Retirement Planning Series - Why Plan for Retirement?

Before we even begin discussing how to plan for a successful retirement, we need to understand why we need to plan our retirement in the first place. This may seem like a trivial question, but you might be surprised to learn that the key components of retirement planning run contrary to popular belief about the best way to save for the future.

The following are some key reasons as to why you need to plan for Retirement.

Note: All the details below are with respect to India unless stated otherwise.

Lack of Schemes Social Security

This is probably the most important reason. India is one of the fastest growing/developing nations but we still do not have a strong scheme that can be compared to the Social Security System in the United States.

Trivia:
If we had such a scheme, do you think thousands of old aged people languish in old-age homes and in orphanages without proper food or shelter or medical facilities?

Unfortunately, we can’t blame our government because they do not have the money or the means to provide retirement income to everyone. If you ask me why cant they, then ask the same question to people around you when you see them not paying taxes. In the United States, Social Security is available to everyone who paid their taxes promptly and paid their Social Security contribution on a timely basis. Do people around us do so? When people don't pay the government what is due (in terms of taxes) we can’t expect the government to pay us back when we are old. Isn’t it?

Coming back to topic, at the end of the day, we are forced to save up money for our own future and unless we save money for our retirement, we are going to find it extremely difficult to survive post our official retirement.

Unforeseen Medical Expenses

As we get older, our medical requirements become more significant. A man in his 60’s will have far more medical expenditure than someone in his 20’s or even 30’s. so, when we cross that age of 60 and need money for our medical expenses, where will we go? We would need a retirement corpus that we can dig into at such times.

Trivia:
If you are someone who says, India is a land of culture where parents are treated with utmost respect and our children will take care of us, go back to the previous paragraph and read the trivia. Do you think we will have thousands of old aged people suffering in orphanages and old-age homes if this was the case? They are suffering without proper medical care because they don't have the resources for it. We shouldn't be in such a state. Or do you want to be in such a state?

Old age typically brings medical problems and increased healthcare expenses. Without your own nest egg, living out your golden years in comfort while also covering your medical expenses may turn out to be a burden too large to bear - especially if your health (or that of your loved ones) starts to deteriorate.

However, to prevent any unforeseen illness from wiping out your retirement savings, you may want to consider obtaining medical insurance, to finance any health care needs that may arise.

Financial Security of our Children & Grand Children

Moving on to a more positive angle, let's consider your family and loved ones for a moment. Part of your retirement savings may help contribute to your children or grandchildren's lives, be it through financing their education, passing on a portion of your nest egg or simply keeping sentimental assets, such as land or real estate, within the family.

Without a well-planned retirement nest egg, you may be forced to liquidate your assets in order to cover your expenses during your retirement years. This could prevent you from leaving a financial legacy for your loved ones, or worse, cause you to become a financial burden on your family in your old age.

Wouldn't you want to fund your grandsons dream to study his Masters degree in the United States? How proud would you feel if you can do it?

Flexibility & Peace of Mind

As we know, life tends to throw unexpected bouncers every now and then. Unforeseen illnesses, the financial needs of your dependents are but a few of the factors at play.

Regardless of the challenges you may face post retirement, a sizeable retirement corpus could be just what the doctor ordered for a peaceful life post retirement!!!

Sneak Peak: The Next article in the Retirement Planning Series is going to be about how much money would you actually need to retire...

Happy Retirement Planning!!!

The Art of Financial Planning

In the previous article "Plan for a Better Future" we saw the importance of financial planning. In this article we are going to dig deep into step 3 which is “Design a Plan” to help you all formulate a plan that would help you achieve your financial goals.

Lets get started!!!

Things to consider while formulating a plan

Some of the things you need to consider while designing or rather formulating a financial plan are:
a. Liquidity – How liquid is the investment? Can we get money when we want?
b. Rate of Returns – How good is the investment? How much money would I earn with this investment?
c. Risk Involved – How risky is this investment? Will I get all my money back or will I suffer losses?

All the 3 above mentioned points are equally important. An investment that does not give good rate of returns to beat the inflation rate is bad and so is an investment that is too risky which may result in you losing all your money and so too is an investment that is illiquid and you cant sell it when you want the money. So we need to keep in mind all the above aspects when we plan for the future.

Asset Allocation:

Asset Allocation is very very important when it comes to financial plans. An old saying goes “Never put all your eggs in the same basket” and this is 100% true for financial investments too. For ex: when the stock market crashed a couple of years back, everyone who had investments in the market suffered losses (unfortunately I did too). Luckily some of us did not put all our money in the stock market and had some exposure to other investments like gold or bank deposits which helped us offset our losses. So it is extremely important that you have a balance asset allocation.

You can take a look at some of my articles on investment portfolios to get a good idea of the different types of them using the links below:

What is an Investment Portfolio?

Conservative Portfolio

Aggressive Portfolio

Balanced Portfolio

You can choose any of the 3 types depending on your risk appetite.

Choose your Asset Class based on your goals:

Choosing your asset class must be dependent on the goal you intend on achieving with the investment. For ex: Stock markets are very good in the long run as an investment but they are pretty risky and you may end up suffering huge losses if the market turns volatile in the short term. So if you are planning to achieve your goal of buying a car next year by investing in the stock market, you may end up with losses and not be able to fulfill your goal of buying the car.

The preferable assets classes depending on your investment/goal horizon are:

1. Short Term (< 1 year) – Stick to fixed income instruments like bank deposits and liquid cash 2. Medium Term (1 – 3 years) – Have a healthy exposure to fixed income instruments and have little exposure to stock markets 3. Long Term (> 3 year) – Have a good exposure to stock markets with a decent exposure to fixed income instruments.

Planning how much you can Invest every month:

Planning how much you can spare to invest every month is an important aspect of the financial planning life-cycle. Every month we have fixed expenses like groceries, house-rent or home loan EMI, childrens school fees, petrol expenses for car/bike etc. So, in order to arrive at the amount you can invest every month, you need to do the following:

a. Total your Earnings – Include your income (and your spouse’s income if they are employed) and all other earnings like rental income, bank interest etc
b. Assess your monthly expenses – Include all fixed monthly expenses like rent, electricity bill, telephone bill, petrol expenses, school fees etc
c. Subtract monthly expenses from earnings
d. Subtract any extra expenses – for ex: scheduled car maintenance/service, trips to the doctor, holiday/festival related purchases etc
e. Keep a cushion – Always keep a fixed sum (say 5% or 10% of your monthly salary) as liquid cash in a bank account to meet emergency expenses. This is to ensure that, you don’t eat out of your investments that are designed to achieve a long term financial goal to meet your current cash requirements
f. Subtract cushion from the amount remaining after subtracting monthly & extra expenses from your earnings

This is the amount you can invest every month for your financial future.

Time for Action:

Once you know how much you can save every month, you can then decide on the instruments you wish to invest this amount and then voila!!! You are on your way to a good financial future.

Happy Investing!!!

Plan for a Better Future

Planning for the future is something that we have learnt ever since we were kids. The story of the hard working Ant and the lazy Grasshopper was taught to us when we were in school. We were told that the Ant worked hard and saved food to help itself during the winter while the grasshopper enjoyed during summer and starved during winter.

I guess you are getting a fair idea of what I am going to tell you in this article. Yes, it is about planning for a better future. We all study hard with the aim of getting a nice paying job. Because, without a job you cannot get married, without marriage you cant have kids and so on and so forth. So, in order to settle down in life, we need money and I mean a lot of it. Am not trying to be boastful or pessimistic here, but the fact is, money has become one of the most important aspect of an individuals life (second only to love and family)

Every individual who is in a job and is earning, needs to plan for his financial future. Things like, marriage, childrens education, retirement are in the back of all our minds. This article is about planning our future in a way that would benefit us in the long run.

Lets get started!!!

The following section will have 3 items:
1. Step – The activity under consideration
2. TODO – What we must do

Step 1: Assess your financial health

Before we start charting out a plan for our financial well-being, it is most important to assess our current financial health. It would give us a good idea of where we stand and what needs to be done to reach the place we intend on being. Not all of us have a father who is a TATA or an Ambani. We are all sons and daughters of hard working middle class individuals who have struggled all their lives to give us a better education and eventually a better life. So the onus is on us to make sure that we make the most of it.

TODO: Analyze your savings, loan commitments, investments etc and figure out your current financial status. For ex:

Savings in Bank: Rs. 1,00,000/-
Stock Market Investments: Rs. 5,00,000/-
Car Loan: (-) Rs. 3,00,000/-
Home Loan: (-) Rs. 25,00,000/-
Annual Salary: Rs. 7,50,000/-

If you see the example above, the current status of this individual is pretty grim because he has loan commitments worth 28 lacs and has an annual income of 7.5 lacs and has investments worth 6 lacs. Even if he happens to use all his savings and all his income to pay off the loans, he will need 3 years to do that. This isn’t so nice is it?

Step 2: Identify your goals

The next step to a better financial future is to identify our goals. It could be like “I wanna buy a BMW in 2015” or “I want my son to study in Harvard” etc. It is just what our goal is. As expected, the goal involves a certain amount of money.

TODO: List out your goals one after the other and assign a rough value against it which we must save within the specified time frame in order to achieve our goal.

Ex:

Buy a Car in 2015 – Amount Required: Rs. 5,00,000/-
Daughters Marriage in 2025 – Amount Required: Rs. 10,00,000/-
Sons education in Harvard starting 2020 – Amount Required: Rs. 25,00,000/-

This would give us a fair idea of how money we need for our future goals.

Step 3: Design a Plan

This is probably the most important aspect of them all. Based on our goals and the timeframe we need to come up with a plan using all our available resources.

TODO: Calculate the amount required for each goal and figure out, how much you can spare to save/invest every month in order to achieve that goal.

For ex: Goal – Buy a car in 2015 – Rs. 5,00,000/-

As of today (Feb 2011) there are still almost a full 4 years till the target date of 2015. so if we manage to save Rs. 1.25 lacs every year, in 4 years we will have 5 lacs to buy our dream car. 1.25 lacs every year equals Rs. 10,000/- every month.

So, to achieve this goal, I would have to invest Rs. 10,000/- every month (in some sort of savings scheme, it could be stocks, bank deposits, gold etc etc) for the next 4 years and I will have 5 lacs to buy my car in 2015

Step 4: Execute the Plan

Do I have to say that, this is the hardest part of the plan? Planning to invest a certain amount every month is easy, executing it is extremely difficult. It is our duty to stick to the plan we formulated in step 3 and execute it properly.

TODO: Make sure you spare enough money to meet the plan designed in step 3 every month.

Alert: It is easy to skip the plan when you need some extra cash due to some unexpected situations. I repeat, it is very easy. But if we happen to do that, we will not be reaching our goal. So it is important that we stick to the plan as best as we can.

Step 5: Review the Plan

Every year, as our income and expenditure goes up, we need to review our plan. A plan for a better financial future is not a one time activity. We need to review it yearly and make sure we accommodate the change in value of our goals.

TODO: Check out the cost associated with each of your goals and maybe include new goals into your list or remove completed goals from the list every year. Make sure you make changes to the investment plans to adjust for the new entries added or existing entries removed/modified.

A car that you planned to buy in 2015 which was Rs. 5 lacs today may be 6 lacs in 2014. So, the rate at which you are saving every month wouldn’t be enough to buy your car. So in 2014, when you review your plan, you must accommodate the increased cost and adjust your savings in a way that you will end up with 6 lacs in 2015 and meet your goal.


Conclusion:

To wrap up, let me say that financial planning is very important and every individual who wants a good financial future must take some time to chart out a financial plan for themselves.

All the very best and Happy Investing!!!