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RETIREMENT PLANNING

How to make your retirement kitty last


Your retirement nest egg has to go a long distance as high inflation could shrink your buying power. Now save a lot more

contribute to the retirement corpus for 35 years for a target amount of ~2.5 crore, s/he needs to contribute just ~6,500 a month Saving for the twilight years Those in their twenties and early thirties should put savings into equity or equity funds as these assets have sound potential for long-term returns. For instance, people in this age group can have as much as 75 per cent in equity assets. Besides, they could invest in PPF. If employed and with an EPF, so much the better. They should not withdraw it when they change jobs. They should instead transfer the amount to the new account. The other sound investment option would be the National Pension Scheme. For those between 35-50 years, equity assets should be between 55 per cent and 70 per cent, depending on the number of years to retirement. They could also contribute to PPF, NPS and long-term debt funds. Those above 50 years are nearing retirement. Their asset allocation should be rebalanced to between 40 per cent and 50 per cent in equity assets. They should now have substantial assets in debt instruments of all types. They should have good amounts in PPF, an EPF if they are employed, FDs, debt funds, NCDs, and so on. An income during retirement Nearer retirement, their corpus should have about 40 per cent in equity. Also, nearer retirement one should set up avenues for regular (monthly, quarterly, half-yearly) cash-flows. Depending on which tax slab one falls into, investments need to be structured. For instance, the Senior Citizens Savings Scheme would be good for someone who is not going to pay tax. For someone in the 30 per cent tax bracket, getting a little more than 6 per cent after tax is not very exciting. Debt funds could work well for those in the higher tax brackets. One could invest in growth and set up systematic withdrawal plans for the amounts required looking at sustainability based on corpus size and returns of the debt fund. This could be a wise strategy as the effective tax on debt funds could amount to just 5-6 per cent due to capital-gains tax treatment after a year. Depending on the tax slab one is in, one could also look at the desirability of setting up an immediate annuity for a part of the corpus. This would ensure sustained income, though that would be taxable. This is however expected to change in future. Taxfree bonds also offer annual income on a sustained basis for 10 to 20 years and could be a good income planning tool. Retirement is a goal which needs to be addressed on priority. One must take this seriously and start saving for a comfortable retirement.
The author is founder, Ladder7 Financial Advisors

SAIL THROUGH THE TWILIGHT YEARS


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SURESH SADAGOPAN e have all seen brochures of pension plans. Of old couples laughing and playing in the park with their grandchildren. Of elderly couples hand in hand strolling on the beach. Pension plans are marketed in that manner. Most people fear not having enough money in their old age and of having to depend on their children. Today, no one wants to be in such a situation. Thats why the advertisement Sar uthake jio was such a hit. It spoke to the innate desire of everyone for independence, selfreliance and respect. But, besides what the advertising was attempting, there are several other means of accumulating a retirement corpus than random pension plans. Understanding the importance of retirement funding: Most people do not give retirement the importance it deserves. In fact, it is not a priority in many cases till they are in their mid-forties. Today, the retirement corpus required is likely to be quite large. Inflation in the past four years has been alarming. The latest (November 2013) Consumer Price Index (CPI) was more than 11 per cent. The effect of inflation is pervasive and overwhelming, sapping spending power.

The figures are daunting. Assuming that one spends ~20,000 a month now, expenses on retirement in about 20 years are likely to be more than ~77,300, assuming 7 per cent inflation. Normally, expenses in retirement shrink. Assuming 25 per cent lower expenses during retirement, they would still amount to ~58,000 in the first month after retiring. Assuming 7 per cent inflation throughout and that one is able to generate a real return of 1 per cent over inflation in retirement, the corpus required would be ~1.5 crore (further assuming survival for 25 years after retiring). Remember, this corpus would be completely exhausted in those 25 years, with nothing left. For other tenures and expense levels, refer to the table. This shows that the amounts involved are large and one needs to save for them for a long, long time. If not, the amount to be saved at the end would be immense. For instance, for a corpus of ~2.5 crore, one needs to save more than ~60,000 a month over 15 years. If one has 30 years for such saving, the amount to be saved each month becomes a far more manageable ~11,000. Hence, starting early to save for retirement is imperative if one wishes to pace it properly and not be overwhelmed in later years. First principles First, retirement funding is an

Expenses will rise sharply in the future years if inflation stays at elevated levels making it difficult to make both ends meet Individuals who have accumulated a smaller retirement corpus could see their kitties shrink faster than anticipated You have to save more in higher yielding assets such as equities, and real estate so that your kitty grows adequately large Ensure that you switch to income generating assets in a staggered manner to keep pace with inflation and expenses

important goal, not to be compromised. Since retirement is a long way off in most cases, the seriousness of disciplined funding for retirement is not realised. Normally, retirement funding is subservient to other goals such as childrens education, their marriages, vacations and such. Second, some such goals can be funded through loans. For instance, education can be funded through a loan, which can be paid back by the student, instead of utilising a part of the retirement kitty. Retirement cannot be funded by any other means except savings. Third, regular funding for retirement starts much later in life, say when a person is in his/her forties. As seen earlier, the longer the tenure of contribution, the lower the amount required. For instance, if a person is going to

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