Whether you are salaried person, employed by a Government or private entity, a professional, a business person or anyone who have indulged in active pursuit of goals, take care not to fall in to the trap of adventure seeking.
a) Do not take an about turn in your career. If you had been an office goer for the last three decades, it would be necessary for the right combination of luck and hard work to become a successful farmer after you retire.
b) Do not take any aggressive stance on your investment portfolio for reasons such as starting late or mid-way losses. Economic environment may not favour your thoughts and you will not have any time left to recover from the losses.
c) Do not get in to the itch of ‘one last time before I retire’ syndrome, especially in relation to risky options in the areas of investments or adventurous activities.
d) Do not under-estimate your life expectancy. Disciplined way of living clubbed with improvement in health sciences would increase your longevity.
e) Do not give away your wealth and assets to your heirs sooner than necessary.
f) Do not ignore taxes and inflation
g) Do not ignore health insurance. You need it most when you retire if you have not created a separate health care management fund.
h) Do not ignore your exercise or yoga routine. Prevention is better than cure.
i) Do not forget to remember that when you retire you do not work for others. You never retire from what you do for yourself and your love ones.
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It used to be the common refrain in the last decade that people wanted to retire early. How early? ‘May be after 45 years’ used to be the common answer. Somehow, such thinking has diminished in the new decade. Reasons could be many. Stagnation of salaries could be one of the reasons for loss of bullishness to retire early. Economic environment could also be a dampner. Whether you wish to retire early or at the legal superannuation age, you need to know and define your transition phase.
So what is transition phase and how long it should be? Transition phase is defined usually as the time period before the actual change happens and the next phase begins, from active regular employment to part time employment or transition to profession or business or complete cessation of activities related to job, such activities constitute the transition phase. The length of transition phase would depend on your approach to retirement planning. It could be just one day as in most of the cases or it could be long drawn.
What is the importance of transition phase and what actually happens in the transition phase?
Transition phase is important in the following ways:
a) You will soak in the reality that your life would alter, may be even drastically, when you retire.
b) You will start developing your hobby or passion in to useful economic activity that can sustain you emotionally and/or financially during your retirement.
c) You will cut down on your activities related to your profession or business, create backup plan and set in motion activities to handover your jobs and responsibilities to your heir-apparent.
d) You will start counting the beans and re-align your investment goals. You will also start establishing passive sources of income.
e) If you are relocating to another place or city or country you will begin the process of acclimatisation.
A financial planner would use the transition phase to re-jig the portfolio which is currently oriented towards growth to a portfolio oriented towards safety and income generation. Usually the financial planner would use a 3-year period to perform transition activities.
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The general connotation of retirement planning actually is “Accumulation and Growth Phase” and other phases are conveniently ignored but not by a professional.
This phase of retirement planning is most exciting for you and host of other solution providers especially product manufacturers whereas you must give equal importance to all the phases of retirement planning.
What makes Accumulation and Growth Phase more exciting than others? Firstly, it is the first in the order. Secondly, it is easy to visualise. Thirdly, it could be the longest phase and comparatively easier to manage than other three phases. For do-it-yourselfers it is a veritable buffet lunch of assorted financial products and solutions. For product manufacturers it is most rewarding phase by the type of products they can manufacture. In actuality, it is the easiest phase to traverse and for a financial planner it may amount to managing the risk-reward expectation of the client unless she enters in to the nexus with the client to make it more complicated than necessary.
Why many fail in this phase? I can list some of the common pitfalls you may come across in this phase:
a) Procrastination and lack of future orientation
b) Mis-understanding your ability to take risk and not giving enough time and effort to understand the activities you need to perform during this phase
c) Over-dependence on products than on solutions
d) Failing to prioritise what is most important – current consumption or future wellbeing?
The accumulation and growth phase of retirement planning can be traversed very easily provided you:
a) start early
b) talk to your financial planner and understand your money-personality and the needs
c) keep the choices simple, easily comprehensible for you and your spouse and most importantly flexible
d) have future orientation
Best wishes for a successful Phase 1 of your retirement planning.
Your retirement planning time horizon can be divided in to four major stages or phases:
a) Accumulation and Growth Phase
b) Transition Phase
c) Consumption phase
d) Transmission or ‘giving away’ phase
One fundamental question you will face is when to start ‘investing’ for your retirement. Logical answer is soon after you receive your first ‘income’ or ‘salary’. Provident fund contribution is a statutory contribution mechanism for organised work force. From your very first salary, you and your employer would start contributing in to this account. For the present, it is a tax free accumulation and growth enabling system. What about unorganised sector of employment? If you belong to this category, or otherwise also, you can open ‘Public Provident Fund’ Account and begin your contribution. This also is a tax free account to help you in the first phase retirement planning. Those of you who wish to take exposure to equities in your primary retirement account, you can look at NPS. Importantaly, before opening the account, make it a point to understand clearly how the account works and its limitations.
When you should start contributing additional amount for retirement planning? Well, the answer again is immediate, generally. There would be certain situation in your life and career when you will be unable to do this. If you want to pursue higher education or if you are a business person or a professional starting your own practice, you will be cash strapped and would be unable to commit additional resources. Work with your financial planner to chalk out an action plan to fund your retirement account optimally.
Congratulations to you upon getting in to your first (stable) job and being on the very first day of your job. This is good news for you and your family. Along with the good news, hope you also know that the countdown for your retirement has already started this very day! Yes. It is true that the countdown for your retirement has already begun. If you are now aged 25 years, and are likely to retire after 58 years, you are left with only 12410 days for your retirement, more or less. Looks like too many days are left. Yeah, kind of. But tomorrow you will be left with one more day less and so on. It is as simple as that.
Now, let us come to the brass tacks. I am not writing this blog to be your countdown clock. I am writing this to warn you that each day’s procrastination is going to cost you. Cost me what? Friend, it is going to cost you more. More what? More money dear. Didn’t get it? Let me explain. On the first day of your job, at age 25, you need to save Rs.473/- in any instrument that can give you annual return of 10%, if you want to have Rs.5 Crores when you retire. Yeah, you heard me right – just Rs.473/- per day. No big deal? Then go and do it. Let me also warn you; if you procrastinate by 10 years, the asking rate goes up by a whopping 189% to Rs.1367/- per day. If you procrastinate by another 10 years, and start thinking of funding your retirement at age 45, your asking rate goes up by another whopping 228% to Rs.4484/- per day.
What, you don’t want to think of retirement now? Not a good idea, because clock is ticking tick-tock-retire and you can neither change your date of birth nor stop the clock ticking you see. So why can’t you start saving from the very first day of your job and keep it simple.
Your Financial Planner
Communication_10022011 A message to the investors, especially those who invest in equities and equity mutual funds
Article published in Moneymantra Magazine (1-15 Jan 2011) under “Investment Clinic” column.
There is India Growth Story playing out in front of us. Indian economy is a trillion dollar economy and world leaders are visiting India one after the other, not because we are an old civilization with rich culture and history, but because we are re writing the history through the stellar performance of our economy. In absolute terms, investing in Indian assets, especially the stock market, is rewarding the investors handsomely. Had you invested Rs.1,00,000/- in Nifty index on 13/11/2009, your investment would have grown by 21.52% to become Rs.1,21,523/- on 12/11/2010.
The question is has the common investor benefited from the growth? Does he have plans to do so in the future? The answer appears to be in the negative. Common investor is not benefiting simply because he is not participating. Just the other day, UTI’s one of the longest running schemes, UTI Master Share completed 24 years of existence. Publicly available data indicates that the fund has given the investors 20.75% CAGR. This means that had the investor invested Rs.1 Lakh in the scheme on 19/09/1986, he will be sitting on a corpus of nearly Rs.95 Lakhs on 12/11/2010.
Though there are enough such opportunities and examples, the problem appears to be,
a) Lack of participation
b) Not sticking to the investment plan for sufficiently long period
c) Wrongly timing the entry (usually when the stock market nears all time high)
d) Wrongly timing the exit (usually when the market tanks)
It would be very pertinent to remind the common investor (also called the retail investor) one of the 16 rules of investment success by Sir John Templeton given in the year 1993: Do not be fearful or negative too often!
May I add here that greed and fear should never be driving one’s investment decisions?
The moment we join employment force, be it on hire or self employment, the retirement clock starts ticking. We are certain that we retire from employment after several years. Also, those of us who are employed know the year in which we retire by default. Some may choose to retire early and some may be willing to accept extension of retirement age through contracts. This implies that we have ample time to plan for this important event in our life.
While it is important to know how to plan for retirement, it’s equally important to understand why to plan for retirement.
Once up on a time, Government job was much sought after for retirement benefits it entailed. How times have changed! Under the current dispensation, a government employee has to contribute her money for retirement fund, similar to a private sector employee. Job related social security benefits like provident fund, family pension and gratuity will never be able to fund substantially the retirement corpus.
Modern health care and increased financial resources have contributed to increase our longevity. We not only live longer than any time in our history and lead an active life too – so much so that our retirement life would be longer than our period of employment. So we have to fund a longer retirement period through shorter earning period!
Then there are unforeseen medical and long term care expenses. Old age typically brings medical problems and increased healthcare expenses. We may also would like to pass on inheritance to our children. Without a well planned retirement corpus, we may be forced to sell off the assets to generate the required cash; even worse we may become financial burden to our children during old age. Many families have adopted single child policy and this makes us even more vulnerable during old age.
Last but not least, inflation has a killer effect on our standard of living. If not taken in to account while planning retirement needs, inflation will punch holes to our best plans.
Who does not want retire comfortably? But we need to find out what is “comfortable retirement”?
The goal of Retirement Planning is to allocate the financial resources available so that we can plan for a financially secure retirement.
After understanding ‘why’ of retirement planning, let us look at ‘how’ of it. When we start planning our retirement, we have to answer the following questions:
Ø How Much Will I Need?
Ø Where Will My Money Come From?
Ø How To Investment For Building A Nest Egg?
Ø What Are The Tax Implications And Effect Of Compounding
Ø What’s Importance Of Asset Allocation And Diversification
Ø How To Review And Perform Course Correction
A Certified Financial Planner is specially trained to look in to our financial future and plan for such eventualities. He has the wherewithal to peek in to the likely future based on our risk appetite, time horizon, existing asset base and such several variables.