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 

Case Study 27th Dec,12

Haven't Planned Your Taxes Yet?

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It's never too Early to Start Saving

Have you maintained an Emergency Fund?

Mario (35) a manager in a reputed BPO firm had been informed by his office colleague that investment in land was one of the best things to do for earning higher returns. After considering a proposal which came his way, Mario purchased half an acre of agricultural land for sum of 6 lakhs in coastal Maharashtra. For this purpose he utilized his fixed deposits and savings account balance. The shortfall of Rs 2 lakhs was raised from a personal loan. Mario was extremely happy as he felt he had made one of the smartest decisions in his life and created an asset apart from his self occupied property, which also was on loan. A few months later came the news that the company was not doing well and was in the process of closing a few of their processes which included Mario’s. Having worked for only a year in this company, Mario didn’t get anything except 2 months’ salary as notice period and was immediately laid off. Mario started applying for a job but it took him nearly 6 months to get one. During this period Mario found it difficult to manage his home expenses and loan payments. Finally in the 5^th month he sold the land that he had purchased for the same amount and cleared off his personal loan.

Can you avoid getting into such a situation: Job layoffs, sudden illness of self or dependent parents or accidental hospitalisation are events on which we do not have any control? No one can predict the timing or frequency of such events but at least we can be prepared for it. Why does it normally happen that even though we know the monsoon is round the corner, most still purchase the umbrella only after the first showers and after having got wet a couple of times. Getting wet may not be as much depressing as the events mentioned above. A sudden illness, especially if you are not even covered by a medical cover can upset your entire financial life if it turns out to be a major illness or surgery.

How can I be prepared: Firstly one needs to check if the basic insurance’s are in place or not. Evaluate your needs with the help of an expert and cover yourself for untimely death, disability and illness which can be done by purchasing life insurance, Personal accident and mediclaim policies. This is the first level of protection that you need to do. But there could be events which may or may not be covered by the insurance policies that you have bought.  For example, in case of job loss you might not get any unemployment compensation. In case if your parents are senior citizens with pre-existing illnesses, chances are that even they might not be covered by any medical insurance.

Any Thumb rules which we can follow: Ideally if you have a stable job along with a working spouse, try to maintain 3 – 6 months of your monthly expense in liquid form. Liquid form refers to easy availability of cash at any time of day or night. An emergency fund can help you take care of those smaller and bigger sudden expenses such as un- insurable auto repairs, replacing nonfunctional electronic items, non insurable illnesses, etc. It can also come in handy where at times your cashless mediclaim might not get approved and you need to pay upfront cash and claim later. Six months contingency fund is usually suggested for covering extreme situations such as a job loss where it might take that much time for getting a new job and during which you need to still pay your mortgage or insurance payments. In case you have dependent parents either senior citizen or not, but not insurable by any medical coverage, then you need to keep a higher amount.

How should we maintain this emergency fund?

For a contingency fund equal to 3 months of your monthly expense, it is suggested to maintain the same in your savings account which has an ATM card so you have the convenience of withdrawing it any point of time. Nowadays banks provide you a Flexi-Fd facility where deposits above Rs 10000 is automatically converted into fixed deposits and are also liquid, in the sense you can withdraw it using your ATM card and still get FD interest for the period it was maintained. Anything over 3 months can be maintained in a liquid fund offered by mutual fund companies as they offer better returns than savings account. The redeemed money also gets credited the next day into your bank account. Some mutual funds are also offering ATM cards along with the liquid fund schemes which makes it that much more convenient and hassle free.

For those who don’t have enough savings to maintain an emergency fund, it is suggested that you start a recurring deposit to build one. If you are planning to build an emergency fund of say Rs 1 lakh, then look at your surplus that you generate every month and depending on that allocate a part of the surplus to this RD so that you have your emergency fund ready in a few months.

Remember; don’t commit any money to long term investments unless you have made provisions for your emergency fund. This will ensure that you are prepared and provide peace of mind which we all need in today’s uncertain times.