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| 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.
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