Planning your Retirement the smart way

Foreword
Dear friend, If you are reading this guide then Congratulations! You already understand that Financial Planning can help you get your retirement life or second life in order. You want to take a planned approach to achieving financial success and be independent even in your non-earning years. But building a Financial Plan for your retirement can seem confusing not only are you too close to the project since it involves your own finances, but also it is a complex process which takes into account a number of pieces of your personal financial information like a large puzzle where each piece is your own financial data and requirements. These puzzle pieces include: Your Assets Your Liabilities Your Cash Inflows Your Cash Outflows And most importantly Your Financial goals and dreams Every person needs his or her own financial plan in order to enjoy his or her second life so why live your entire life without properly planning your finances? And we at PersonalFN would like to help you do just that with our own knowledge and expertise poured into this Guide in as simple and easy to understand manner as possible. Read on Warm regards, Team Personal FN

www.PersonalFN.com

Planning your Retirement the smart way

Disclaimer
This Guide is for Private Circulation only and is not for sale. The Guide is only for information purposes and Quantum Information Services Private Limited (PersonalFN) is not providing any professional/investment advice through it. The Guide does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. PersonalFN disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this guide, including without limitation the implied warranties of merchantability and fitness for a particular purpose. PersonalFN and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this guide is at the users own risk. The user must make his own investment decisions based on his specific investment obj ective and financial position and using such independent advisors as he believes necessary. PersonalFN does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this guide are and shall remain with PersonalFN. This guide is for your personal use and you shall not resell, copy, or redistribute this guide, or use it for any commercial purpose. All names and situations depicted in the Guide are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.

www.PersonalFN.com

Planning your Retirement the smart way

Index
Section I: Introduction Need for planning your finances!! Section II: Retirement Planning The First Steps How does financial planning aides retirement planning? The importance of starting early in retirement planning Section III: Case Study Learning by an example Section IV: Role of different asset classes in retirement planning Equity Debt Gold Section V: Insurance a must in retirement planning Section VI: Already retired? Then this is what you have to follow? 15 15 16 18 22 11 07 08 05

www.PersonalFN.com

Planning your Retirement the smart way

I: Introduction
Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing... those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it.
Noel Whittaker

Need for planning your finances Lets make it simple at the very beginning. Why do you need to plan your finances? Financial Planning is a process whereby you will have a roadmap of your personal and financial life, which will help you to meet all your lifes expenses both the expected (household expenses, discretionary expenses, childrens school and college fees, putting money together to bu y a home, EMI payments, saving and investing for your retirement and so on) and the unexpected(medical contingency, creating a safety fund to compensate for loss of a job, and so on). It is easy to say that as long as you are earning, your monthly salary will cover your expenses, and whatever you save you will invest, and on your retirement, hopefully, you will have enough set aside to live the rest of your life maintaining a good lifestyle. But we all know that there are 2 things that go against this thought:

The first is Inflation the one thing that kills the value of your money.
Something that costs you ` 100 today could cost you ` 110 tomorrow. Imagine what it would cost you when you retire after so many years. An example to bring out the point: Monthly Household expense today: ` 30,000 Years to Retirement: 15 Inflation Rate: 8% p.a. Household expense at the time of retirement, to maintain the same lifestyle: a staggering ` 95,165 per month

www.PersonalFN.com

Planning your Retirement the smart way

The second is the improper investment of your money.

This is what can kill the potential future value of your money when it is needed the most.
For example, if you have surplus funds which you will not need for the next 5 year, and you choose to lock them into a 5 year FD to save on tax, consider that you might have been better off investing into the equity markets perhaps by way of a tax saving mutual fund thereby getting the benefit of equity over the long term and also saving on tax. It is the improper investment of your surplus funds that can reduce the power of your money to maximize your wealth. Because of these 2 major factors, it is absolutely essential to have a strong Financial Plan that will give you awareness on where you stand today, and what steps you need to take to achieve your future financial goals. We have also come across a common mis-conception among investors today, wherein they believe that doing your tax saving investments during the year is the same as doing financial planning. Absolutely a myth!! Making tax saving investments is often misconstrued as proper financial planning but financial planning is a lot more than this. Financial Planning involves planning for your life goals such as your own retirement, your childs education and marriage, purchase of an asset such as a house or a car, planning for annual family vacations and any other goals you may want to achieve. When doing financial planning, you perhaps with the help of your planner, will first determine and quantify your goals, and then assess your cash flows to see how to allocate funds towards your goals in a manner that your goals are suitably achieved. Once a plan has been created by taking all your personal financial requirements into account, then you would begin investing towards the goals. The recommendations for investments are the last piece to fit into the financial plan. These recommendations may also include tax saving investments. Thus as you see, tax saving investments are only a small part of overall financial planning.

www.PersonalFN.com

Planning your Retirement the smart way

II: Retirement Planning The First Steps

"Would you tell me which way I ought to go from here?" asked Alice. "That depends a good deal on where you want to get," said the Cat. "I really don't care where I get" replied Alice. "Then it doesn't much matter which way you go," said the Cat. Lewis Carroll, Alice's Adventures in Wonderland

How does financial planning aides retirement planning?

Financial Planning is a comprehensive term which includes retirement planning. To put it simply, first your finances needs to be planned and invested properly so that you can enjoy the benefits during your retired life.

Measuring your Financial Health

Your financial health in present terms will aid you and your financial planner to derive a course of action to achieve a sustainable retired life plan. Thus, when dealing with your personal finances, it is therefore important to start by knowing how financially healthy you are today. Generally most of us get a complete physical health check up once a year, especially after a certain age. This is done so that we know our health issues if any, and can treat any ailments before they cause any damage. Your finances are as important to you as your health, and deserve at least the same amount of care and attention. Here we will cover 3 simple personal finance rules that you can start with, to see where you stand today.

Debt to Income Ratio

Total monthly outgoings on liabilities (EMIs) Debt to Income Ratio = Total monthly income from fixed sources

www.PersonalFN.com

Planning your Retirement the smart way

Ideally, your debt to income ratio should not be higher than 30% as it means you are straining your income. This means you should not be spending more than 30% of your income on paying loans / interest on loans.

Savings to Income Ratio

Total monthly savings Savings to Income Ratio = Total monthly income

Ideally, you should be saving at least 20% of your monthly income to save and invest.

Contingency Reserve
Contingency Reserve = 6 to 24 months of living expenses

You should set aside 6 to 24 months of living expenses as a contingency fund to be used only in times of emergencies. This should include any EMIs that you may have. Once you implement these simple rules, you will find that your finances are more in your control and manageable.

Remember it is better to first invest, and then spend out of what is left, rather than to first spend, and then invest out of what is left.
But the beginning of all this is to start keeping track. Maintain your budget. You can use PersonalFNs free online tool MyPlanner to start maintaining your personal budget. Your budget will help you monitor and track your money flow on a month on month basis. You will be able to see how much of your money is spent on necessities, and how much on luxuries. By the end of one month, you will have greater awareness on where your money is going and you will be able to streamline your expenses to increase your investments, ultimately building more wealth. Go over your cash flows for the month and see how your money is flowing between your four segments. Also, test the 3 financial rules on yourself assess your savings to income ratio, your debt to income ratio (if you have liabilities) and see if you have enough of a contingency reserve set aside.

The importance of starting early in retirement planning

www.PersonalFN.com

Planning your Retirement the smart way

An often-heard excuse for putting off retirement planning is I have enough time to go before I ret ire, so why rush? Unfortunately, most of us fail to realise that postponing is their biggest enemy when it comes to making retirement plans. In fact, starting early and ensuring that you have sufficient time on your side is the key to successful retirement planning.

In fact starting early provides you with a lot of benefits: Greater flexibility Having adequate time grants a degree of flexibility to your retirement plans. It gives you the opportunity to explore various investment options and avenues. For example, among asset classes, equities are known to outperform others like gold, property and bonds over longer time frames. The key here is longer time frames. However, over shorter time periods equities can be the most volatile asset class. Hence if you wish to gainfully utilise the power of equities, making an early start is imperative. Power of compounding The single biggest advantage which can be derived from making an early start is the opportunity to benefit from the power of compounding. Put simply, this is the ability of an asset to generate returns, which are reinvested for generating higher returns. Longer time horizons enhance the compounding benefits. An illustration will help us better understand the same. Mr. Raj and Mr. Jai (both 30 years of age), wish to make investments to build a corpus for their retirement. Mr. Raj starts immediately with annual investments of ` 10,000 earning a return of 8% pa. On the other hand, Mr. Jai postpones and starts investing after 10 years. However to make up for the lost time, he invests twice the amount i.e. ` 20,000 at 8% pa. Both the individuals would like to retire at the age of 60 years, giving Mr. Raj an investment horizon of 30 years, while the same is 20 years for Mr. Jai.
Mr. Raj Amount invested (` per annum) Tenure of investment (years) Returns (% per annum) Maturity amount (`) 10,000 30 8 12,23,459 Mr. Jai 20,000 20 8 9,88,458

At 60 years of age, Mr. Raj has a corpus of ` 12,23,459 as compared to ` 9,88,458 accumulated by Mr. Jai. Despite doubling the investment amount, Mr. Jai fails to match the sum amassed by Mr. Raj. The longer investment tenure (30 years vis--vis 20 years) makes all the difference. The

www.PersonalFN.com

Planning your Retirement the smart way

message is clear give your investments sufficient time to grow and you can gain from the power of compounding.

For those who start late or postpone their investments

Those who delay their retirement-related investments are likely to have a tough time in meeting their defined objectives. Suppose you decide (after taking into account your present income and expenses, the likely increase in both) that on retirement you will need a corpus of ` 25,00,000. We will assume that investments made will yield a return of 12% per annum. Now let us consider 3 scenarios, wherein you are 30 years, 20 years and 10 years away from your retirement.

Case 1 Target amount (`) Tenure (years) Returns (%) Annual investment (`) Monthly investment (`) 25,00,000 30 12 9,249 708

Case 2 25,00,000 20 12 30,979 2,502

Case 3 25,00,000 10 12 1,27,197 10,760

In case 1, the monthly investment amounts to approximately ` 708 to achieve your target amount; however with passage of time, it grows exponentially. As a result if you start investing for retirement as in case 2, 20 years before the due date, ` 2,502 will be the monthly investment amount. Finally in case 3, when you are just 10 years away from your retirement, the monthly investment required will be ` 10,760. Lesser the time at your disposal, the higher the amount has to be set aside for meeting your retirement needs. Not only can the same be hard on the wallet, for some it may not be a feasible option. As a result, the pre-determined investment objective might have to be toned down. Moral of the story Not only does it pay to start early, delaying the same can cost you dear! We have discussed how it helps to start early and how not starting early could prove to be an expensive proposition. But there is also a need to understand why many fail to get started. At times individuals are not able to set aside the requisite amount of money needed for their retirement. They can contribute only a part of it, not all. As a result, they end up postponing their plans. In our view, this is a wrong approach. Instead, the right course of action is to start off with what you have and make up for the deficit at a later stage. On the other hand, if you decide to simply wait for an opportune time, it might be too late by the time you start.

10

www.PersonalFN.com

Planning your Retirement the smart way

Another reason for failing to start is that a significant amount of money is often spent on providing for ones present lifestyle i.e. shopping and entertainment binges, leaving very little for retirement. While the importance of satisfying present needs cannot be denied, it does make sense to take care of your future as well. You should strive to strike a balance between the two. Finally, perhaps, making a retirement plan and putting money aside for the same acts as a reminder of the eventuality retirement. Maybe the thought of growing old and leading a rather sedentary lifestyle brings with it a certain degree of discomfort and discourages some from working towards their retirement plan. However such mindsets need to change. Looking the other way will only worsen the situation. The solution lies in accepting retirement as an eventuality and being adequately prepared for it. And making an early start is your best bet at being prepared!

11

www.PersonalFN.com

Planning your Retirement the smart way

III: Retirement Planning : Scenario Review

Planning is bringing the future into the present so that you can do something about it now Alan Lakein

Before we get on with discussing the scenario, it is important to highlight that retirement planning is A very personalised process that is unique to every individual. An ongoing process because what we are aiming at is not fixed (our standard of living, which we are aiming to secure will change over time) Our aim therefore in discussing this scenario is to understand how you can get started in planning for your retirement. For you to be able to draw up a personalised retirement plan, you will require the services of a financial planner. Let us now get acquainted with the retirement planning process of an individual. Mr. Roy (our scenario review subject) is aged 45 and currently is working with ABC Ltd. as a software developer. He is earning ` 60,000 p.m. and also earns around ` 1,00,000 every year as incremental bonus. Mr. Roy wishes to retire at age 55.

Details of expenditure, income and goals Current house hold expenditure is ` 25,000 per month. ` 75,000 a year for an annual vacation with his family (excluding the above) ` 25,000 a year for medical expenses Maintain the same level of life-style post his retirement. Life expectancy as 85 years (assumed) Children are already educated He is adequately insured and has created a contingency corpus of 12 months of living expenses and is maintaining this corpus in liquid funds and partly as cash in the bank.

12

www.PersonalFN.com

Planning your Retirement the smart way

As he is nearing retirement, Mr. Roy is worried about how much corpus he is going to need and whether or not he will be able to build this corpus in his remaining 10 working years.
Mr. Roys age Retirement Age Life Expectancy Current Monthly Expenditure Annual Expenditure (Vacation) Annual Expenditure (Medical) Inflation (household) Inflation (Vacation, medical) Pre-Retirement Return Post-Retirement Return Corpus Required at retirement 45 years 55 years 85 years

` 25,000
` 75,000 ` 25,000 7% 10% 15% 6% ` 3,40,47,826

So now Mr. Roy knows he needs to achieve a corpus of ` 3.40 crore to maintain his lifestyle in his post retirement period. The next question in Mr. Roys mind is how to achieve this huge corpus. He is expecting to get gratuity of ` 25 lakhs and expects his EPF maturity to be ` 48 lakhs. Over and above this, keeping retirement in mind he has invested ` 12 lakhs in mutual funds (current value) so far and has allotted his ancestral property of ` 50 lakhs (current value) to his retirement goal. He also has ` 35,000 surplus savings per month that can be invested (in mutual funds expected to grow @ 15% p.a.) towards his retirement. Taking into consideration the above information, let us see how much will his total achievable corpus be at retirement?
Gratuity at retirement EPF Maturity Value Future Value of existing Mutual Funds Future Value of Ancestral House (7% p.a. growth) Maturity Value of SIPs TOTAL RETIREMENT CORPUS ` 25,00,000 ` 48,00,000 ` 48,54,669 ` 98,35,757 ` 92,05,636 ` 3,11,96,062

From the above table it is evident that Mr. Roy has a shortfall of approximately ` 28.51 lakhs.

13

www.PersonalFN.com

Planning your Retirement the smart way

Thus, Mr. Roy has 3 options in the above situation: a) To post-pone his retirement by some time i.e. increase his number of earning years b) To reduce his expenditure post retirement c) To save and invest a higher amount today and going forward

By choosing one or all of the above solution options, Mr. Roy will be able to build the retirement corpus that he needs, to live his golden years in financial freedom. The corpus that is built by his retirement can be invested into fixed income products and kept away from any market risk / volatility. It is important to note however, that upon the end of his 85th year, the funds will have been entirely utilized. Hence it is always better to assume a longer life expectancy and plan accordingly rather than run the risk of outliving your wealth and then being dependent.

14

www.PersonalFN.com

Planning your Retirement the smart way

IV: Role of asset classes in Retirement Planning

Mutual funds have historically offered safety and diversification. And they spare you the responsibility of picking individual stocks Ron Chernow As you may have observed in the above scenario review, exposure to different asset classes (having inverse relationship with each other) is imperative in building ones retirement portfolio. The different asset classes have different attributes which help in maintaining the required balance in ones retirement portfolio. Let us now, understand the benefits of the below mentioned asset classes in ones portfolio: Equity Equity as an asset class has the ability to beat inflation and provide alpha returns over longer time horizon. By nature equities are volatile and risky investments. However, if one lacks the expertise and skills of analysing and selecting the right stocks, then he can adopt the indirect route of investments to equities i.e. equity mutual funds. By taking exposure in equities through equity mutual funds, the risk and volatility of this asset class is reduced to a considerable extent. Again, over here you need to select the right mutual funds to benefit in the long run. You should look at not only the quantitative parameters but also qualitative parameters like the fund management style, whether the fund house is driven by strong investment systems and processes etc. Based on your risk appetite, exposure to mid cap funds, large cap funds can be derived at. Thus a prudent approach followed in selecting the right mutual funds for your retirement portfolio may work wonders in generating stellar returns. Generally your exposure to equity mutual funds should be more of large cap funds as they are able to provide stability to the portfolio during economic turmoil. However, exposure to well proven mid cap funds from the stable of fund houses following prudent investment systems and processes may be considered to give that extra push to returns generating ability of the portfolio. Debt Debt as an asset class is known for its ability to provide stability to ones portfolio and also emphasise on generating regular income stream (which is extremely important during your retired life). Again over here the category of debt oriented mutual funds can be of immense help to provide stability or to generate regular income as required in ones portfolio.

15

www.PersonalFN.com

Planning your Retirement the smart way

As you near your retirement age, make sure your exposure to debt oriented mutual funds is increased so as to protect the corpus built up over the years and reducing the risk of the overall portfolio. There are various categories of debt oriented mutual funds like liquid funds, liquid plus funds, income funds, floating rate funds, gilt funds etc. which you can pick and choose for investment based on your investment time horizon. Generally when you are nearing your retirement, you should transfer your corpus to a debt oriented mutual fund from a fund house having a proven track record of strong investment systems and processes. However, please keep in mind that taking into consideration the prevailing market conditions at that time you may have to shift your corpus to any of the debt mutual fund categories as mentioned above. For instance, if the then interest rates are at elevated levels and close to peaking out, you may take exposure to short term income funds or pure long term income funds as longer tenor bond papers look attractive. Longer duration funds (preferably through dynamic bond / flexi-debt funds) can be considered, if one has a longer investment horizon (of say 2 to 3 years). But if you have a short-term time horizon (of less than 3 months) and need to keep the principal intact, then you would be better-off investing in liquid funds. Liquid plus funds (Ultra Short Term Bond Funds) can be considered if you have a 3 to 6 months horizon. However, if you have a medium term investment horizon (of over 6 months) you may allocate your investments to floating rate funds. Gold Gold has been historically considered as an important asset class mainly for three reasons: Hedge against inflation Adds stability to ones investment portfolio Asset Allocation avenue And as an asset class, gold over years has shown a secular uptrend. In 1971, the price of gold was about U.S. dollar 32 an ounce and today (i.e. on April 30, 2011) it is U.S. dollar 1,556 an ounce which indicates that price of gold has gone up by 49 times over the last 40 years. Moreover, even the central banks across the globe take refuge in this classic asset class (considered as a safe haven) to ward off the ill effects of an economic turmoil. Historically gold has enjoyed an inverse relationship with equities and this makes it a strong bet in ones portfolio. Hence taking into account the fundamentals for gold presented above, we strongly believe that gold as an asset class makes a strong case for inclusion in one's retirement portfolio (as it would insure / hedge your portfolio against the various risks it is exposed to).

16

www.PersonalFN.com

Planning your Retirement the smart way

As an investor you have various ways in which you can take exposure to this shinning asset class. Some of them are as below: 1. Physical Gold If you are an hardcore believer of investing in physical gold, the only advantages which it can offer you is touch, feel and see along with the choice of converting the gold coins and bars collected by you into jewellery at some point in time. However, this passion of investing in gold in the physical form has some disadvantages which are as under: High Holding / storage cost Quality / Purity under question at times Sold at a premium by jewellers and banks Discounted Resale Value Attracts Wealth Tax 2. Gold ETFs For gold bugs, investing in Gold Exchange Traded Funds (GETFs) today is a very simple and a lucrative exercise. ETFs are instrument, offered by mutual fund houses and are listed on a stock exchange. They represent ownership in an underlying security, commodity or asset. Hence, now to simply put, a GETF is an instrument that represents an ownership of gold assets. This gold is held on your behalf by an appointed custodian for the ETF. GETFs offer a host of benefits which are as under: Convenience in buying / selling Premium Quality Low holding cost No Wealth Tax 3. World Gold Mining Funds Gold mining funds are feeder funds that invest in offshore funds investing in stocks of gold mining companies. The investments in gold mining fund is linked to both gold price movements and volatility in equity markets, as these funds bet on stocks of gold mining companies. In our opinion the smart way to invest in gold is through Gold ETFs due to the advantages offered by it.

17

www.PersonalFN.com

Planning your Retirement the smart way

V: Insurance a must in retirement planning

"Precaution is better than cure. Edward Coke

What is insurance? Insurance in its purest sense is protection against a financial loss / uncertainty which includes the risk of illness, disability, damage to property, and the most final of them all ones demise. The value of your loved ones life is a very sensitive issue as your loved ones are priceless. But it becomes necessary to evaluate a human life in terms of money, in order to safeguard from problems caused by under-insurance. Human Life Value (HLV) of an earning member in the family could be defined as the amount that the family would require to retain the same standard of living in the absence of the earning member. This would be the maximum amount for which a person can seek insurance protection. The amount of insurance you require can be calculated in a few different ways but a comprehensive method of calculating this is the PersonalFNs HLV method. How to calculate HLV The first step towards calculation of HLV would be to determine the net annual income of the person after deducting the amount spent by him for his personal use. This amount will be the amount that he affords to his family annually. For Example: Mr. Sinha, aged 40 years, earns `15,00,000 per annum and spends `4,50,000 per annum on himself. Hence, he earns a net income of `10,50,000 p.a. for his family. Therefore, as income replacement, his family would require `10,50,000 p.a. for 1 year of life expenses. Each year, with inflation, the familys expenses would proportionately increase, which must also be taken into account. The calculation will also include specific goal related expenditure. Furthermore, assuming Mr. Sinha has a son and a daughter, both of whom would require `10 lakhs for their education i.e. a total of `20 lakhs. In Mr. Sinhas absence, this amount is still required such that the childrens education do not suffer. Hence this goal amount can be added to the finan cial value of Mr. Sinhas life.

18

www.PersonalFN.com

Planning your Retirement the smart way

Once the HLV has been calculated, the next step is to choose the appropriate insurance product to cover your needs. There are a number of insurance products available in the market today from term plans to ULIPs to endowment plans and so on. It is important to assess the available products and select the right insurance for your needs. At Personal FN we recommend opting for pure term plans. Term Plans A term policy is a simple pure life insurance which provides a sum assured in case of the policy holders unfortunate demise. Most people are not in favour of a term policy, as there is only a death benefit. Also, it is believed that since the insurance is available only for a particular term after which there is no cover, it is not a comprehensive policy. But the reality is that term policies are the purest form of insurance available today. They are very cheap compared to other insurance policies. A term plan plays an essential part in your retirement planning. It helps you to focus on the retirement planning exercise without having to worry about the financial condition of your dependants in your absence. The term plan does this by providing for a large sum assured (corpus in the event of death of the policyholder) at a lower cost, which can help take care of finances in the absence of the breadwinner. Ideally, you should buy a term plan for the maximum tenure available. The maximum tenure available as well as the premium charged differs across insurance companies. Individuals would do well to check these aspects before finalising on such plans. Term 20 Years Age Insurance Company LIC Max New York Birla HDFC Bajaj Reliance ICICI ING Vysya Kotak SBI Sum Assured (`) 10 L 4613 NA 4103 3579 3894 3952 3464 3787 2655 3775 25 L 8500 5875 8934 8675 8493 9131 7098 8617 4770 5786 50 L 17000 11000 13071 14196 15746 17762 13093 16868 8603 10761 1 Cr 34000 22000 22832 25237 30250 35024 25082 33736 16269 18765

35

(Source: Company website)

19

www.PersonalFN.com

Planning your Retirement the smart way

The earlier a term plan is bought, the cheaper it turns out to be. Having said that, it is also never too late to buy a term plan.

Endowment Policies These are traditional policies floated by Insurance companies. An endowment policy covers risk for a specified period, at the end of which the sum assured is paid back to the policyholder, along with the bonus accumulated during the term of the policy. The returns on endowment policies are typically very low approximately 3% to 4% per annum and often do not beat inflation. Unit Linked Insurance Plans These are insurance policies with an investment component. In these policies, the policy holder pays premiums (or a single premium) of which part of the money is invested and another part goes towards providing the life insurance cover. ULIPs therefore combine insurance protection with wealth creation opportunities. But then, what should you opt for? It is recommended to always opt for a pure insurance product rather than combining insurance with investments such as what is done by way of market linked insurance policies i.e. ULIPs etc. Also, it is seen that traditional policies such as endowment policies and money back policies provide very poor returns, giving a yield of 3.00% to 3.50% per annum over the entire term. This does not even match inflation and hence it is not recommended to go for these products. Products like ULIPs and the like have hidden charges and high commissions, which leads to an inefficient use of your funds, which could otherwise have been invested in better performing avenues. Until these products become transparent, it is not advisable to opt for them. At PersonalFN, we believe taking a straightforward term policy is the best insurance you can take. It is also advisable to opt for the following policies, in addition to your term policy: Health Insurance (Mediclaim) this is a must have for every family member. It can be taken as an individual policy or as a family floater. This will cover regular hospital expenses in case of any hospitalization. Personal Accident Policy this will cover you from loss of income in case of an accident. This is a common policy for those who are employed as the policy partly covers you from loss of income. Critical Illness policy this will pay out a lump sum upon diagnosis of any critical illness from the defined list of illnesses stipulated. This policy can be opted for by any member of the

20

www.PersonalFN.com

Planning your Retirement the smart way

family it is not meant only for people who are employed, as critical illness might strike anyone, and costs incurred in case of such illnesses can be very high.

It is advisable to opt for insurance because it is a cover from risk and while you might believe that something will not happen to you that is often exactly what your neighbour is thinking. In case of an unfortunate circumstance, insurance can be a financial boon to you or your family members.

21

www.PersonalFN.com

Planning your Retirement the smart way

VI: Already retired? Then this is what you have to follow!

Age is only a number, a cipher for the records. A man can't retire his experience. He must use it. Bernard Baruch

All through this issue of the Money Simplified, we have dealt with issues pertaining to retirement planning. The implicit assumption was that individuals have time on their side and can use the various strategies for planning and conducting their retirement in a better manner. However there is a segment for which this advice might have come a bit too late the retirees. If you are already retired, what you really need is a retirement solution. Lets begin by discussing the uniqueness associated with building a portfolio for retirees. Firstly, the importance of capital preservation gets magnified manifold. The retirement corpus at the investors disposal has to provide for him henceforth. Hence high-risk investment avenues like equities or equity funds should either be excluded or be allocated a very modest portion of the portfolio. Liquidity assumes significant importance. With no alternate options like salary or business income to fall back upon, the portfolio should be structured in such a manner that it grants a high degree of liquidity to the investor. So, now let us discuss the various investment options available to retirees and find out how they measure up. Senior Citizens Savings Scheme (SCSS) As the name suggests, the scheme is a dedicated investment option for senior citizens i.e. individuals above 60 years of age; those above 55 years are also permitted to invest subject to fulfilment of certain conditions. The minimum investment amount is ` 1,000 while the upper limit has been capped at ` 1,500,000. The scheme runs over a 5-Yr period and offers a return of 9.00% p.a. on a quarterly basis making it the most attractive investment option in the peer group. Premature encashment is permitted after completion of 1 year from the deposit date. If the investment is liquidated before expiry of 2 years, an amount equal to 1.50% of the deposit balance amount is deducted. A termination after completion of 2 years attracts a penalty of 1.00% of the balance amount.

22

www.PersonalFN.com

Planning your Retirement the smart way

Post Office Monthly Income Scheme (POMIS) Another popular investment avenue for investors seeking regular income, POMIS is operated from post offices and offers assured monthly income. The minimum investment amount is ` 1,500; the upper limits have been set as ` 4,50,000 and ` 9,00,000 for single and joint accounts respectively. The investment tenure for POMIS is 6 years and investments earn a return of 8.00% p.a. (payable monthly); also a 5.00% bonus is paid on maturity. The norms for premature withdrawal are rather stringent. Premature withdrawals are permitted after 1 year; however 2.00% of the deposit amount will be deducted if the account is closed on or before expiry of 3 years from the opening of such account. Premature closure of account after 3 years from the opening of such account will attract a deduction of 1.00% of the deposit amount. Post Office Time Deposits (POTD) POTD is essentially the fixed deposit variant from the small savings segment. While the minimum investment amount is ` 200 (and in multiples of ` 200 thereafter), there is no upper limit on investments. POTD offers investors a number of options in terms of investment tenures ranging from 1 year to 5 years. Similarly, the returns range from 6.25% to 7.50% on a quarterly compounding basis. Interest payments are made annually. Premature withdrawals can be made after the completion of 6 months and before 1 year; however investors have to bear a loss of interest. Premature withdrawal after 1 year will attract a penalty of 2.00% on the interest fixed at the time of opening the account. Fixed Deposits Retirees can also consider making investments in fixed deposits schemes are offered by Banks, NBFCs and Corporates. Our preference is for fixed deposits with a AAA rating indicating a high degree of safety. Interest payouts are made on quarterly, semi-annual, annual or cumulative basis (based on the offering) throughout the tenure of investment. Also fixed deposits are known to offer a higher interest rate (generally 0.50% more than the regular rate) to senior citizens, thereby making them attractive investment options. It is important to note that all fixed deposits do not offer liquidity or premature withdrawal facility. Albeit terms and conditions set by the issuer governing premature encashment, it is generally permitted only after completion of 3 months from the date of deposit. Also liquidating the investment before completion of its stipulated tenure entails loss of interest. So far the investment options discussed were of the assured return variety. Though they have assured returns but on the flip side, some of them tend to lag when it comes to beat the inflation and earning an inflation-adjusted positive rate of return.

23

www.PersonalFN.com

Planning your Retirement the smart way

The option mentioned below may be considered by a retiree only if he or she is willing to take that extra bit of risk in pursuit of higher returns:

Monthly Income Plans (MIPs) Monthly Income Plans typically invest 15%-25% of their corpus in equities and the balance in debt instruments. Investors can choose between the monthly, quarterly, half-yearly and annual dividend payout options or the growth / cumulative option. However it should be understood that on account of their market-linked nature, MIPs expose the investor to higher levels of risk vis--vis peers like POMIS and POTD. Also the returns are not assured; neither is there certainty in terms of capital preservation. On a positive note, MIPs are equipped to deliver superior returns as compared to its assured return peers. Also it scores on the liquidity front as there is no fixed investment tenure (an exit load may be charged if investments are liquidated within 6 months from the investment date). Finally, dividends received from MIPs are tax-free in the investors hands, although a dividend distribution tax is indirectly borne by the investor which is held back by the fund house before distribution of dividend. The decision to invest in any of the aforementioned schemes and the allocation to each scheme should be a factor of the investors risk profile. Retirees who are not averse to taking on a higher degree of risk can make more allocation to MIPs or even consider adding diversified equity funds to their portfolios. Conversely, those who attach greater importance to capital preservation should invest predominantly in assured return instruments. Likewise, the retirees requirements will also play an important role in the portfolio creation. For example, a retiree who is well off and supported by his family may not need to fend for himself. Instead he might be keen on investing for his grandchildren and other family members. In such a scenario, the investment tenure goes up, as does the opportunity to take on higher risk; equityoriented funds emerge as a feasible option. Finally, dont undermine the importance of a qualified and experienced investment advisor. Powered by his expert advice and prompt service, a good investment advisor can ensure that your postretirement investments become a hassle-free affair.

24

www.PersonalFN.com

Planning your Retirement the smart way

VII: Conclusion
"The value of an idea lies in the using of it. Thomas Edison

So now we have come to the end of the PersonalFN Guide on Retirement Planning. We hope this Guide has been a useful read for you and congratulations once again for taking an interest in improving your personal finances and getting your financial life in order. We are sure that most of you have not taken your own retirement seriously till now because you feel that it a tedious job but actually it is one of the most important part of your life. Please remember; Retirement Planning is an ongoing, lifelong process that takes decades of commitment in order to receive the final pay-off. But once it is achieved it will ensure that you have sufficient income every month to make your day to day expenses. You might be 25 today, so what? You need to plan for retirement at this very moment. This is because you have sufficient number of years to save money for your retirement and it is most likely that you would achieve your retirement goal. And even if your age is around 45 50 and have not thought about retirement planning, you should start it immediately otherwise you might not be able to achieve your retirement goal and hence you might have to work a little bit longer than you would have thought off. So, the key to a successful retirement planning is to start early in order to make the most of your financial life!

If you have any queries, please feel free to write to us at info@personalfn.com or simply contact us.

Warm regards, Team PersonalFN

25

www.PersonalFN.com

Planning your Retirement the smart way

Contact us

Head Office Mumbai

101 Raheja Chambers, Nariman Point, Mumbai - 400 021. Tel: +91-22-6136 1200 Email: info@personalfn.com

26

www.PersonalFN.com