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Retirement

Hype and hysteria surround Indian weddings – what about your investments?

Prathiba Girish Financial Planning, Personal Finance, Retirement , , , 0 Comment
Hype and hysteria surround Indian weddings – what about your investments?

Weddings are big in India, it is an event for which people plan and save for years, sometimes decades. The recent celebrity weddings have the attention of the entire nation. There is so much interest in what did the bride and the groom wear, the jewellery, the locations, the food, the guests… Everything is scrutinised and fed for public consumption which we lap up hungrily. What’s wrong with that? Who doesn’t want to look at beautiful people and extravagant weddings? True, it’s all quite harmless to be an animated spectator to a celebrity wedding.

 

But look closer home and chances are that you will see the same thing being repeated. The focus is always on the event. Somewhere, one forgets that the wedding itself signifies a happy beginning rather than a happy ending.

 

Curiously, in my many meetings with customers, I have noticed that we often behave the same way when we invest. We speak to a lot of people, make a conscious choice of the product and pat ourselves on our backs when we actually execute our decision to buy. But what after that?  Are these reasons for the investment not important to remember later, when one decides to take a sudden decision to liquidate that investment prematurely due to a sudden (hitherto) unplanned need?

 

All the initial research and focus signify a happy beginning in your investment’s journey and its extremely important to stay focussed even later during the lifetime of the investment. One needs to invest with a purpose and a clearly articulated expectation from the investment. Expectation is again a two-way street where you need to put down what is it that you will commit to do eg. quantum of money you are willing to invest, the time for which you will stay invested and therefore the kind of returns you expect to make.

 

With many of my clients, I have noticed simply naming the investment with the purpose brings in a lot more focus and avoids knee jerk reactions which could greatly harm the portfolio. For eg. if you are saving for your child’s education you could name it “Anu education fund”.  The other thing which keeps you on track is understanding the volatility and having realistic expectations from your funds. 

 

Remember, while the act of investing itself is the wedding, the financial plan required to support it is the marriage, and just like in a marriage, it takes a lot of effort and time to keep investments on track.  You must review your investments with your planner at regular intervals and evaluate if you would invest for the same purpose in the same scheme if you had to do it now. If the answer is yes then you are sorted, else it’s time to rethink and learn from your earlier decision.  Wishing you the very best in your wealth building journey.

 

We would like to thank our unnamed friends whose wedding image has been used in this blog, with permission.  

 

Finwise is a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at prathiba.girish@finwise.in or +91 9870702277.

 

You can be young and without money, but can you be old and without it?

Prathiba Girish Financial Planning, Retirement 1 Comment
You can be young and without money, but can you be old and without it?

While young people who are just venturing off and finding their feet may find themselves without money, this brings to mind an image of positivity. It brings to mind carefree days, huge potential, unlimited possibilities and is indeed a happy picture.

 

When you flip the coin and look at a senior citizen who has no money, what is the image your mind conjures up? Is it of loss of dignity, dependence, despondence and tension caused by uncertainty about the future?

 

We all know the importance of being self-dependent in the twilight years. Yet somehow you find many a senior citizen cash strapped and living a very cautious, uncertain life, and depriving themselves of small luxuries which are so rightfully theirs, earnt over a life time of prioritizing everyone’s needs above theirs and being thrifty.

 

When I look around I find so many senior citizens who are asset rich but are having a tough time making ends meet.  These are seniors who have real estate worth lakhs, but think very hard before booking a ticket to the  music program that they have been really looking forward to.

 

In most cases while savings of their lifetime lies locked up in the form of a house, the children contribute towards their day to day needs. This automatically gives the children the upper hand and the parents think and rethink basic wants and needs since they have to dip into the pockets of their children.

 

On rare occasions where I have approached these senior citizens to monetize their house, seek professional help to invest the proceeds and live a life of a much better standard in a rented house,  I am met with shock and disbelief. In all these cases the children are well settled and the estate is not going to make much of difference when its time. However the same has a potential of giving a wonderful, carefree life filled with much cherished experiences to the seniors.  ‘

 

The common objections to this are

  • This is our hard-earned asset. How can we sell it?
  • At this age, you want us to shift houses every year or so? We are too old to manage house hunting, shifting etc.
  • What will we leave behind to our children when we are gone?

 

Each of us have our own belief systems. I feel shifting to a better house even if you are doing it repeatedly is worthwhile, especially given the fact that your second innings is with financial independence.

 

Of course, you are not expected to do the actual hunting and shifting, you will be surprised at the level of service available when you can afford the cost. All it takes is a proper real estate agent and a good mover and packer to get you settled.

 

Why worry about leaving behind something for your children? The greater worry should be of being at their mercy and expecting support in your life time.  As for estate, I am sure your children will not have a problem when you leave behind wise financial instruments as compared to a tax-unfriendly,  illiquid difficult-to-split piece of real estate.

 

I am sure there would be other views and would love to hear them. Do drop a comment on what path you would like your parents to choose if they are caught in a similar situation.

 

Finwise has significant experience working with retired customers and helping them live their second innings with financial security. We are a personal finance solutions firm that helps people plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at prathiba.girish@finwise.in or +91 9870702277.

Should you invest in National Pension Scheme?

Prathiba Girish Retirement 0 Comment

Should you invest in National Pension scheme?

I have been asked this question repeatedly over the last couple of months.  Hence, I decided to pen down the pros and cons that you need to consider while deciding if the product is meant for you.  Before we get started on the same, let’s summarize all that is known about NPS.  These are facts that are available aplenty all over the web but for ease of understanding have summarized below.

What is NPS?

National Pension System (NPS) is a scheme initiated by Government of India to provide old age security and pension for all citizens of India. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). 

Why was NPS introduced?

This scheme was introduced by the government to shift from defined benefit to defined contribution scheme.  It was initially introduced to all government employees and was mandatory for all employees joining service after 1st Jan 2004, it was opened to all citizen in 2009. 

Who can Invest in NPS?

Any Indian Citizen (both resident and non- resident) between the age of 18 and 60 on the date of submission of application can join NPS. 

How to apply for an NPS Account?

You can procure your PRAN application form from any of the Point of Presence – Service Providers (POP-SP) you wish to register with. One can also apply online.      

Who manages the money?

You get to choose from the seven provident fund managers mentioned below andyou can change the fund manager once a year without any exit load.

  • HDFC Pension Management Company Limited
  • ICICI Prudential Pension Funds Management Company Limited
  • Kotak Mahindra Pension Fund Limited
  • Reliance Capital Pension Fund Limited
  • SBI Pension Funds Private Limited
  • UTI Retirement Solutions Limited
  • LIC Pension Fund Ltd.

How does this work?

The scheme is based on unique Permanent Retirement Account Number (PRAN) which is allotted to each Subscriber upon joining. Subscriber can contribute directly or through the Employer. With PRAN, the disadvantage of shifting the NPS account due to change of employment is done away with, since PRAN is portable across geography and employer.  An investor can open only one account during his/her life span.

There are two schemes available for subscription

Tier I  NPS account

This is known as retirement account, withdrawals from this account is restricted. Tax benefit under section 80CCD is available only for investment in tier I account.  On retirement or closure of the account, part of the corpus accumulated has to be compulsorily assigned towards annuity.  Currently 60% of the corpus can be withdrawn and the rest will be retained to provide annuity.  Minimum annual contribution for this account is INR 6000, however minimum contribution while opening this account is INR 1000.

Tier II NPS  account

This is an investment account, withdrawal from this account can be done at any time as per need.  No tax benefits are available for this account.  In order to open Tier II account one must compulsorily open a Tier I account. Minimum annual contributions for this account is RS 250 subject to year-end holding of a minimum of INR 2000, however minimum contribution while opening this account is INR 1000.

What are the different fund options?

NPS offers 3 fund options

  1. Equity –  investments in equity funds capped at a maximum of 50%
  2. Corporate bonds (C) – no maximum cap, it can be upto 100%
  3. Government securities (G) – no maximum cap, can be upto 100%

You have two options for deciding the percentage allocation towards the 3 funds.  Under Active choice you get to choose your own asset allocation subject to a maximum of 50% in equity.  The allocation can be changed once every financial year.

Under Auto choice the allocation is done automatically as per your age.  You can shift from Auto to Active once in a Financial Year.

What about maturity and premature withdrawal?

On exit at retirement age, 60% of accumulated corpus can be withdrawn as lumpsum, of which only 40% tax free and 20% taxable.  The remaining corpus (40%) will be utilized to purchase an annuity to provide monthly pension. However, the subscriber can choose to not withdraw as lumpsum and utilize the entire corpus for purpose of annuity.

On exit from NPS before retirement age, which is possible after 10 years of starting the scheme, only 20% of the corpus can be withdrawn and the remaining 80% needs to be compulsorily used for purchase of annuity

On death, the entire corpus can be withdrawn as lumpsum by the nominee/legal heir.

What are the most compelling reasons in favour of NPS?

Tax concessions

For NPS, tax deduction for contribution can be done under three sections

Employee contribution

  1. Contribution upto Rs.1,50,000 under section 80CC (this includes mandatory deduction for NPS)
  2. Additional Deduction for voluntary contribution upto Rs. 50,000 under section 80CCD

Employer Contribution

  1. Upto 10% of basic salary put into the NPS by the employer on behalf of the employee is deductible without any limit.

Cost structure

The expense ratio is very low and ranges from 0.1% to 0.21% when compared to 2.00% and higher in equity Mutual funds and insurances. This can boost returns over the long term substantially

Liquidity

Unlike many other products this is truly a long-term product meant to secure your retirement. It can be an advantage given that it forces the subscriber to stay invested over long periods of time.

Ability to tweak Asset Allocation

Allocation to equity and debt can be changed once a year under active choice.

What could be the disadvantages of NPS?

Compulsory Annuity

NPS investments mature when the subscriber attains age 60. If the corpus is in excess of Rs 2,00,000 at maturity then 40% of accumulated corpus has to be compulsorily used to buy annuity. Simply put, in this case you would pay a lumpsum (minimum 40% of accumulated corpus) to receive a series of payments which could last for a specific period or your life time. 

The returns on annuity in India has been extremely poor. Assuming you get great returns during your accumulation phase, the investment can still be undone with very poor returns during your annuity phase.  Further pension received from annuity is taxable.

Taxation at maturity

NPS maturity proceeds are taxable, as mentioned earlier only 60% can be withdrawn at maturity out of which 40% is tax free whereas tax is payable on the remaining 20%.  Further pension received from annuity is taxable. 

Liquidity

While the lock in period is huge, this apparent lack of liquidity can work to the advantage of investors who discontinue investments started with a long term horizon at the smallest of pretexts and do not stick to their retirement plans.  For disciplined investors who earmark funds for retirement and persist with the plan, this can be a huge drawback..

Tax deductions

I am assuming that the 80C limit is taken care of by EPF contributions which is the case with most salaried investors in the 30% tax slab.  For others where investments need to be made to avail of 80C exemptions, ELSS is a better bet (more on that in my next article).

Contributions to NPS are exempt from tax under section 80CCD to the extent of INR 50000 per annum.  For a person in the 30% tax bracket this could lead to tax savings of approx. INR 15000 per year but for those in lower tax brackets, this amount is reduced to INR 10000 and INR 5000 respectively and does not provide a compelling argument in favour of investing in NPS.

Cap on Equity Exposure

The expense ratio being low is a huge plus and a very compelling reason to invest, but one needs to bear in mind that maximum asset allocation to equity under active choice is pegged at 50%. Given the long-term nature of NPS, this maximum cap of 50% limits the upside which aggressive investors could get by increasing their allocation to equity.

Given the overall arguments, I will not be investing my money in NPS in its current avatar and would rely on my discipline and knowhow to build a sizeable corpus.  As an investor, the knowhow part can be outsourced to your financial planner.  If you plan to give this a miss do ensure that you have discipline to set aside finances for your retirement and have the will power not to dip into your nest egg till you retire.  If this seems unlikely you should consider investing despite knowing the pitfalls!

Have you adequately secured your retired life?

Prathiba Girish Retirement 1 Comment

A dear uncle of mine, who retired a couple of years back, recently checked with me if there were any specific steps to be taken post retirement towards financial wellness. That got me thinking, is there anything which we do differently because we are retired, except of course, not earning an active income? The answer is not a simple yes or no. Some things listed below can be done irrespective of whether you are already a retiree or not, while others are specific to retirees. Following are my thoughts on what your approach should be towards financial planning post retirement.

Retirement caption image 2

Start with your current position: To start planning for your future you need to know where you stand currently. Start by listing all your assets and liabilities. Take time to accurately list down your monthly and annual expenses. Factor in one-time expense like the wedding of a child or recurring expenses like vacations. List down your goals and the implications they have on your finances. Start with living a comfortable retired life and work your way down to the long cherished dreams of vacations, etc. Once this is done, you will have a clear road map on finances required at various stages in life and will be able to plan your investments accordingly.

Don’t shy away from equity just because you are retired: Retirement is not a short phase, it could encompass almost one-third of your life. It could last even 20 years and sometimes, even more. Equity has a history of giving stable and superior returns over long periods of 8 to 10 years. I am not asking you to experiment at this juncture in your life. There are relatively safe products to invest in equity. Even assigning a portion of your corpus can do wonders to your returns. Considering we are talking about investing money which you have really sweated out to earn during you entire working life, hire a good professional and understand their reasons for recommending products. If they demand a fee for their advice, believe me, it may be well worth it.

Ensure you have sufficient health insurance cover: This is the phase where expenditure on health related issues is often at its highest. It is extremely important to have an adequate health cover, hence, if you have a health insurance cover of your own, do continue it even if your premium has gone up considerably owing to increase in age. If you don’t have a health cover, you may find it difficult to get one now, especially if you have been diagnosed with one of the abundantly common lifestyle diseases like hypertension and diabetes.

If you are able to get a cover, but the high cost of the same is a deterrent, consider a top up cover where you are covered over and above a deductible. I have written extensively on this and you can find links pertaining to the same at the end of this article. If you have children who have group cover with their employers where they have the option of adding you, please ensure that they do, even if it means you bear the premium for the same. The group covers come with huge benefits where pre-existing diseases are covered from day one.

Put away sufficient emergency corpus in investments which are liquid: Even if you have adequate health insurance, you will need to have a sizeable emergency corpus. Various situations may arise requiring you to pay upfront. The hospital were you decide to go in for the procedure may not be covered for cashless facility with your insurer in which case you will need to pay and claim later. In an emergency, the hospital may ask you for a refundable deposit before they start providing medical attention. Worse, your particular ailment or line of treatment may not be covered under insurance at all.

While you will have some part of your investments in long term products without an easy exit route, it is important to have some funds which are earmarked for emergency.

Make a will: Contrary to popular belief, making a will has nothing to do with retirement. We read about accidents almost on a daily basis in newspapers but refuse to believe that the same could happen to us. It is important to list your assets and how you would like them distributed after you pass away. After all, your intention is not leave a feuding family. Also ensure you change your nomination as per your will, don’t leave your assets to one child while you have nominated the other.

Don’t worry! The process of making a will is very simple. You have a lot of assistance available even online today. Registering a will is desirable. You can also change your will any number of times during the course of your life time without much trouble.

Some aspects not directly related to your finances

Spend on experiences: Like most people, you may not have been able to indulge in experiences which you would have always intended to, due to constraints of time or finances. Make a list of all the things you always wanted to do and plan for them. The time you spend in planning and executing them will keep you occupied and joyous for a long time. Don’t forget to photograph these moments so you can refresh your memory and relive them every now and then.

Invest time and effort in keeping body and mind healthy: While sounding very clichéd, prevention is better than cure. Ensure you spend at least half an hour each day on keeping your body and mind fit. Join the yoga classes nearby, go for a walk, do whatever you enjoy, but be consistent and half your troubles will take the next route out of you!

Join clubs where you meet people at the same stage of life: Join the laughter club near your place or the temple committee, any place where you meet people who are in the same stage of life. Actively participate in organizing social outings. This can cheer you up, especially when you realize that you are not alone and others around you face the same issues as you. It is strangely heartening to know that others face them too.

Try to keep abreast with technology: Your grandchild will be only too happy to demonstrate his/her knowledge to you. Kids can be very patient. If you don’t have a grandchild yet, look for some kid in the family or neighborhood. Technology can be liberating. I have personally witnessed how simple stuff like checking your whatsapp, bonding with your extended family & checking the latest news flash on your phone can keep a person involved and connected.

Links to article mentioned above

 

https://finwise.in/blog/?p=412

 

 

7 Things to keep in mind while planning for Retirement

Prathiba Girish Retirement , , , , 0 Comment

While we make elaborate plans for the vacation round the corner or a wedding in the family many of us don’t take the pains to make a plan for retirement. Quite naturally so, considering retirement to most of us seems far away. We refuse to acknowledge it. Retirement is a reality just like death and taxes. It will happen to us whether we want it or not.

retirement high res

Your parents took care of the first one-third of your life and left no stone unturned to ensure that you had the very best! You slog it out and try to make the best of the opportunities for the second one-third. What about the last one-third of your life? Do you want to be left in a lurch at the mercy of others when you truly deserve to enjoy the fruits of all the hard work put in?

1) Have a plan
Most of us would agree that nothing happens by chance or by itself. Putting away money randomly and believing it should suffice could be a grave mistake. Retirement is a long term goal for most of us. It would be prudent to remember though that time is a luxury when it comes to investing and we must take full advantage of it. The first step in planning is to estimate what is likely to be your expenses post-retirement. Make sure you list your current expenses correctly. Next discard expenses incurred towards children’s education, life insurance premium, EMIs, investments and other expenses which will not exist during your retirement. Once the task of classifying expenses which will be carried forward to your retirement is done, factor in inflation. A good rule of thumb would be expenses would double every 10 years at a inflation rate of 7%. Next would be to calculate the corpus required to sustain you through your retirement. Once you have done this and knowing how much time you have on your side, you will be in a position to choose best fit products which will maximize your returns without taking undue risk.
2) Don’t under-estimate life expectancy

With medical science making advances every day, life expectancy of a moderately well-to-do person is only going up. When asked how long their post-retirement life would be, most people under-estimate their life expectancy by as much as 10 years, sometime even more. If you have to err, than let it be on the side of caution. If you plan to retire at 60, I would recommend that you must plan for a minimum of 25 years post retirement.

3) Start early
The importance of starting early when you are investing for retirement can never be emphasized enough. Starting early and staying focused can make a huge difference in the quality of your retirement. Start small if you must, but the key is to start now!! If you start with a small amount and diligently increase your contribution towards retirement you will be amazed at the magic compounding will weave to make an enviable corpus.
4) Don’t dip into your retirement corpus
Temptation to dip into your retirement corpus will be many and frequent, given that retirement is a long way off and cannot even be visualized and will compete with a need that might offer you instant gratification. But beware! Stay away from dipping into your corpus unless it’s a matter of life or death. Nothing, not even your child’s education should come in the way of your retirement (after all, your child can easily take a loan to fund his or her higher education, reap tax benefits and pay it comfortably considering he or she has a long working life ahead). Also remember that people who willingly loan your child money for higher education will not do the same for your retirement!
5) Don’t be mis-lead into investing in anything with the name retirement attached to it!
There is a trend is to include retirement or child education to the name of insurance or investment products as marketing ploys. Don’t be lured, the product with the name retirement attached to it may not suit your requirements at all and may have very divergent goals. What’s in a name? When it comes to investments, whats important is choosing the right one for your goals.
6)Don’t wait till you retire to take your health cover.
Take a health cover when you are healthy and young even if you are in employment and you are covered by your employer. If you insist that two health covers are a waste, then go for an add-on cover which will offer you cover above a deductible (say 2 lakhs). These types of policies are very inexpensive as compared to normal health covers. This will ensure that should you become uninsurable due to any lifestyle disease like diabetes or hyper tension at a later age, you would have capped the amount to be borne by you towards any post-retirement hospitalization-related expenses.
7) Stay invested in equity
Retirement is not a single stage and neither is it short; it could last one third of your life time! Just because you are retired (or about to), it does not make sense to withdraw completely from an asset class like equity which gives long-term returns which is unmatched by any other asset class. After all, assuming that you retire at 60, you still have 15 years for your expenses when you are 75. That’s a long time and short term volatility should not bother you given the time frame. A word of caution though, take both your risk capacity and risk tolerance into account before deciding on percentage of corpus which will remain invested in equity.