Wednesday, February 20, 2013

Do you have enough to retire ?

At the age of 53 years, when most people start thinking about planning for retirement, Pankaj Kumar quit his banking job and professional life for good. Over the next one year he indulged in his passion – travel and trekking. Kumar travelled across north India, visiting places, which he had always wanted to, but could not due to work and family responsibilities.

Today at the age of 58, nearly five years after retirement, Pankaj has covered a lot of places and is planning to travel more in the days to come. When asked about how he is able to manage his routine and travel expenses, Pankaj casually mentions that he has planned for his retirement in advance and has created adequate income streams to fund his retirement.

Gopal Rao’s case is exactly the opposite that of Kumar’s. Having retired from private service at the age of 58 years, Rao utilised most of his provident fund corpus for the lavish weddings of his two children. He is now left with only Rs 10 lakh, which he has invested in a bank fixed deposit at 9 per cent interest, which earns him only Rs 7,500 per month. With the present level of inflation hovering at around 9 per cent. it is a challenge for Rao to manage his expenses with this money.

Of the two cases mentioned above, Kumar definitely seems to be better placed. He is living a dignified life, having planned adequately for his retirement expenses. Let us look into the steps he took to retire early.

Start investing early: The moment, Kumar got his first salary at the age of 21 years; he opened a Public Provident Fund (PPF) account and starting investing 10 per cent of his salary in it every month. He knew that if he kept surplus money in his bank account he would spend most of it. So, he saved first and then spent whatever remained for his basic needs and requirements. He initially opted for bank recurring deposits and postal schemes.

PF should be exclusively for your retirement: For the salaried, Provident Fund (PF) is like a blessing in disguise as a fixed amount (usually 12 per cent of your basic) gets deducted from your salary along with an equal contribution from your employer. This contribution increases as and when your basic salary increases. It earns you compounding returns of 8.5 per cent.

Just to give an idea, if the basic salary of an individual at 21 years is Rs 10,000 per month and he is expected to retire at age 58 years with a modest 5 per cent annual increase in his basic salary, he would be able to create a PF corpus of Rs 1.42 crore.

Plan your retirement age in advance: Kumar had his family responsibilities, but since he had planned all of them in advance he was able to focus on each of them. Having clear goals helped him to start allocating funds to his various goals.

Calculating the retirement corpus: Once you have decided to retire at a particular age, the next thing to do is to find out how much your expenses will be at the time of retirement. For this, the present expenses can be considered as the base. After deducting children’s educational expenses and other financial liabilities, the future value should be calculated at an appropriate inflation rate. For example if the basic monthly expenses at age 35 is Rs 25,000, then at the present inflation rate of 8 per cent, the future value of this expense at age 58 will be Rs 1,47,000. Then if one is expected to survive (life expectancy) till age 80 years, assuming that you can earn 9 per cent returns on your retirement funds and the inflation that time to be 7 per cent, you will require a corpus of Rs 3.17 crore.

Investing in equity: Understanding the power of equity over longer period of investment helped Kumar to create wealth over a 20-year period. He started investing in equities and slowly and gradually built a portfolio only of bluechip and large companies. He followed a strategy of identifying the top 20 companies of the Sensex and kept investing a small amount every month irrespective of the market situation.

These investments provided him with an annualised return of around 16 per cent over the 20-year period and helped him retire early. Today, he retains around 25 per cent of his corpus in stocks and enjoys a regular stream of tax-free dividend income, which is an additional source of income. Fixed deposits and PPF provide stability, but are not enough to beat inflation.

Planning activities post retirement: After leading an active life for more than 25 years before retirement, it is difficult to suddenly find yourself without work.

After a few days of retirement, the inactivity and loneliness will begin to haunt those who do not have any activity planned after retirement. One way out would be to develop your hobbies in your younger days or plan activities which can keep you busy such as teaching, part time consultancy, and so on. Not only will these keep you active - mentally and physically, they can also provide you with a source of additional income.

Don’t let your retirement turn into a curse. With a little bit of planning and starting early, you can life a dignified life even after retirement.

Credits for - Business Standard 

Sensex has returned 18% a year in the last decade

A majority of the households are a worried lot these days. Monthly budgets are getting stretched and even after consciously making efforts to avoid any additional expenditure, the outflows are exceeding set targets. For the last few years, retail inflation in India has remained within the 8 to 10 per cent range and is not showing any signs of reducing in the near term. Thus, with shrinking surpluses, saving for long term goals like retirement continues to be a challenge.

Even, today, for most investors, Fixed Deposits (FD) seem to be the most preferred avenue to park the funds for short and medium term. Most of these deposits get continuously renewed for long term goals, thereby, getting exposed to the reinvestment risk. At current rates, fixed deposits are not in a position to beat inflation and, therefore, there is a dire need to look at other avenues. Secondly, the income on FDs is taxable, thereby further reducing post tax returns.

Equity is one asset class which can beat inflation in the long run provided one stays invested. But the volatile nature and irregular returns keep a lot of investors away. But just to give you an indication of the kind of returns that have come in this category, one can consider the Sensex, an index representing 30 large companies across various sectors, which has provided a return of nearly 18 per cent in the last 10 years.

But to begin with, investors need to shed their inhibitions and anxieties about equity and try and understand how it works, rather than live with the pre-conceived notion that equity is very risky and equated with gambling. A few guidelines for beginners can help.

First time investors: For those who are keen to add equity in their long term investment portfolio, it is suggested to consider the mutual funds route and invest in large cap diversified equity funds. These funds invest in a portfolio of stocks of large and bluechip companies, diversified across sectors in order to provide lower risk than direct equity. Always remember to look at the past performance of the fund and compare it with similar funds before investing.

The best method of investing is the SIP or Systematic Investment Plan route where you allocate fixed amounts of money regularly every month. The results will not come in immediately and you will need to stay invested and be patient enough to see good returns. Resolve not to stop investing or withdraw if the going in

the market gets tough or if negativity persists regarding the state of the economy. If you stay invested during such dark times, you will see better returns when the market sentiment improves.

Investing in direct equity: Today, we have a plethora of information available online on the past performance of equity shares of all listed companies. Since the data is enormous, it is suggested to focus initially only on the index stocks for which you can look up to either the Sensex (30 stocks) or Nifty (50 stocks).

Once you have zeroed down on the index, the next step is to find the leaders within the sectors comprising the index. For example, it does not require rocket science to identify, say an SBI or HDFC from the banking and financial sector or an ITC in the FMCG sector.

After you have identified these stocks, start investing a small amount of money initially and gradually increase the allocation as you go along. Please remember that individual stocks carry more risk than a diversified mutual fund, but at the same time can outperform the mutual fund during good times. Stocks also provide dividend income which is tax free for the investor. In fact, some of the large companies in the FMCG and pharma sectors, including many public sector giants like ONGC, dole out huge dividends which act as an additional income.

Equity aids long term wealth creation and is one of the best asset classes which reward the patient investor. The earlier you begin investing, you will have more time to let equity perform and deliver. If you decide late in life to enter into equity, the time factor may not support you since your goal may be very near. Monitor your portfolio on a periodic basis and avoid checking the values on a daily basis as wealth creation is a long term process and nothing will change in a matter of a few days.

So, take an informed decision and consciously try to include equity in your asset allocation to achieve your long term goals.