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

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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 objective 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.

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Index
Section I: Introduction
Need for planning your finances!!

05

Section II: Retirement Planning - The First Steps

How does financial planning aides retirement planning?

07

The importance of starting early in retirement planning

08

Section III: Case Study

Learning by an example

11

Section IV: Role of different asset classes in retirement planning

Equity

15

Debt

15

Gold

16

Section V: Insurance a must in retirement planning

18

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

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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 buy 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 Rs 100 today could cost you Rs 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: Rs 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

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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.

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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

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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

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An often-heard excuse for putting off retirement planning is I have enough time to go before I retire,
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 Rs 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. Rs 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.

Amount invested (Rs per annum)

Tenure of investment (years)
Returns (% per annum)
Maturity amount (Rs)

Mr. Raj

Mr. Jai

10,000

20,000

30

20

12,23,459

9,88,458

At 60 years of age, Mr. Raj has a corpus of Rs 12,23,459 as compared to Rs 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

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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 Rs 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

Case 2

Case 3

25,00,000

25,00,000

25,00,000

Tenure (years)

30

20

10

Returns (%)

12

12

12

9,249

30,979

1,27,197

708

2,502

10,760

Target amount (Rs)

Annual investment (Rs)

Monthly investment (Rs)

In case 1, the monthly investment amounts to approximately Rs 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, Rs 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 Rs 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.

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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!

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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 Rs 60,000 p.m. and also earns around Rs 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 Rs 25,000 per month.
Rs 75,000 a year for an annual vacation with his family (excluding the above)
Rs 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.

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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

45 years

Retirement Age

55 years

Life Expectancy

85 years

Current Monthly Expenditure

Rs 25,000

Annual Expenditure (Vacation)

Rs 75,000

Annual Expenditure (Medical)

Rs 25,000

Inflation (household)

7%

Inflation (Vacation, medical)

10%

Pre-Retirement Return

15%

Post-Retirement Return

6%

Corpus Required at retirement

Rs 3,40,47,826

So now Mr. Roy knows he needs to achieve a corpus of Rs 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 Rs 25 lakhs and expects his EPF maturity to be Rs 48 lakhs. Over and
above this, keeping retirement in mind he has invested Rs 12 lakhs in mutual funds (current value) so
far and has allotted his ancestral property of Rs 50 lakhs (current value) to his retirement goal. He also
has Rs 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

Rs 25,00,000

EPF Maturity Value

Rs 48,00,000

Future Value of existing Mutual Funds

Rs 48,54,669

Future Value of Ancestral House (7% p.a. growth)

Rs 98,35,757

Maturity Value of SIPs

Rs 92,05,636

TOTAL RETIREMENT CORPUS

Rs 3,11,96,062

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

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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.

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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.

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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).

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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.

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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 Rs 15,00,000 per annum and spends Rs 4,50,000 per annum on
himself. Hence, he earns a net income of Rs 10,50,000 p.a. for his family. Therefore, as income
replacement, his family would require Rs 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 Rs 10 lakhs
for their education i.e. a total of Rs 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 financial
value of Mr. Sinhas life.

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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 PersonalFN - 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
Sum Assured (Rs)

Age

Insurance
Company

10 L

25 L

50 L

1 Cr

35

LIC
Max New York
Birla
HDFC
Bajaj
Reliance
ICICI
ING Vysya
Kotak
SBI

4613
NA
4103
3579
3894
3952
3464
3787
2655
3775

8500
5875
8934
8675
8493
9131
7098
8617
4770
5786

17000
11000
13071
14196
15746
17762
13093
16868
8603
10761

34000
22000
22832
25237
30250
35024
25082
33736
16269
18765

(Source: Company website)

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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

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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.

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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 Rs 1,000 while the upper limit has been
capped at Rs 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

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amount is deducted. A termination after completion of 2 years attracts a penalty of 1.00% of the
balance amount.

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 Rs 1,500; the
upper limits have been set as Rs 4,50,000 and Rs 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 Rs 200 (and in multiples of Rs 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.

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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.

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.

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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

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Contact us

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

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