THE world is not what it used to be. Gone are the days when you could get a plate of idlis for one rupee or the days that you could walk on the roads without fear of being run over or mugged. Or when the only channel you could watch was Doordarshan. And yes gone are the days when you could expect your children to take care of you when you grow old. Nuclear families are in and so are longer life spans. And with inflation and escalating medical costs - you're looking at serious money for a comfortable retirement.
Some random fixed deposits or stock options do not a corpus make. So are you really doing justice to your post-retirement corpus?
The list of what TO DO is too long, so we spoke to experts, asking them what NOT TO DO when you are planning for retirement, and all the following is from stuff that they had to say.
DO NOT put all your money in fixed instruments:
Kartik Jhaveri, director, Trancend Consuting (India) Pvt Ltd. says, "At first sight, it seems the most logical thing to do. After all, the safety of your hard-earned money is at stake, and the government is giving you a comfortable rate of interest. But consider this: the money you keep does not match inflation."
For example, historically average inflation has been in the range of 5-6%. Even if bank deposit interest rates are about 6.5%, you actually end up losing money. Tax plays a big role too here. The interest herein is not going to be tax-free, so your effective return will be less than 6.5%.
As for corporate bonds, investment advisor Gautam Narain has a word of caution. "HDFC bonds used to give in returns of 16% at a time, now it is down to 6 to7%. Unless the company has a AAA rating, investment in company bonds will be asking for trouble".
DO NOT lock in all too much money for too long:
The problem with fixed income instruments is the lock-in period, Narain says. While planning for that post-retirement nest egg, remember that you need both flexibility and liquidity for your savings. Accordingly, it is not at all a good idea to put all the money in a fixed instrument like corporate or company bonds or long term bank deposits, says Jhaveri. The biggest problem with this would be that the money can't be witdrawn in the middle of the term. This is added to a reinvestment risk. Mutual funds are a good idea, but that should be preceded by some careful number crunching.
Mutual fund investments are subject to market risks. Also, there is little guarantee that a fund which has a consistent track record of performing, may not underperform in the coming years. The expense ratio for the fund also needs to be calculated.
DO NOT invest and forget, you need to rebalance:
There are two things you need to figure out while planning for retirement, feels Jhaveri. After retirement, you need to withdraw a certain amount of money, say, every month, for your expenses. This withdrawal amount will deplete your corpus. And secondly, you would need money for emergency or unplanned expenses. This can only be achieved by rebalancing your portfolio from time to time. So don't make investments and bury the papers. Monitor them from time to time.
The trick, Jhaveri says, is to devise a professionally counselled and well-managed asset allocation portfolio, in which the return from investment of the portion of corpus will compensate for the withdrawal amount. Typically, for a 25 to 45-year age band, the accent should be on equity investment.
The amount to be invested in equity should necessarily be determined by the risk appetite of the individual.
Typically, for a post-45 professional, the most immediate need is payoff of debt. This is the time to move more of the investments to debt. Besides, in the 45 to 60-year age band, income level is typically high. By the time you are 55, you should be clear of debt.
DO NOT forget to own your own mediclaim:
"Your personal health is your personal concern, do not leave it to the company!" says Narain. Even if the company is taking care of all post-retirement medical benefits through medicare or mediclaim, you need to meet the expenses up-front first. That would require initial investment, and in case of a complex operation and convalescence period, the bill may run into lakhs. And you need to pay that out before you get out of the hospital and face the company with the reimbursement form.
Benchmarking your company's health benefits against a mediclaim scheme in the market is imperative, experts agree. In most companies, healthcare benefits exclude many diseases, and different kinds of post-hospitalisation care. This is not the case with mediclaim policies, which cover hospitalisation and convalescence cover. Company benefits could also exclude certain kinds of cover for dependents, as well as the ceiling for the cost to be covered by the company.
You should also check carefully as to what happens to dependent covers once in your absence. If there are holes in the cover, you need to supplement it with healthcare policies available in the market. You may not get individual mediclaim once you retire. Do not wait for retirement to buy your individual mediclaim.
DO NOT use your savings as a source of ready cash:
Many of us do cling to life insurance and bank fixed deposits and savings accounts as a way of saving up on monthly terms. Unfortunately, due to the unregulated nature of bank accounts, it is easy to withdraw money from there to meet small fancies like buying that sofa, or the discman.
It is equally tempting to withdraw from your provident fund money to meet credit that might have built up through dalliances on your part.
DO NOT take all your PF and gratuity as ready money while switching jobs:
"In today's world of changing jobs, a PF-cum-gratuity cheque from your old employer is a one-time bonanza. Enjoy it, as in treat your wife to dinner! But afterwards, consult a professional and invest it for the long term. Taxation and risk are important," Narain says.
It is tempting to cash your stint at your last job, since staying for about say, five years, will give you quite a neat bit of savings. Employers and employees are to make mandatory equal contributions between 20% to 24% of basic salary towards Employee's provident fund benefits. Therefore, if the monthly cost to company is Rs 20,000 for which the basic will be around Rs 8,000, the total amount released by the company at the end of five years could be close to Rs 115,200 exclusive of interest at 8.5%.
That is quite a neat sum to blow away on all that fancy gadgetry. The obvious mistake you are making here, is that the money is your own hard-earned savings for the past five years, on which there is also an interest paid to you.
Well, if the above sounds like it requires a lot of discipline then you're right, it does. But remember, your well-being and lifestyle depends on creation of wealth. After all, if you've lived your life king size, surely you don't want to retire a pauper. The fall from BMW's to bullock carts is harder than you think!
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