Graded Financial Services

We do not get younger by the day; eventually someday we have to retire. In the world of medicines, chances are that the number of years we would live post retirement, may be more or less equal to the number of years we spent working!
Retirement usually comes at the end in the list of financial goals of most people. People think they can start saving for it after other big obligations such as home loan and children's education/marriage are met.
Starting early has advantage, as your money gets more time to grow. Each gain generates further returns. As time passes, you miss out on this benefit, called compounding, which can grow money exponentially over time.
If you have already retired but do not have enough savings, take up a job. Alternatively, shift to a smaller city and give your house on rent. You can also sell your house if it is in a big city and buy a smaller one in a Tier-II city and use the money saved for the retirement.
Generally, retired people keep funds in conservative instruments such as bank fixed deposits. You can allocate a small portion of savings to equity based products, depending upon your risk appetite. The aim is to earn higher returns to bridge the gap between required and actual cash flow. Another option is investing in monthly income plans (MIPs) of mutual funds that invest upto 25% money in equities.
You should start financial planning for Retirement from the time you receive first pay-cheque and the second best time is Now itself.
It is everyone’s wish to lead a happy life after retirement. However, this requires years of pre-retirement financial planning to meet the demands of a retired life, by strategically saving and investing.

1. Planning for medical exigency: The moment we retire and become non-income generating individuals; no one would lend us money.
   Therefore, a provision for minimum 12 months of expenses (including medical expenses) needs to be kept aside as an emergency fund. To make provision for medical exigency, we should take medical insurance  to care of frequent health issues arising out of old age.
   Lack of government social security schemes and retirement benefits to self-employed and private sector employees makes this subject even more crucial to be tackled in our twilight years.
   Things to be considered while planning for medical exigency are:
   
   • General health of our family members.
   • Family history of certain genetic disorders.
   • The class of hospital you would prefer to get treated would help in proper estimation for medical insurance.
   Many people don't buy individual health plans during their working life as they are covered by employers. However, keep in mind that most employers give the cover only till we are employed with them.
   It is good to buy an individual health policy early in life. It is not only cheaper but also, helps you cover pre-existing illnesses after completion of the waiting period. Moreover, it covers you even after you leave the job or your company curtails the benefits under the group plan to cut cost. It also earns tax benefits upto Rs 15,000 for individuals and Rs 20,000 for senior citizens.
   In addition to the medical insurance, you also need to create a reserve for non-claimable and ongoing medical expenses.
   It is also wise to provide for contingencies that arise if we were to retire early. We could
   
   • Suffer ill health.
   • Lose job.
   • Need to care for a sick or elderly member of the family.
   • Women may have to opt in voluntarily to look after the family needs.


2. Create a financial security for the dependents: Your spouse and dependents need to live a secure financial life after your lifetime. Taking up life insurance policies during your working life and well thought out retirement planning will take care of your dependents and spouse financially.
   • Make an estimation of how many years your dependents may outlive you.
   • Create a provision for them, for those many years.


3. Beat the Inflation: Retirement is a long-term goal therefore, it is important to incorporate the impact of inflation on your financial goals.
   This means that things would become costlier and years later you will be able to buy much less with the same amount of money. Taking inflation into account will not only tell you how much you have to save but also help you decide the most appropriate investing strategy.
   Invest in such a way that you beat inflation by earning returns that is couple of percentage points higher than the inflation rate.
   Consider the real rate of return (rate of return minus inflation) while doing the calculation. Also, use a realistic rate of inflation by taking an average of the past few years.


4. Define the sources of retirement income: Sometimes you may be ignorant of the benefits of Provident fund, PPF and Gratuity. They are good instruments for retirement planning.
   Withdrawing money from EPF & PPF should be utmost avoided, as EPF (Employee Provident Fund) & PPF (public provident fund) have been designed to provide financial security after retirement.
   Even if it is to make a big-ticket purchase such as house, it is better to dip into other savings; EPF & PPF should be only for the post-retirement years.
   While we pay tax on interest earned on fixed deposits; gains from the EPF & PPF account are tax-free, eligible for deduction under Section 8OC of the Income Tax Act.
   In India, the lack of social security schemes makes it necessary to invest more in good income generating sources for a steady flow of retirement income.
   • Create a checklist of the expected income from different sources after retirement.
   • Note down the periodicity of the income (monthly/quarterly/Annual/ Cumulative).
   • Understand the tax implications on these post-retirement income streams.
   • Figure out the ability to liquidate or the options to take a loan from these schemes.


5. Myth that expenses would reduce: Many people assume that their expenses would reduce drastically after retirement; it is a myth. Expenses after retirement are usually 75% of pre-retirement expenses.
   While we may not have to spend on children's education and marriage, loan repayments would have been over by then. However, some expenses such as medical and payment to domestic helps are likely to rise as we grow old. Our travel expenses may also rise as we may wish to take abroad tours, visit friends and family members frequently.


6. Have a Home: If we are living on rent, our monthly outgo will generally be 25-30% of monthly income. So, having own house during sunset years will reduce expenses substantially, besides providing a sense of security.
   In the worst scenario, go for reverse mortgage of the house. Reverse mortgage is the opposite of home loan. The lender makes monthly payments to the owner till he/she is alive. After death, lender sells the house, recovers it’s dues and gives the rest to legal heirs. Reverse mortgage can be a good strategy after the person enters his 70s. Reverse mortgage annuities are now tax free.


7. Expectation of high returns: Those who invest in shares expect very high returns. Experts believe it is better to be conservative in your expectations. This is because how your investments perform is not in your hands, especially in case of assets like equities. Stocks have the potential to deliver amazing returns, but the risk of losses is also high.
   Exposure to stocks is likely to go down substantially after retirement. So, you should not assume high returns while doing your calculations. One can invest in conservative or balanced funds at this stage, which are combination of Debt & Equity.


8. Estimate Tax Obligations: The pension we receive is taxable. If you fall in the highest tax bracket of 30% while you are working, it is unlikely that your income after retirement will not be taxable. Also, after retirement, people generally opt for conservative investments such as bank fixed deposits whose returns are taxable. So, it is better to take post-tax returns into account while working on the retirement plan.