Retirement planning – dynamics of time and activities

Of late, I have been doing a lot of reading on the topic of retirement planning. I must say that, while there has been a certain level of interest about retirement issues in India now, much of the good inputs come from the US, where this has been a topic of great interest over several decades. One of the areas most of the financial community there agree on is the need to structure your decades of retirement by activity levels. In this post I will try to suggest a framework, we can adopt to our context in India.

One of the important differences between US and India that we need to keep in mind is the age of retirement and life expectancy. Many people in the US work till the age of 65 and consider they will live till 90. In the Indian context, it will make sense to look at these figures at 55 and 85 respectively. Yes, I know many people retire at 60, but with the focus on shorter career spans along with many wanting to look at doing other things, 55 will be a good age to aim for. Moreover, with the passage of time, more people are going to have non-traditional careers where the working in regular jobs will have shorter life span. The other aspect is life expectancy – I feel with the current state of medical advances, it will be logical to take 85 as the figure. Again, it is possible to live beyond that and you must factor that into your plan. In the end however, a 30 year retirement period which you need to plan for and fund will probably do the trick.

Ok having established the above, let us now turn to a framework of the 3 decades. I will follow the terminology from an US blogger. He calls the first decade to be the Go-Go decade, where you are going to be quite active. This is the time to catch up on all the family visits, travel the world, organise your monetary and other affairs, spend time with your adult children and to indulge in the hobbies and interests for which you may not have had much time during your working life. The second decade is termed as the Slow-Go decade, where you still do much of the earlier stuff, health permitting, but there is a palpable slowing down in both the numbers and frequency of activities. The final decade is termed as the No-Go decade where you will mostly be indoors with limited activities.

If we adopt this framework to the Indian context, how will things look? I can think of the following for the first decade, in terms of the situation and the activities:-

  • You will still be actively engaged in some professional activities but not a regular job any more.
  • Your income will mainly come from passive category with some active income.
  • It is likely that your children are into their careers now or at least finishing up their post graduate education. 
  • They will also possibly get married in this decade of your life.
  • With time and hopefully money in your hands, you can look at travelling much more than you have done earlier.
  • You may want to replace some assets such as cars or white goods.
  • You can also indulge in your hobbies and interests in a more significant manner. If these are outdoor in nature, this is obviously the best decade to do so.
  • You will settle down in your home town or your place of retirement during this decade. Catching up with friends and family there will be a good part of leisure.

In the second decade, the professional activities will probably cease. Your outdoor aspects such as travel or any active sports will also taper off gradually. While you will still be healthy ( hopefully ), you will not be too inclined to venture out of home. This will probably be a time to view movies in home theatre as opposed to the cinemas and to order food in as opposed to driving out to a restaurant.

In the third decade when you are 75 plus, it is very unlikely that you will engage in a lot of activities that require a lot of physical exertion. Yes, it will still be important to do regular exercises, but your travels and other outings reduce drastically. Visits to the doctor are, unfortunately, going to increase in frequency. We can look at this decade as the winding down phase, where you should take care of your affairs, rest as much as you need to and hope that the passing away, when it happens, is a relatively smooth affair.

What happens if you live longer than you have estimated? We need to understand that this is possible, given that many people are living well into their 90’s nowadays. While you will either be almost inactive, if not in some long term care facility, there is clearly a need to plan for this financially. The last thing you need at this stage of life is to worry about money or being dependent on your children when you are at your most vulnerable. Any financial plan should include a final 5 years for you and your spouse.

Once you have chalked up your road map, we can start to put a financial dimension to it. This should be done in a bottom up manner, by understanding your lifestyle and then working out the relevant cash flows needed in the 3 decades. This is conceptually a little difficult and I will explain with a personal example in the next post.

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Retirement corpus needed is a function of real returns

In an earlier post, I had written about how our lifestyle choices in retirement will influence the amount of retirement corpus we need to start our retired life with. I also wanted to write a post with my personal example but, with some other engagements, I have not been able to get down to it. I hope to do it this weekend.

The retirement corpus is also a function of the real rate of return you are able to get. For those who are unaware of the term, the real rate of return is the difference between your return on investments and inflation. So if your portfolio is giving an overall return of 9 % and the inflation in the economy is 7 %, then your real rate of return is 2 %. In one of my earlier posts, I had shown a simple way to calculate a retirement corpus by assuming the real rate of return as zero. Interested people can read the post here.

So in order to recap that post, if you are retiring at any age and have X years to live with an annual expense of Y, then your retirement corpus needed will be XY. For example, I think I will live for 30 years max and my annual expenses may be in the range of 12 lacs per year. According to the formula XY, I will therefore need 3.6 crores. Note that this assumes two things – firstly, my money will only grow at the rate of inflation and, secondly, I will not have any corpus left when I finish the 30 years.

Now, I may not be lucky to have this amount. In this case, I can simply keep trying to earn some active income, hope to get a lottery or depend on my children to tide by my later years. As I do not fancy any of these strategies another option can be to reduce my spending. For example, if I can somehow do with an annual expenditure of 8 lacs then the corpus needed is only 2.4 crores. However, this will now compromise with the lifestyle I want to have, especially in the area of travel. Fortunately, there is a way out of this and I will show you how to do it.

The trick is in organising your money in such a manner that you have some real rate of return. Let us say, I use debt MF and hybrid funds to increase my returns to 8 % and inflation rate for me is 6 %. With this real return of 2 %, it will be quite possible to have a significantly lower corpus retirement. There are calculators available in the public domain which you can use so I am not getting into that. However, here are the outcomes.

Assuming 30 years to live and 12 lacs per year as the annual expense:-

  • With a real return of 0 %, corpus needed is 3.6 crores.
  • With a real return of 1 %, corpus needed is 3.28 crores.
  • With a real return of 2 %, corpus needed is 2.83 crores.
  • With a real return of 3 %, corpus needed is 2.46 crores.

I can go on but you get the point. The idea therefore will be to organise my money to generate a decent level of RRR so that even with a lower corpus there is a chance I get to lead the lifestyle in retirement that I am desirous of. The flip side is this – to generate high RRR, I will need to take more risks in my money and definitely put some of it in equity. This is fine with me as my basic 3 portfolios of Debt, MF and Stocks are something I am quite comfortable with. If you are not fine with the risks you can only deal with RRR of 1 % or so. In that case you will need a higher corpus, a lower annual expenditure or hopefully a pension from the company where you work now.

I will write some more posts on retirement, follow the blog to get those.

Cash outflow in retirement is a function of lifestyle

Over the years I have planned my financial independence, where I would have no need for an active income. This entailed creating the 3 portfolios of Debt, MF and stocks. If you are interested you can search my blog to read about my financial planning, there are quite a few posts on it. The important thing to understand here is that for me and anyone else, the amount of money needed in retirement will be a function of the lifestyle you want to lead. 

For example, you can say that you just want to have a simple lifestyle in your home town without too many activities such as entertainment, dining out or travel. In this case, your expenses are likely to be reasonably controlled and maybe a figure of 6 lacs in current prices will suffice annually. On the other hand you may be a person who wants to have a vacation abroad every year, visit your children once in 6 months, have a car and driver to take you places etc. In such a scenario even 15 lacs per year may not be adequate.

So how do you go about estimating the kind of cash flows you would need in order to be able to have the lifestyle you want? One of the major assumptions I will make here is that your retirement period is 3 decades. Since most of the people retiring today are unlikely to do so before they reach 50 and almost many will look at 60 years or close by, this is a reasonable assumption. The mistake most people make is that they feel the expenses will be constant over the period of these 3 decades. In fact many people I know spend less initially as they are worried about inflation and their money running out.

If you look at this in a logical manner, you will probably do far more activities in the first of the three decades. Let us say you have retired at 55 years – now till you are 65, you will probably be in good health and therefore be in a great position to indulge in your hobbies and passions. The second decade will definitely see a reduction in the physical activities, for example your frequency of travel will reduce significantly. The third and final decade will probably see very little activity outside home.

Now, if we have to provide a framework for all the cost elements that are required to be funded in retirement, it will probably look like this :-

  • Accommodation : Most people having their own house or apartment will need to have maintenance costs. Even if you are having a property somewhere and can fund your accommodation expenses through it’s rent, you are in good shape. In case you need to rent that will prove progressively more expensive with each year and therefore need a fair amount of assets.
  • Running costs : These include daily living costs such as food, help expenses, utilities, maintenance, entertainment, clothing etc
  • Insurance : Term insurance should be junked in retirement and you need to have Medical and home insurance for as much as you can possibly afford.
  • Asset replacement : You will need to replace some furniture, quite possibly several white goods and also your car, once or more in these 3 decades. It is best to be prepared for it, very often we do not take it into account.
  • Children related : I hope the higher education of the children and maybe marriages are over by the time you retire. Even if they are not, you need to keep a separate fund for it. Do not mix it with your retirement goals or plans. Also, while it is perfectly all right to give gifts to children, in your retirement you r children should not be needing monetary support from you in any manner.
  • Travel : If you are a travel crazed person, like I am, you better estimate these expenses in a proper manner. Travel abroad is obviously expensive but even travel within India is getting there, especially if you account for the fact that at an advanced age you will need to travel in some comfort.
  • Hobbies : Whether it is Golf, attending live music shows or visiting literary or theatre festivals, hobbies can be expensive. However, at this stage of your life you do need to indulge in them and therefore you have to plan accordingly.
  • Health related : Even with health insurance, there is no guarantee that all mishaps will be covered adequately. As the decades go by, whatever you reduce in travel and hobbies should be kept for this purpose.

We can keep adding other categories but the above are good enough to arrive at a reasonable basis for our retirement expense calculations. How do you do it?

  • Take your running costs based on your current expenses at the time you retire. Let us say this is X.
  • Take other costs as a factor of X. For example if you are a frequent traveller then you may want to keep 0.5 X as your costs here for the first decade. Remember it is also a function of what X is. For example if you live frugally then X may be 4 lacs and you may need to keep 3 lacs for travel, especially if you are looking to travel outside India.
  • Some costs are not annual in nature. For example asset replacement may well cost you 5X BUT it will be only once in 10 years or so.

I hope you have understood the concept by now. Doing this for 3 decades will tell us what is the total cash flows that we need at current costs. You can then check as to whether you have adequate inflows either from your assets or other sources.

The proof of the pudding is always in the eating though, and I will explain this framework with my personal situation in the next post.

Financial plan for the retired – A guest post

This is the first guest post in my blog and I am happy that my friend Biswanath Sengupta has penned down his experiences and thoughts on how he is going to manage his financial life in retirement. Biswanath and I were college mates while doing BE in Computer Science & Engineering at Jadavpur university.

Without further ado, here is Biswanath in his own words :-

My Financial Take – For Retired and Retired hurt People Only.

This is my first tryst with the financial instruments. I formally retired from the corporate services at an age of 55 yrs. Obviously I will be active and earning in the startup world, but at present it’s minuscule compared to the corporate earnings and the future is unknown. I have my set of liabilities as well. With high competition and automation and fast change in business scenarios we are having a significant number of retired hurt cases post 50 yrs in the service industry.
I have consulted many financial experts and did my studies as well . I am a conservative risk averse investor and as per normal life cycle would expect to live for another 25 years. Here are my few takes and learnings.

1. Practical inflation rate is 8 percent plus , irrespective of whatever the govt of the day claims.
2. The cost of living does not decrease significantly after retirement.
3. Cost of healthcare increases at the rate of 12 percent. With high pollution and global warming and junk food, incidence of lifestyle , tropical and cancer increases alarmingly.
4. Except for the Pension Schemes of the Central and State Govt employees , all other pension schemes are useless as they only give an annuity of @6-7 percent which post tax is around 5 – 6 percent.
5. As the economy grows and become global the Fixed deposits rates will come down significantly and likely to settle around 4 – 5 percent per annum meaning post tax rate will be 2 – 3 percent.
6. Most of the investment consultants are fresh or junior MBA’s with no experience of economy and life and are busy selling their products. They are useless. Experienced financial advisers are rare and pricey.
7. For many non pensioned retirees the standard of living deteriorates after 10 years of retirement and they struggle for existence after 15 years.

My learnings on how to live happily for most of your life post retirement.

1. We have to move out from risk averse FD zone unless we are ready for an effective yield taxed at your taxed rate for around 3 – 4 percent.

2. PPF, Post office schemes , Sr citizen FD limit can be exhausted.

3. Have only emergency money in FD .

4. Move 50 percent into debt or MIS schemes . Any standard advisory can support you on the same. You only have to check your portfolio once in three months. The effective post tax yield will be around 7 – 8 percent with low risk and better tax treatment as they come under LTCG after 3 years.

5. You have no choice other than to move 30 – 40 percent of your corpus into equity market to generate return and wealth. You can do this via a good equity mutual fund or thru an experienced portfolio advisory. Please do not venture on your own untill you are an expert. I trusted a portfolio advisory got a CAGR of 30 percent irrespective of the market conditions. This is the only steam of my survival. These days there are good portfolio advisories which starts from an investment of as small as Rs. 5 lakhs.

6. Have a medical insurance ASAP. If your medical insurance is less than 5 lakhs then create a seperate corpus to meet your additional need via debt MF.
7. There is nothing like minimum corpus required . They are all myths. Start courageously with what you have. Let the destiny prevails.

8. You are lucky if you have more than one house as that generates income in terms of rent and reverse mortgages in your winter days.

Enjoy retired life.

A case study from recent AIFW post

It always surprises me a little to see the reactions of people in Facebook groups when a group member asks a simple query. Some members assume that the questioner needs to get knowledge by reading blog posts of some other members first, others advise him to go to a fee only financial planner and even give him a list, yet others tell him that one should just keep working and not think of retiring.

To come back to the recent query, here are the salient facts shared by the person who wanted advice on whether he will be able to gain Financial independence in 6 years:-

  • He has 1.2 crores in FD and another 30 lacs in equity etc
  • Can invest 20000 per month for next 6 years
  • Has a child in class 7, who should be going to college in 6 years
  • Has his own house and loans will be paid for by the time he is 50.
  • Current costs are 1 lac per month, 15000 for child and includes loan repayments.

Let me come to the question as to whether he will be able to be financially independent by the time he is 50. For this we will calculate his Financial Independence Number (FIN) in the following manner.

  • His base cost at 50 will be lower than 1 lac as child cost will be gone and so will the loan repayment. However, let us take it at 1 lac to take care of inflation etc.
  • For retirement of 30 years his cost will be 3.6 crores at zero real rate of return
  • For child higher education we can take 20 lacs
  • For asset replacement etc we can take 20 lacs
  • Total FIN therefore comes to 4 crores.

Fortunately, in real life we do not need to go with financial planner and/or calculators blindly and can use some experience and common sense. It is difficult to tell others what to do as they will have their own goals and ways. However, if I were in his place, I would be doing the following:-

  • As his child’s college education is 6 years away, I will put 10 lacs in an Aggressive Balanced fund like HDFC Prudence. This amount will take care of the 20 lacs that will be required for the child’s graduation.
  • I will redeploy the 1.1 crore left in FD to different types of Debt funds. Assuming a CAGR of 8 % this will grow to an amount of 1.75 crores.
  • His current equity investment will grow to 60 lacs if we take 12 % CAGR over 6 years.
  • 20000 SIP @ 12 % returns will grow to about 21 lacs in 6 years.
  • So at 50 years he will have 1.75 crores in Debt and 81 lacs in equity

Let us now look at deployment of corpus. In the first 10 years of retirement, his strategy can be the following:-

  • Interest from Debt portion will be to the tune of 14 lacs @ 8 % returns. This is definitely possible if he is into good quality Debt instruments.
  • As his child is in college and he is still relatively young, I will not reinvest this 2 lacs but spend it in discretionary expenditure such as travel or asset replacement.
  • At the end of 10 years, he will be 60 so the activities will reduce and on the balance his medical expenses may grow. I think an annual expense of 18 lacs will be enough. There is no need to calculate this by inflation formula – makes no sense at all to do so.
  • Assuming a 12 % return on equity his equity corpus will be 2.51 crores.

In the next decade his deployment can be as follows:-

  • Keep using the interest from Debt instruments and take out the remaining required amount from redeeming the principal.
  • Even after you finish the decade you will have some amount left in Debt instruments. I suggest you donate it to a charity of your choice.
  • Your equity investments would have grown to more than 7 crores by now and will be more than enough to last your life as well as live a legacy.

So to come back to the basic query – will you have enough to retire at 50? You bet you will. Now just shut out all the negative people with negative comments from your mind and go ahead with the plan. Honestly, if you are able to get the selection of instruments done on your own, you do not even need a Financial planner.

Will be happy to receive comments, feedback and criticism on the post.

An MF portfolio for Retirement

Most of us are familiar with creating and investing in an MF portfolio during our active earning years. We start off in a small manner, keep increasing our investments as our incomes keep rising over the years and hopefully get to a stage of having sufficient corpus in hand when we retire and no longer have an active income. This post is about the aftermath – what happens when we retire and id there a way in which we can deploy the corpus through MF? 

Firstly, let us examine whether it will make sense to be invested in equity as an asset class after retirement. My view is, unless your corpus greatly exceeds your needs, you will need some amount of equity growth to take care of unexpected circumstances which can impact any of us. This can be a sudden illness, some other emergency in the family or simply having the good fortune of living longer than what you had estimated. Being invested in only debt instruments and drawing out of it, may result in a situation where you run out of money when you need it the most. I. therefore, am a big supporter of being invested in equity to the extent feasible even in the retired stage of life.

Secondly, the question arises as to how should you be invested in equity then? Well, the ideal way will be to keep having your 3 portfolios of Debt, MF and Stocks even in retirement. You start realizing money out of these portfolios in the same order so that your equity investments have the maximum chance to grow. However, as many readers will surely point out, what happens when you do not have sufficient corpus that allows you to follow this strategy? One way will be to invest in equity through MF which carries a lower risk by their hybrid nature. You are now not in a growth phase of your corpus but in the drawing down phase. At the same time, you want to ensure some decent growth as this will ensure the longevity of your corpus.

The following portfolio is again taken from Investors Guide and has been suggested by Dhirendra Kumar of VR Online. The idea is to put most of your corpus, save some emergency money, into the following funds:-

  1. FT Dynamic PE Ratio fund
  2. HDFC MIP
  3. Reliance MIP

Note that the choice of funds ensure that the risks are contained either through Debt investments for 2 and #, or through market actions in the case of 1. Let me take an example to illustrate how this will work in real life.

  • Consider a person who will retire in the next 2-3 years and has about 1.5 crores with him. He can put 50 lacs in each of these funds.
  • For taxation issues, investments in 2 and 3 should be ideally done 3 years prior to the first year when money has to be withdrawn.
  • The growth of the portfolio will be about 10 % on an average.
  • Withdrawal rate can be about 6-8 % of the portfolio value, depending on the need.
  • In the first year this will give about 9-12 lacs which is sufficient for most of us to run their annual expenses. I am assuming here that the investor already has a home.
  • The surplus can be invested in some safe avenue or reinvested in these funds if some risk is OK.
  • In case the corpus is 1 crore, the withdrawal will be 6-8 lacs in a year.
  • Assuming a 6 % inflation, this will last about 20 years or more with a reasonable degree of comfort.

Note that depending on the corpus available, you can have more complex bucket strategies but this is probably a simple hassle free way to achieve what you need.

The million Dollar question of retirement

One of the great imponderables in the personal finance space is the question – how much do you need in retirement? There are several ways which are commonly used to arrive at an answer. In the US context, one figure that many planners throw around is 1 million Dollars, provided you have your own house. Of late, I am seeing a lot of people in India suggesting this figure for retirement in India also.

Now, in something like a retirement corpus, the more is always the merrier. As such, there is absolutely no problem in investing more for retirement, in fact it should really be a goal to invest as much as you can. However, two aspects are critical to examine in terms of how this figure may not be a good thing. Firstly, many investors will be hard pressed to invest beyond their means to arrive at such a corpus, thereby creating a situation where they have to compromise on living a good life today. Secondly, while a focus on saving and investing for this amount can be worthwhile, it will seriously limit any risk taking ability of the investor, thus limiting oneself in many cases to a job or career that one may not be overly excited about.

My principal objection to the above figure is that it is in another currency. So while the $ was at 50, the figure was 5 crores and today it is at 6.7 crores etc. This can be seen as a good hedge for our inflation but there are obviously far better ways to address that. Also, it is not a good idea in general, to have a moving goal post. Now, let us come down to what an amount of 1 M $ will mean for retirement corpus in real terms:-

  • Let us assume a corpus of 6.7 crores, zero real rate of return and 30 years of retired life for which you need income.
  • The amount you can theoretically spend each year will then be about 22 lacs. Note that this is in current prices.
  • I am sure there are some people who have an expense of 22 lacs a year today, but it will be safe to say that their numbers are minuscule.
  • If you assume an annual expense of 10 lacs then the corpus comes to 3 crores, which is less than half of the 1 M $ figure.
  • If the real rate of return is 2 % then you will need much less than 3 crores.

The reality is most of us spend far less than 10 lacs a year, exclusive of accommodation expenses. So a far better way will be to estimate your monthly expenses at retirement, bump it up by a few percentage points and arrive at a corpus. As an example, if you are spending 7 lacs per year today, you can inflate it by 15% and look at 8 lacs as your annual expenditure. Remember, it is not the amount you are spending at your peak level of expenditure, it is the amount you will need when you are retired.

To take my personal example, for the past few years my annual expenses have actually been at the range of 20 lacs plus. However, a large part of this is due to the educational expenses for my children. When I do retire completely, these expenses will not be there and my estimate of 8 lacs annually should hold quite comfortably. As such, while I am probably going to be quite close to the US figure, I do not think I need so much.

Do not get swayed by fads that do not have any substantive basis. Your situation is unique – look at it and deal with it accordingly.