Age is just a number. Being 55 is like completing a solid half-century and looking forward to a spectacular century. It is also that time of your life when you have already fulfilled most of your responsibilities, from providing a secure future for yourself and your loved ones to marry-ing off your kids and most importantly building a strong monetary corpus. Now you can safely hang up your boots and say, "From now on I will live for myself."
As amazing as it may sound, the truth is that to live your life your way and enjoy your sunset years to the fullest, finances should be the least of your worries. There should be zero-dependence on others.
Planning for your old-age should ideally start at the youngest age possible - preferably from the time you get your first pay check. This will help you build a strong corpus by the time you reach 55. But alas, most of us are so engrossed in earning for our day-to-day needs that we lay little or no emphasis on retirement planning. So this article is aimed at all those who have never given a second thought to financial planning until today. It's never too late to start.
The first thing to do before drawing a financial plan is to make a list of three basic things - income, expenses and net worth.
Income: Make a list of the income you earn from all sources namely, salary (if still employed), pension (if retired), income from interest and income from other investment avenues.
Expenses: These include your monthly household expenses, medical expenses, insurance policy premiums, loan repayment EMIs and other miscellaneous expenses.
Net worth: Here you should make a list of all your assets like house, office, vehicles, investment in property, fixed deposits, Public Provident Funds or equity investments, Mutual Fund investments, investment in gold, etc.
A thorough evaluation of all the above three basic things will help you determine where you stand in terms of financial stability for the next 10, 20, 30 years or even more. This will also help you in determining which investment avenue is best suited for your particular plan. Many people live under the false belief that they have enough capital to last them through their lifetime. But in doing this they make a very basic but grave mistake of not taking into account the time factor.
For example, if a liter of milk costs around Rs 36-40 in today's market, 10 years or 20 years down the line, inflation will propel the same carton of milk to maybe Rs 50 or even Rs 60. They calculate their present rate of return on investment but with changing times the rates of return can also change and may even give negative returns on investment. Also with advancements in the healthcare sector the average life expectancy of individuals has gone up. So you need to factor in the additional cost of living for your extended lifespan.
Even though life expectancy has gone up, there is no denying the fact that old age will bring with it a host of ailments and maladies and the cost of hospitalization and medication that follow will burn a hole in your pocket. One serious illness can set you back by almost 10 to 20 years, financially.
To tide over all these entities, a proper financial plan needs to be drawn. This plan may differ from person to person depending on their needs. However, the gist remains the same.
The 3 most important factors to consider here are:
a. Safety
b. Rate of Return
c. Liquidity
To achieve an effective mix of all three in one products is next to impossible. In India, the products on offer generally concentrate on safety or on higher returns. There are pros and cons of both. If you go in for a safe investment avenue (debt instruments), the returns are either very low or there is a lock-in period, which hampers the liquidity of the product. In contrast if the returns are high (equity or equity-linked instruments), safety is at stake.
A lot of emphasis is laid on safety. Hence most retirees tend to park almost all their retirement corpus in fixed income and debt instruments and rightly so since at the ripe age of 55, capital erosion is a complete no-no. Only after you have guaranteed yourself a safe, fixed, regular income should equity come into picture.
But senior citizens should not shy away from equity considering it as a risky investment avenue since studies have shown that in the long run equity tends to give the best return than any other investment class. Equity is your best hedge against inflation.
So the right investment plan should include the best of both worlds. A very basic formula for calculating your debt to equity allocation is to subtract your age from 100 (If you are 55 then 100-55 = 45). Thus 55% of your investment should be in debt and fixed instruments whereas the remaining 45% should be in equity and equity-related products. But things are not always in black or white. Sometimes they are in shades of grey too.
The amount of equity exposure that should be factored in your financial plan depends purely on your financial goals and your risk-taking ability. It is a very personal thing. But a word of caution; if you are new to the stock market, don't get ambitious and buy stocks randomly on tips, it's suicidal. Instead invest your money through Mutual Funds. Let experts handle your money. Note that tax implication of each and every investment class should be given due importance while charting your plan.
In addition to the above investment avenues, there is a new product namely reverse mortgage, which is a relatively new and a novel concept in post-retirement planning. In a conventional mortgage setting, you normally borrow a lumpsum amount from a bank and repay it by paying EMIs. And under reverse mortgage, you mortgage your house (property) to a bank, which pays you a fixed sum regularly for a fixed tenure.
The concept of reverse mortgage was put forth in the Budget 2007-08. Under this scheme, any senior citizen above the age of 60, who owns a house in his or her own name can pledge his property to a bank in return for a guaranteed fixed regular amount for a pre-decided period. This is a boon especially for those who have no source of fixed income and nobody to fall back on financially. The prime requisite for any person to be eligible for reverse mortgage is that he should be the owner of the house and there should be no outstanding mortgage on the property.
Golden Rules Of Post-retirement Investing:
Invest more than 50%-60% or even more in debt-related instruments like Fixed Deposits, Postal Schemes, Debt Funds, etc. Roughly 20% of these should be in liquid funds, which can be easily cashed in times of need.
One must always keep at least 6-12 months' worth of monthly expenses as reserve fund in your savings bank account as contingency.
Invest a part of your portfolio in equity and Mutual Funds to hedge against inflation and give superior returns on your investment.
Diversify your investment. Don't put all your money in one or two investment avenues.
Invest in physical assets such as gold and real estate.
Don't stop or be late in your insurance premiums.
Opt for adequate medical insurance even if the premium is high.
Update your bank passbook on a regular basis so that you have a better understanding of your funds and can check for disparities, if any.
Keep your family members abreast of your investments so that they are not in the dark if anything untoward happens to you.
Make a will and provide for adequate nominations in all your accounts. You don't want your loved ones to run from pillar to post for your money after your demise.
If you follow these simple basic rules, your old age will be more enjoyable and wholesome than even your younger days. Remember that you worked all your life for your money. Now it is time for your money to do all the hard work. So relax and enjoy life.
Source: Nirmal Bang's Beyond Market
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