START PLANING FOR YOUR RETIREMENT--USEFUL MESSAGE TO PLAN YOUR FUTURE

It's never too late to start planning for your retirement

Retirement planning was the last thing on Debanjan Mukherjee’s mind when he tied the nuptial knot with Namita eight years back. With both their career going great guns, the IT couple left for the US on a two-year foreign deputation after marriage. Earnings were good but Mr Mukherjee’s extravagant habits meant the couple’s savings never took off.

Though the couple did buy a house in Mumbai, on their return they decided to get rid of it as they felt it wasn’t big enough to accommodate their lifestyle.

So, a new house at a higher installment was purchased. During the dream run, for them, theories like power of compounding looked absurd and contrived. This continued till the day his wife Namita broke the news of her pregnancy four years back. Sonography reports revealed that his wife was expecting not one but three kids.

This multiplied Mr Mukherjee’s joy arithmetically but concerns too grew geometrically. Today with all the three kids roughly three years old, Mrs Mukherjee has quit her job and Mr Mukherjee remains the sole earner in the family with four dependents.

Though the 38-year-old IT professional has managed to come out of the volatility in the global economy with his job intact, he is now bracing himself for his first major financial expense—getting the kids enrolled in a decent school. Mr Mukherjee’s case is not one-off. Financial planners say many Indians in their middle age are less prepared to finance their golden years than ever before.

There is a rising trend among young people to withdraw money from their provident fund to buy their favourite sports car and at other times to fund their dream of a foreign education. The realisation of under-preparedness for retirement often kicks in when people reach the wrong side of 30s and kids start to grow up. “It (retirement planning) is very important especially in India where there is an absence of a social security programme,” says Aditya Gadge, a certified financial planner and marketing manager at Financial Planning Standards Board India.

According to him, despite losing out on easy runs in the power play phase, if you are a person in your late 30’s, retirement planning can still be done if the middle overs are played sensibly. As such, there are four ways to tackle this gap. First, you can put money in more aggressive financial instruments either directly or through portfolio management services.

But keep in mind returns can be volatile. Then, you can always contribute more towards your provident fund account from your salary or put money in a public provident fund account, which will result in forced savings. Third, you can revise your twilight years’ plans and quit later to make up for the lost reserve.

Fourth and the last, you can rework your retirement plan and increase allocation by either increasing the income streams or reducing consumption. “In Mr Mukherjee’s case, however, he now needs to keep his asset allocation moderate and a higher contingency reserve equivalent to at least two years of his expenses,” says Mr Gadge.

As far as ideal allocation is concerned, financial planners say the rule of thumb—100 minus age—should define the share of investment in equities or related instruments. The rest must be parked in safer products like government bonds, gold and others. “The allocation should primarily target to secure a steady flow of income on yearly basis,” says Divya Baweja, partner—tax & regulatory services at Grant Thornton India.

She feels a person in this age bracket can afford to be aggressive, if professionally standing is sound and risks are properly covered.

When it comes to self-assessment of yearly expenditure at retirement, financial planners advise it should approximately be no less than 6.5 times your current yearly expenditure. This is based on an assumption that your current age is in late 30s, retirement age is 60 and real inflation 8%.

“Remember that a loaf of bread that costs Rs 20 today would cost almost Rs 130 when you retire!” says Shikha Hora Kamdar, director, products & advisory at Religare Macquarie Private Wealth.

On whether it’s a better idea to contribute more to the provident fund or a PPF at such an age, the financial pundits all think alike. They feel with no cost to entry, maintenance or exit on this product, it’s certainly a better option compared to a debt fund or fixed deposit.

“PPF is one product which all investors up to age 50 should definitely invest in. For one, it scores high on safety since your principal amount invested carries the government backing. Two, it also qualifies for tax breaks under Section 80C of the Income Tax Act,” says Mr Gadge of FPSB India.

This aside, even the interest earned—8% compounded annually—is free from income tax, making it the debt-based product on a tax-adjusted return basis. Is you put money in a similar product, it will have to earn 11.5% at the 30.9% tax rate to be equal to the return that the PPF offers