Retirement Planning

Golden Years of RetirementMr. Joshi and Mr. Das have retired from their service of almost 30 years. Both friends have been looking forward to these golden years and wish to

be able to pursue their dreams on retirement.

Each person has his own idea of spending his retirement years. Retirement Planning is all about being able to realize these dreams

while leading a comfortable retired life.

Mr. Das wants to start his own venture once he

retires.

Mr. Joshi wishes to travel the world and see different

countries and cultures.

Reality Check

Mr. Joshi has been able to amass a large retirement corpus in addition to retirement benefits from his employer. He is comfortably able to withdraw from his corpus for meeting his routine expenses and also fund his travels.

Mr. Das has invested his retirement corpus into his business. His investments earn him interest but that does not match his household and new business expenses. He is finding it very difficult to meet ends.

Is there anything that Mr. Joshi did differently from Mr. Das?What is the reason behind this difference?

Retirement - A Key Financial Goal

Always had retirement as a key goal.

Believed in planning ahead for future needs and contingencies.

Started saving for retirement as soon as he began his career at 25 years.

Believed in living in the present.

Thought that there’s enough time to plan for retirement.

Prioritised other goals to retirement.

Started retirement planning in the mid of his career.

Retirement is about planning for about 30 years of retired life and should be a top priority while planning finances.

Mr. Proactive

Mr. Laid-back

Mr. Joshi

Mr. Das

Compounding works wonders when you start early

Began investing at age 25 with Rs.6,000 in the first year. He increased his investment by 10% annually.

Notice how @ 14% growth rate,

Mr. Joshi’s investment could fetch Rs.1.05 crore

as against Mr. Das’s investment value of

Rs.39.94 lakhs though there is

not much difference in the total investment

made by both.

Investing early allows the investment to get benefit of compounding over a period of time.

8% Rs.39.95 Lakh

Rs.62.83 Lakh11%

Rs.25.08 Lakh

Rs.31.14 Lakh

Start Year 1980 1995

Period 35 years 20 years

1st Year Investment Rs.6,000 Rs.15,000

Investment Increased annually by 10% 15%

Total Investment Rs.16.26 Lakh Rs.15.37 Lakh

Mr. Joshi Mr. Das

Began investing at age 40 with Rs.15,000 in the first year. He increased his investment by 15% annually.

Rs.105.00 Lakh 14%

The above table is for illustration purpose only to explain the concept of starting investments early & shall not be construed as indicative yields/returns of any asset classes.

Rs.39.34 Lakh

Assumed Return @

Cover for inflation

Return from investment should first keep up with the inflation rate to increase the real purchasing power.

Inflation eats into the return made from investments.

Return from long term investment should be such that it has the capacity to earn over and above the inflation rate.

Note: Assuming an inflation rate of 7%

Since retirement was a long term goal, Mr. Joshi thought it wise to make the risk-return trade-off and invest in higher risk assets for the long term

in contemplation of better returns.

If your monthly expenses are Rs. 20,000 today, see how much you will need to spend after...

5 years 10 years 20 years 30 years 40 yearsRs. 28,000 Rs. 39,000 Rs. 77,000 Rs. 1,52,000 Rs. 2,99,489

Real return = Return from investment – Inflation rate

Underestimating inflationEstimating Inflation does not only involve estimating increasing prices, but also the changing life style and price to be paid for the changed lifestyle.

Mr. Joshi understood that to keep up with changing times, he would have to incur these expenses and needed to make provision for the same.

Fixed income investments will fall way too short to take care of expenses that increase manifold.

Things of luxury in the past are now necessities.

Changed lifestyle also calls for increased expenses towards

necessities.

Strategic allocation to Equities

Equities tend to be volatile in the short term but have given superior inflation adjusted returns over the long term.

Strategic allocation to equity in the early years of investing can ensure healthy retirement corpus.

Past performance may or may not be sustained in future. Investors are requested to consult their financial advisor before making any investment decisions

During the Accumulation (Earning) phase Mr. Joshi made a strategic allocation to equities with a small allocation to fixed income.

On retirement, he remained invested in equities to keep up the retirement corpus against rising prices.

Investment of Rs.10,000 made 37 years ago

If invested in the BSE Sensex, value now would be Rs.21.21 lakhs

If invested in a FD at the rate of 8%, value now would be Rs.1.72 lakhs

Source: www.bseindia.com

He gradually shifted allocation to low risk fixed income investments with lower allocation to equities towards retirement age.

Note: BSE Sensex values taken as on Dec. 31, 1979 and Dec 31, 2015.

Evaluate investment choices

Mr. Das limited his investment choices to traditional investments such as gold and fixed deposits.

Choose an investment that is able to provide inflation adjusted returns, while offering convenience, systematic approach and flexibility in investing.

Consider mutual funds over traditional investment options.

Auto-debit of a fixed monthly installment from his bank account towards retirement goal.

Every now and then he would top up the investment with accumulated savings.

Mr. Joshi chose equity. To minimize risks in equities, he chose a diversified equity mutual fund and signed up for a systematic investment plan.

Disciplined way of investing

Provide safety but lower Returns

Save Big if not early

Mr. Das was laid back and lost valuable time. Mr. Das could have done well had he invested larger amounts when he began investing late in his 40’s.

To be able to match up to the lost time and magic of compounding, save in a big way if not early.

If he would have set aside 30% to 40% of his annual earnings for retirement, he would have been in a much more comfortable zone at retirement. It helps to make additional lump sum top ups to retirement funds during the peak income phase.

Incomes usually peak out during the middle of one’s career.

Social security

EPFO declared interest rate vs CPI inflation rate

Mr. Joshi realized that he was not eligible for pension or any other social security benefit of the government. Mandatory retirement benefit schemes such as the

Employees Provident Fund has not been able to provide significantly higher returns over inflation. Apart from the monthly PF contributions, he saved additionally in

growth oriented assets to create a large retirement corpus.

It is best not to rely on social security for retirement. Exposure to equity oriented assets is the key to create

long term growth.

CPI inflation rate

Saving for 30 years

On retirement, the corpus should continue to grow and compound in value so that it fights inflation, while the investor withdraws money from it as required.

After retirement, Mr. Joshi remained partly invested in equities and partly in fixed income mutual funds that enabled regular payouts.

Mr. Das, however, continued his FDs. Soon, the interest payouts seemed too little to suffice the rising expenses.

The retirement kitty needs to work to provideregular income for the next 25 to 30 years.

Income stops at retirement, but inflation continues to erode real income from the retirement corpus.

Increased Life Expectancy.

Smart things to know about retirement planning

Get a retirement plan drawn up by your financial advisor. He will help you to estimate your required retirement corpus and guide you to get there.

Under no circumstances should you touch the retirement corpus.

Withdrawing money midway to fulfill some other goal will affect the returns in the long run.

To be able to Comfortably Retire at 60

20’s

30’s

40’s

50’s

Invest 15-20% of your annual income

Invest 25-30% of your annual income

Invest 35-40% of your annual income

Invest 45-50% of your annual income

80% in equity + 20% in fixed income

70% in equity + 30% in fixed income

60% in equity + 40% in fixed income

50% in equity + 50% in fixed income

Disclaimer: Investors are requested to consult their financial advisor before making any investment decision.

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