Ways To Plan Retirement in India

Capitalstars Investment Advisor

Retirement is one of the important phases of a person’s life when the person, after decades of dedicated service, finally calls it a day. This is the time that professionals look forward to, when after years of toiling and handling responsibilities, they can finally enjoy their full, family time. However, retirement also comes with its own share of financial woes and unpredictable measures. The absence of a regular monthly income means that strain is put on the existing savings and returns from investments.

The purview of retirement does not exclude self-employed persons and like their salaried counterparts, they too, are bound to feel the burden of a retired life unless they have planned their finances well in advance. Investments made earlier in life, if chosen well, can go a long way in ensuring financial freedom after retirement.  Here is a list of certain important ways in which retirement can be planned:

* Increase the volume of investment with an increase in income: Starting from the earlier phases in life, choosing an investment that yields dividends as and when required is very essential. As the career graph moves on, there comes a phase when the volume of investment can be increased. You must always invest more when there is any such increase in earnings.

* Start early: The cost of living in India is on an upward spiral and this makes us feel the pinch with each passing day. Therefore, it is important to start investing in your future as soon as you start earning. Younger the person is at the time of commencement of relegating funds towards a retirement investment, higher is the term build-up and the resulting payout at the time of investment-maturity.

* Allocate a fixed percentage of your income towards retirement corpus: Investing a fixed percentage of the income towards the main retirement corpus always helps. One must also be careful not to use any part of the corpus (i.e. the main amount) before retirement.

* Consider the inflation factor while taking a retirement plan:  Seeking to invest and build up on that investment is important. However, the fact that inflation affects the financial planning heavily must never be ignored or belittled. Inflation can make your returns take a plunge and therefore, while choosing any plan, you must make sure that you have taken the futuristic price-rise projections into your consideration.

* Invest in health-insurance and specific plans simultaneously: You may not be in the prime of your health in your sunset years and therefore, start early when it comes to building up the financial safeguard in times of emergency. This ensures that your savings and the returns from the investments made by you do not suffer due to medical contingencies.

Retirement Planning Tips in Your Mid-60s and Beyond

Capitalstars Investment Advisor

Retirement planning at any age can be challenging. Still, there are certain steps to take when you're in your mid-60s and beyond to make sure you're ready for those golden years.

* Many people choose to continue working past retirement age for extra income or to stay engaged.

* If you were born in 1960 or later, your full retirement age for Social Security benefits is 67.

* You can sign up for Medicare at age 65, whether or not you're retired.

* Required minimum distributions for traditional IRAs and 401(k)s start at age 70½.

At one time, the common age for retirement was 65, but times have changed. Even the Social Security Administration (SSA) has increased the age when full retirement benefits are available. Also, there has been a shift from defined-benefit plans to defined-contribution plans in many company-sponsored plans.

Adding to these changes is the fact that many savings programs are not producing projected returns. It's easy to see why many individuals may need to postpone retirement.

Of course, even if you are financially secure, reaching age 65 does not always mean it's time to retire. Many 65-year-olds love their jobs and want to continue working. Still, there are a few things to consider—and take care of—as part of retirement planning in your mid-60s and beyond.

Determine Your Retirement Readiness

If your employer's policy is to offer retirement at age 65, think about whether you are really ready to quit—from a psychological and a financial perspective. If not, consider whether you want to ask your employer to allow you to work a few more years, or if you'd like to be hired as a consultant.

Ideally, you will do this at least a year before you reach 65, as some employers start the retirement process early. Many employers now focus on hiring and retaining employees who are experienced and "know the business" to strengthen their intellectual banks.

Staying on as a salaried employee not only means you continue to receive a steady income, but you will also continue to receive health coverage and other benefits your employer offers. On the other hand, going the consultant route offers you more flexibility and could allow you to have more of a working retirement.

Create a Retirement Budget

Retirees who have saved up for many years can feel that reaching retirement age means it's time to enjoy the fruits of their labor. Fair enough, but the risk is that people can go overboard and spend it all in a few years.

To avoid falling into this trap, budget your expenses. Be sure to include new costs you plan to incur, such as extra travel. This will help you make a realistic determination of how easily you can afford some of those future plans.

Once you are no longer working, a budget is even more important, as your income will likely come from your savings, Social Security, and any pension plans you may have.

Decide the Best Time to Take Social Security

Social Security is usually included in an individual's financial projections for retirement. One key decision when factoring Social Security into your equation is to determine whether you will receive full or reduced benefits.

If you take Social Security benefits before you reach your full retirement age, your annual benefits will be lower than if you waited until you reached full retirement age.

If you do not need the payments when you reach full retirement age, consider waiting until age 70 to garner the maximum possible benefit. Waiting any longer will not raise what you'll receive.

“Factors that drive when it is best to take Social Security include the historical income of you and your spouse, your ages, and life expectancy," says Mark Hebner, founder and president, Index Fund Advisors, Inc., in Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.” 

"Most adults who are healthy would benefit from suspending their Social Security until they reach age 70," Hebner adds. “There are online resources for investors to help them maximize their potential Social Security payout.”

To get a complete understanding of your Social Security benefits, including determining how much you are projected to receive, visit the Social Security Administration website.

Use Your Home for Income

If you live in a large place, it may be time to consider whether you should move to a smaller home that is less costly to maintain and/or to an area where the cost of living is lower. Changing residences could provide some additional funds to add to your retirement nest egg.

If you are not willing to move or sell your home but need additional income, consider whether the risks involved in a reverse mortgage are suitable for you. Under a reverse mortgage program, a lender uses the equity in your home to provide you with tax-free income.

Before applying for a reverse mortgage, be sure to ask as many questions as possible, including how much in fees you'll pay, the terms of the mortgage, and your receipt-of-payment options.

Manage Your Income During Retirement

If you need to take income from your savings to finance your retirement, take steps to ensure that you minimize taxes and maximize what you get to keep. Your unique financial profile will determine the most opportune time to use certain types of income.

From a general perspective, withdrawals from tax-deferred accounts such as traditional IRAs and employer-sponsored plans should occur during the years when your income tax rate is lower. This will help to minimize the amount of income tax you owe on those amounts.

Take Required Minimum Distributions

Of course, if you are of required minimum distribution (RMD) age, you must satisfy your RMD amounts from those accounts—regardless of your tax rate.

You have to start taking RMDs from your traditional IRAs and 401(k) plans at age 70½. If you miss an RMD, you will owe a 50% penalty on the amount you should have withdrawn. Keep in mind that Roth IRAs don't have RMDs. You can keep your money in a Roth as long as you want and pass the entire account to your beneficiaries.

The Bottom Line

You will likely read lots of advice about timing your retirement and ways to manage your income. Still, one thing to remember is that there is no one-size-fits-all solution.

Working with a financial planner and/or retirement counselor can help you design a solution tailored to your needs and income. Ideally, start planning for retirement as early as possible and don't forget to rebalance your investment portfolio as often as necessary.

Do you know about sequre act and How Could It Affect Your Retirement?

Capitalstars Investment Advisor

Could a sweeping new bill help the country overcome its retirement savings crisis?

That’s what some lawmakers envision with the Setting Every Community Up for Retirement Enhancement Act of 2019—better known as the SECURE Act. The far-reaching bill includes 29 provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.

KEY TAKEAWAYS

The SECURE Act would make it easier for small business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer.
Many part-time workers would be eligible to participate in an employer retirement plan under the bill.
The Act would also push back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70½ to 72.
The legislation, which passed overwhelmingly in the House in May 2019, remains tied up in the Senate.

A Troubled Retirement System
That there’s trouble brewing in the U.S. retirement system, which requires most workers to supplement Social Security with personal savings, has been widely acknowledged. According to data from the U.S. Bureau of Labor Statistics published in 2018, only 55% of the adult population even participate in a workplace retirement plan—whether defined benefit or defined contribution.
And even those who do are often woefully behind when it comes to investing part of their paycheck.
The wealth management giant Vanguard, for instance, revealed early in 2019 that the median 401(k) balance for those ages 65 and older is just $58,035. The SECURE Act aims to encourage employers who have previously shied away from these plans, which can be expensive and difficult to administer, to start offering them.
“With passage of this bill, the House made significant progress in fixing our nation’s retirement crisis and helping workers of all ages save for their futures,” Rep. Richard E. Neal (D-Mass.) said in a statement after the bill sailed through the House in May.

Major Provisions of the SECURE Act
The SECURE Act would tweak a number of rules related to tax-advantaged retirement accounts. For example, it would:
Make it easier for small businesses to set up 401(k)s by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans, from 10% of wages to 15%.
Provide a maximum tax credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment.
Enable businesses to sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service.
Encourage plan sponsors to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations.
Push back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70½ to 72.
Allow the use of tax-advantaged 529 accounts for qualified student loan repayments (up to $10,000 annually).

Planners Evaluate These Changes
While retirement planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Md., cautions that the bill is far from a cure-all for the nation’s retirement challenges, she says several of the provisions represent a step in the right direction.
In particular, she notes, reducing the number of hours that employees are required to work in order to sign up for 401(k)s can help expand participation. “That’s helpful for part-time employees, whether they’re just entering the workforce or about to leave,” Cheng says.
And she’s in favor of adding flexibility to 529 accounts, which could be used to repay some student loans under the bill. That’s a good option, she says, for parents who may have fund remaining in an educational savings account and want to help a child who has already graduated. “The SECURE Act provides more flexibility,” says Cheng.
For David Rae, a financial planner based in Los Angeles, moving the starting age for required minimum distributions to 72 also makes sense, given that people are living longer than they did a generation ago. “Pushing back RMDs will help people make their money last just a little bit longer, especially since more of them need to work later,” Rae says.

The Bottom Line
While it’s still possible that the SECURE Act will go through some minor changes, the bipartisan support behind the legislation means it’s likely to end up passing in the Senate, too. Whether it ends up being a game-changer or not remains to be seen. But one thing is abundantly clear: The current rules aren’t allowing nearly enough Americans to put away the nest egg they’ll ultimately need for a secure retirement.

Look Out Some Tragic Retirement Cases

Capitalstars Investment Advisor

I am sharing one case and it is beneficial for all because everyone need to invest there money in right place and earn money so that it will help them after retirement and no need to depend on others.

In one case the couple who had run out of money were childless, and he had exhausted his money. Well almost. Who helped? The woman’s nephew had a spare house which he gave to his aunt and uncle. They lived in that house (rent free, even the maintenance was paid by the nephew) and they had money to eat and pay for the medical expenses. Then one day the uncle died. The nephew wanted to sell the house. She went off to a Senior Citizens Home. Suddenly the nephew found that she had Rs. 30L in bank fixed deposits. He did not know about that earlier. Neither did I. So in such cases, you never know the full truth. So the nephew paid the one time donation for the Senior Citizens home and she is paying the regular monthly charges. She is 83 and we are hoping that the 30L Rs. should last her lifetime!

In another case the old man ran out of money and the son was not (is not) in a position to fund the expenses of the Senior Citizens home. The son in law came to me saying ‘My father in law has Rs. 12 lakhs (this was about 8 years ago) and his expenses are Rs. 19,000 per month. I know this will go up and I have no clue what to do. Clearly the daughter and son in law were very well off and could afford to look after the old man. I said take the 12L and mix it with your portfolio. However, tell the old man that his money has been lent out at 20% per annum and hence they are able to afford to pay for his senior citizens home expenses. The 93 year old STILL BELIEVES that his “huge Rs. 12L” is feeding him. The home now charges about Rs. 70000 a month – including diapers, medicines etc. So the daughter says “interest rates have gone up” or “we put some of the money in shares”. However for the past 3 years those lies too have stopped. He is unable to comprehend what is happening. However, clearly he is outliving his money.

We have had such cases in the family too. Death of people who had no money to pay for cremation. Death of people whose family came to the hospital with Rs. 240 to claim the body, and do the cremation. The amount needed was Rs. 26,000. Obviously somebody from the family steps in and picks up the bill.

It is a real tragic story out there and it is very common to see such people. Even though they are still a small minority. We also need to remember that such stories do not come out. If you have such stories, please share them.

Investment options for retired person

Capitalstars Investment Adviser

Here are few investment options for the retired to provide for their monthly household expenses. The idea is to build a retiree portfolio with a mix of these products.
Retirement means the end of earning period for many, unless one chooses to work as a consultant. For retirees, making the best use of their retirement corpus that would help keep tax liability at bay and provide a regular stream of income is of prime importance. Building a retirement portfolio with a mix of fixed income and market-linked investments remains a big challenge for many retirees. The challenge is not to outlive the retirement funds - one retires at 58 or 60, while the life expectancy could be 80.

The idea is to build a retirement portfolio with a mix of these products. Here are few investment options for the retired to provide for their monthly household expenses.

Senior Citizens' Saving Scheme (SCSS)
Probably the first choice of most retirees, the Senior Citizens' Saving Scheme (SCSS) is a must-have in their investment portfolios. As the name suggests, the scheme is available only to senior citizens or early retirees. SCSS can be availed from a post office or a bank by anyone above 60. Early retirees can invest in SCSS, provided they do so within one month of receiving their retirement funds. SCSS has a five-year tenure, which can be further extended by three years once the scheme matures.
Currently, the interest rate in SCSS is 8.6 per cent per annum, payable quarterly and fully taxable. The rates are set each quarter and linked to the G-sec rates with a spread of 100 basis points. Once invested, the rates remain fixed for the entire tenure. Currently, SCSS offers the highest post-tax returns among all comparable fixed income taxable products. The upper investment limit is Rs 15 lakh and one may open more than one account. The capital invested and the interest payout, which is assured, has sovereign guarantee. What's more, investment in SCSS is eligible for tax benefits under Section 80C and the scheme also allows premature withdrawals.

Post Office Monthly Income Scheme (POMIS) Account
POMIS is a five-year investment with a maximum cap of Rs 9 lakh under joint ownership and Rs 4.5 lakh under single ownership. The interest rate is set each quarter and is currently at 7.8 per cent per annum, payable monthly. The investment in POMIS doesn't qualify for any tax benefit and the interest is fully taxable.
Instead of going to the post office each month, the interest can be directly credited to the savings account of the same post office. Also, one may provide the mandate to automatically transfer the interest from the savings account into a recurring deposit in the same post office.

Bank fixed deposits (FDs)
A bank fixed deposits (FD) is another popular choice with the retirees. The safety and fixed returns go well with the retirees, and the ease of operation makes it a reliable avenue. However, interest rate over the last few years has been falling. Currently, it stands at around 7.25 per cent per annum for tenures ranging from 1-10 years. Senior citizens get an extra 0.25-0.5 per cent per annum, depending on the bank. Few banks offer around 7.75 per cent to seniors on deposits with longer tenure.

Mutual funds (MFs)
When one retires and there is a likelihood of the non-earning period extending for another two decades or more, then investing a portion of the retirement funds in equity-backed products assumes importance. Remember, retirement income (through interest, dividends, etc.) will be subject to inflation even during the retired years. Studies have shown that equities deliver higher inflation-adjusted returns than other assets.

Tax-free bonds
Tax-free bonds, although not currently available in the primary market, can also feature in a retiree's portfolio. They are issued primarily by government-backed institutions such as Indian Railway Finance Corporation Ltd (IRFC), Power Finance Corporation Ltd (PFC), National Highways Authority of India (NHAI), Housing and Urban Development Corporation Ltd (HUDCO), Rural Electrification Corporation Ltd (REC), NTPC Ltd and Indian Renewable Energy Development Agency, and most carry the highest safety ratings. One may, however, buy and sell them on stock exchanges as they are listed securities.

Immediate annuities
Retirees could also consider the immediate annuity schemes of life insurance companies. The pension or the annuity is currently around 5-6 per cent per annum and is entirely taxable. There is, however, no provision of return of capital to the investor, i.e., the corpus or the amount used to purchase annuity is non-returnable. There are about 7-10 different pension options, including pension for lifetime for self, death to spouse and post that the return of corpus to heirs. The corpus is not returned to the investor under any pension option. The immediate annuity may not suit an investor who is capable of selecting and building his own portfolio. So it is better to diversify across different investments rather than invest in this scheme if you have the wherewithal to manage your own portfolio. This is also advisable as the returns offered on these immediate annuities are currently on the low side.

Bucket theory for Post Retirement Investments

Capitalstars Investment Advisor

I am a fan of the Bucket Theory of Investing for a Retiree portfolio. How this theory works is simple.

Let me take an example. Let us say that there is a young retired couple (as they say Young in the draw down stage). Let us assume that they have Rs. 10 crores in their portfolio, and have expenses of Rs. 1L a month, and Rs. 5L per annum in vacations expense.

Their money is normally divided like this:

Rs. 70L to 90L in bucket no. 1. This bucket is the very conservative bucket and has its money to be invested in bank fixed deposits, savings accounts, money market mutual funds, short bond funds, very short bond funds and cash at home. This bucket will NEVER EVER turn negative returns. If you invest Rs. 90L…it will never ever go below 90L…

 Bucket no.2 will have money for debt and some equity portfolio. It will have about 50L in a debt oriented hybrid fund. This category will have another say 50L in an equity oriented hybrid fund. Yes this looks aggressive but this couple now has 5 years expenses in bucket 1 and 6 years expenses in bucket 2. Providing for inflation lets say they have 9 years expenses in these 2 categories.

Bucket no. 3 will be more aggressive and will have an exposure to long term gilt funds, large cap funds, multi cap funds, small cap funds – and have a 10 year plus investment horizon. So say about 8 crores to be invested in this category. Do they NEED so much exposure to equity? Well that is a tough call to make. I would not put so much in equity.

For a retiree the MOST important thing is that the money should last LONGER than they last on the planet.

Assuming this was the asset allocation done in 2009, how would have I managed the withdrawals?

I would have done a SWP from the bucket no. 3 from 2009 till 2018 (at the time of writing the article). Which means the draw down is actually happening from the growth bucket. Given the rate at which equities have grown, today they would still have 2 crores in bucket 1, 2.5 crore Rs. in bucket no. 2, and about Rs. 15 crores in bucket no. 3.

Remember the couple is now 70 years of age, and has a very very aggressive portfolio. HOWEVER, they still have about 15 years expenses in the conservative buckets.

Now this couple can remove Rs. 4 crores from bucket no. 3 and buy an annuity from LIC. This would put Rs. 2L per month in their hand, reduce their exposure to equity, and give them a more safety cushion.

Now go back to where we started. Assume that the client had a rental income of Rs. 1L per month over and above the Rs. 10 crore mutual fund portfolio. How does it change things?

Well, then it is no longer a ‘retiree’ portfolio. It is an earning person’s portfolio. I would stick to the same portfolio, but at the age of 70, re-balance by taking some money off equity and putting it in more conservative boxes – 1 and 2.

I would also sell off my real estate at my age of 70 and buy an annuity from LiC. This will put more cash in my hand, and reduce my exposure to real estate – which is perhaps the most volatile asset class.

Money planning differs significantly before and after retirement

Capitalstars Investment Advisor

Before retirement, it is about accumulating a sufficient corpus; subsequently, it is about generating a regular income stream

Understanding the difference between financial planning before and after retirement is extremely critical—more so for those planning to retire in the next 10 years.

For simplicity, let’s refer to Financial Planning before Retirement as FP-Before and Financial Planning after Retirement as FP-After in this article.

FP-Before focuses on the accumulation phase—the years before retirement. A good financial plan (before retirement) will make sure that you set a realistic retirement corpus target. It will also push you to invest enough to reach the target retirement corpus at the right time in the future. It goes without saying that in the years before retirement, there are other goals such as children’s education and house purchase too.

So, a good financial plan will take care of all these along with the goal of retirement. FP-After, on the other hand, focuses on how your existing retirement corpus will generate an income stream during your retirement years and how your expenses will be taken care of. It is, as mentioned earlier too, aimed at ensuring you do not run out of money before your years run out.

Sufficient retirement corpus

If you talk to any 60-plus person who isn’t ultra-rich, has retired and is living on income from retirement corpus, his/her concern would be, “Will my money last?”

Let’s take a small example to understand all this.

Suppose, at the age of 40, you decide (after procrastinating for several years) that you should begin saving for retirement seriously.

So you start with a small Rs 10,000 monthly investment in a 70:30 Equity:Debt portfolio. You increase the monthly savings amount by 10 per cent every second year. So you put in Rs 1.2 lakh each in first two years, followed by Rs 1.32 lakh in the third and fourth years, Rs 1.45 lakh in the fifth and sixth years and so on. You do this for the next 20 years till your retirement at 60.  Assume the returns you get on equity are the same as the actual annual Nifty 50 returns between 1999 and 2018. Debt returns have been assumed to start from 9 per cent and taper down to 7 per cent.

You retire with a corpus of Rs 1.28 crore. Is it enough? Let’s see.

To run the post-retirement scenario (from age 60 to 80), it is assumed that the starting expenses are Rs 50,000 a month (Rs 6 lakh per annum). And this increases by 7 per cent inflation every year. So, it’s Rs 6.42 lakh in the second year, followed by Rs 6.87 lakh in the subsequent year next and so on.

To generate an income for such levels of annual costs, the retirement corpus accumulated earlier (Rs 1.28 Cr) is deployed in a 30:70 Equity:Debt conservative portfolio. Equity returns fluctuate every year and debt returns start from 8 per cent and go down to 6 per cent.

Return assumptions important

If you do a more granular examination of the table above, the equity returns achieved in the first 3 years are 39 per cent, 15 per cent and 8 per cent. It seems like you retired in a good market. But what if you didn’t? That is, what if you retired in a bad bear market where the first three years delivered -10 per cent each? What would have happened then?

The money runs out before you turn 80!

This is, as you will agree, a financial disaster for a 79-year old who is going to live for at least a few more years if health permits.

And this is exactly what concerns financial planning after retirement. It tries to ensure that your corpus does not run out due to poor returns or high expenses.

Before retirement, you should not withdraw from retirement portfolio (but rebalance). So, a string of bad years doesn’t affect your portfolio that much, as you get to average down the cost of your investments, if nothing else. But after retirement, you have to withdraw from your portfolio to meet your expenses. And if this withdrawal happens in bad years, the corpus would deplete very quickly as there are the twin blows of withdrawal and market-related decline to the portfolio.