You're not required to begin taking withdrawals at age 70½ as you are with traditional IRAs, 401(k)s, and other retirements savings plans. 

Putting money in a Roth is a great place to invest extra cash if you're just starting out and you think your income will grow. You can even contribute to both an IRA and a Roth IRA, but your total contributions to both plans can't exceed the $6,000 contribution limit for the year. 

4. Roth 401(k)

A Roth 401(k) combines features of the Roth IRA and a 401(k). It's a type of account offered through employers, and it's relatively new. As with a Roth IRA, contributions come from your after-tax paycheck rather than your pre-tax salary. Contributions and earnings in a Roth are never taxed again if you remain in the plan for at least five years. 

But there's a catch with this type of plan as well. Contribution limits become stricter if your modified adjusted gross income (MAGI) reaches a certain point, and contributions are prohibited entirely if you earn too much. Phaseouts begin at MAGIs of $122,000 for single filers in 2019, and you can't contribute if your MAGI tops $137,000. These limits for married taxpayers filing joint returns increase to $193.000 and $203,000. 

5. SIMPLE IRA

The Savings Incentive Match for Employees (SIMPLE) IRA is a retirement plan that small businesses with up to 100 employees can offer. It works very much like a 401(k). Contributions are made with pretax paycheck withdrawals, and the money grows tax deferred until retirement.

Distributions taken within two years of opening the plan and before age 59½ can result in a hefty penalty, however—25%. You can't borrow from a SIMPLE IRA, either, the way you can from a 401(k). 

6. SEP IRA

A Simplified Employee Pension (SEP) IRA allows you to contribute a portion of your income to your own retirement account if you're self-employed and have no employees. You can fully deduct these contributions from your taxable income.

The maximum annual contribution limits are higher than most other tax-favored retirement accounts: $56,000 or 25% of income— whichever is less—as of 2019.