Easy Steps to Retirement Planning

As Senior Citizens we become increasingly aware of the need for financial security as we age.

 For employed seniors, retirement is a watershed moment in its truest sense.

 It is the moment from which you are Not going to be receiving a salary at the beginning of every month anymore!!

 You are preoccupied with questions:

 -        If you are one of the fortunate ones who is going to receive a pension then the query top most on your mind would be - “Will the amount of pension be sufficient for me to live a comfortable life?”

-        If you have unmarried children – “Will I be able to perform the marriages on my children well?”

-        If a child is keen on studying further – “Can I continue to finance his/her education even during retirement?”

-      If you have not bought your own home Or are repaying a Home Loan then the query would be “How can I take care of my home loan and run my home with my pension or savings? Should I pay off the loan with the retirement benefits I will get as Gratuity or accumulated Provident Fund?”

-        A big question would be “How and where do I invest my savings hereafter so that I get good returns and my money is safe?”

  As a senior citizen reading this, you may well ask ‘What is the use of this article when I have been retired for quite a few years already?’

 If you had done your retirement planning 10/15 years prior to your retirement, or even earlier that would have definitely given you more time to prepare for the post–retirement phase.

 However, if you have never consulted a personal financial planner, a consultation with one, even post-retirement is advisable.

 Why??

 Well, any kind of financial planning by an expert in the field will constitute taking a judicious look at your present state of finances and assessing how they can be improved upon to your advantage for the foreseeable future.

 Retirement Planning is when a financial expert does the overview of your present state of finances and draws up a financial plan for taking care of your post retirement years.

 Key point to note is that there are 2 categories of financial planners ie Commission-based Financial Planners who also distribute Financial Products and get a commission from the Mutual Funds, and other Financial Products which their clients buy. They may or may not charge any fee from the client.

 In the second category are the Fee-Only Financial Planners who charge a Fee from the client but do not take any commission from the mutual funds and other companies offering financial products. [H1] 

 It may seem that it is advantageous for a client like you or me to go in for a Commission-based Financial Planner who does not charge a fee.

 However the fact that a Commission-based financial planner will be making a commission from the products she/he recommends implies that the recommendations come with a vested interest.

 On the other hand the Fee-Only planner charges you a Fee upfront for his services, but does not make money directly from your investments

 An important distinguishing aspect of fee-only financial planners is they do not only advice on specific individual financial and insurance products.

 They first learn about the client in terms of the client’s Investments, Savings, Fixed Asset Holdings, Insurance, and Short & Long Term Financial Goals and then draw up the Financial Plan. Recommendations of specific financial & insurance products are also given.

 However a disadvantage of Fee-Only Financial Planners is that while they do recommend specific Financial and Insurance products, they do not deal with any of these products.

 Hence the execution of the Financial Plan drawn up by the Fee-Only Planner would have to be done by the client that is you. Alternatively you will have to engage an agent who will execute the plan suggested by the Fee-only planner. Especially if the recommendations include investing in Stocks or Mutual Funds.

 Commission-based Financial Advisors on the other hand look after the implementation aspects also of the Plan they suggest. They would purchase the mutual funds, Insurance plans etc on behalf of the client.

 Detailed aspects like filling-up the Application Form, Collection of the Cheque from the residence of the Client, providing regular updates on the investments made in Mutual Funds are all taken care of by the Commission-based Financial Planner

 Examples of Financial Products

 Ø Bank Deposits –Fixed or Recurring    

Ø Senior Citizens Saving Scheme implemented by Banks

Ø  Pradhan Mantri Vayu Vandana Scheme

Ø Post Office Schemes like

o   Public Provident Fund (PPF),

o   Post Office Monthly Income Scheme,

o   National Savings Certificates,

o   Kisan Vikas Patra

        ØMutual Funds, 

         ØGovernment of India’s National Pension Scheme (NPS)

Ø      ØPension Plans of the LIC and those offered by nationalized & private banks,

Ø      ØGovernment Bonds including RBI Bonds implemented by Banks

 

Examples of Insurance Products

Ø Life Insurance   

Ø Term Insurance

Ø Vehicle Insurance

Ø Medical Insurance – Most Important for Senior Citizens

 Basics of a Retirement Plan

 The Financial Planner can formulate a Retirement Plan only after considering the present state of finances, of the client. 

 After taking details as age, employment particulars of the client, his/her spouse, children, other dependants, the Financial Planner will ask for information on Assets and Liabilities.

 Assets would comprise land/property, vehicle, jewellery, and financial Products you have invested in. The latter consists of the investments and savings you and spouse have made.

 Liabilities would mainly be outstanding loans for Home/Land Purchase, for Vehicle Purchase, for Children’s Education etc.

 The next steps are Estimation of Current Monthly Expenditure and your family’s Monthly Inflow and Outflow.

 The planner will also need to know future major expenses. This will include children’s education, children’s marriage, your home/vehicle purchase, your domestic/overseas travel plans.

 After thus collecting your personal data the planner will work out the Corpus you would need upon Retirement, to take care of your future financial commitments and have enough surplus money to maintain the same standard of living post-retirement.

The impact of Estimated Inflation on the Cost of Living in the future will be factored in.  

 Asset Allocation i.e. deciding how much is to be saved by you in the different financial products like PPF, Bank FDs, Pension Plans including NPS, is a key task of a financial planner.

 Experienced Financial Planners use a Retirement Calculator. A Retirement Calculator is a mathematical model to arrive at the Accumulated Corpus required at the Time of Retirement to achieve all your goals and continue with the same Standard of Living you are used to when you were actively employed.

 My Experience – I was no early bird and considered having an expert look at my finances only when I was in my late fifties.

 In my search for a financial planner, I did quite a bit a research on the internet as I am not particularly financially savvy.

 With my search came the learning that Financial Planners come into 2 broad categories ie Commission-based and Fee Only planners.

 After considering the pros and cons of these 2 option, I chose to go with a Fee Only financial planner.

 Key Learnings from my Financial Planner:

-      Health Insurance is important and it is better to begin early, when one is young. The older you are when you start a Health Insurance plan, the higher the premium you pay.

-      Insurance is to be taken for risk coverage and not to be looked at as an investment product. Hence do not divert a high percent of your investments into insurance products.

-      The ‘Bonus’ amount  offered by Life Insurance and Term Insurance products is not always guaranteed and many of us have received much lesser mounts as bonus when compared to the amount indicated when buying the policy.

-      By investing in only Bank Fixed Deposits, Post OffIce Schemes, Government of India or RBI Bonds one cannot beat inflation.

-   Mutual Funds do not offer guaranteed returns, but with knowledge-based investing in mutual funds one can safely achieve returns which are higher than Fixed Deposit. In general Debt Mutual Funds offer lower Returns-Risks compared to Equity Mutual Funds.

-      Fixed Annuity Pension Plans are not designed to take care of inflation. The amount one receives as pension is the same at the point of time of your retirement and for as long as you live.

-      The Public Provident Fund is a highly recommended scheme due to the tax concessions it offers. Thus the amount one invests in the PPF, the interest earned on the amount and the maturity amount are all tax exempt.  Being a Government Scheme it is one hundred percent safe and offers a higher rate of interest than prevailing bank fd rates.

A minimum annual amount of Rs 500 is to be deposited in one’s PPF account and the maximum annual amount is Rs 1.5 Lakhs. One can deposit money in one’s PPF Account for a maximum of 12 times in a year

-      Financial Planning by a professional is not only for the rich or super rich. In fact it is more important for the not-so-rich as we need to hold on to our money, by investing the same judiciously so that in our retired years we can live in peace and leave at least a small nest egg for our children.

-      The Power of Compounding - Financial planners talk a great deal about the ‘power of compounding’ which can be achieved by beginning to invest early in your earning years. The amount may be small but in a period of 10 years, 20 years or at the end of your working life it would have become a golden nest egg if you stay invested. The small sum invested will continue to earn interest on interest and profits on profits year after year!

Fellow seniors and retirees do consult a professional financial planner at least once. Subsequently you can decide if you want to continue with their service. 

Disclaimer: It is to be noted that I am not an expert on Mutual Funds/Other financial & insurance products or on Financial Planning. This article is based on my learning and experience. If you wish to go in for Retirement/Financial planning, please consult a qualified Financial Planner