Planning for retirement? Think deeply

—Vishal Dhawan

One of the sights we have been witnessing quite frequently in the international media is protests in different parts of Europe about enhancing the retirement age. Considering that curtailing government spending has been on top of the agenda of most of these countries, raising the retirement age by a few years to reduce pressure on the pension system has been touted as a solution by many.

Considering that we work closely with investors on their financial goals, one of the most common things we hear from clients, especially younger clients, is their desire to retire at an extremely young age, ranging from 35 to 45. For most individuals, this would probably be close to the prime of their careers, unless they are sportspersons and been forced to retire earlier due to physical limitations.

As we delve further into understanding this desire to retire earlier, we find that the most common answer we receive is probably, "not retire in a classical sense but essentially not having to work for the money."

As financial planners, we find that most investors tend to start working seriously on their financial plans between the age group of 30 and 40. Considering that life expectancy in India is increasing rapidly and medical advancements make it very likely that we will live much longer than we currently envisage, creating a corpus of that size can be quite a challenge. To put it into perspective, investors expect savings and investments made over 10 to 15 years to support them and their families for a 35-40 year period.

Remember that inflation could also structurally move in India to a much higher level vis-à-vis where it has traditionally been due to supply constraints.

Whilst successful entrepreneurs and employee beneficiaries of stock options tend to be the most common group of individuals to achieve this aggressive target that they have set for themselves, most other investors need to enhance their targeted retirement age so that they can build up the requisite corpus.

Since the rate of return on their investment portfolio is another variable that investors can aim at changing if they wish to achieve their target, we strongly advise that investors look at investment strategies that, although riskier over shorter time frames, have the potential to outperform over longer periods. Investments in asset classes like equities for a retirement portfolio should be looked at very closely for their potential to deliver superior returns over longer time frames.

In addition to the quantitative aspects of retirement, we also urge investors to answer two questions when they plan for retirement:

1. What would your ideal day be like when you retire?

2. And will this continue to be your ideal day if you do this day after day?

We find that these answers are far more difficult for most investors, as a spreadsheet cannot answer this for them. We urge investors to think deeply about these answers today so that they are prepared for retirement not only financially but holistically.

INVESTMENT NAVIGATOROR

Na jaane kyon, hota hain yeh zindagi ke saath……

—Vishal Dhawan

As I hurried past ground zero in New York where the Twin Towers stood before the planes crashed into them on September 11, 2001, I paused for a while to reflect on how the world has seemed so much more unsafe after 9/11.

In much the same way, financial markets have not remained the same after the events of 2008, when they saw a significant fall after the collapse of Lehman. Every piece of bad news, whether it is a rating downgrade like that of the US which took place a few weeks ago, or Italy which took place a few days ago, causes jitters in the minds of investors about whether we are going to see a repeat of 2008 all over again.

Just like it is very hard to predict if we will see another attack of the magnitude of 9/11 in the near future, it is also very hard to predict whether or not we will see a repeat of 2008 in the financial markets in the near future. However, just like vigilance has been beefed up very significantly after 9/11, you need to be vigilant about your investment portfolio. We believe a few simple steps can go a long way in protecting your investment portfolio

1) Create an emergency fund of at least 4-6 months of expenses—With very clear signals of a slowdown emanating from the US, Europe and India, you need to be prepared for emergencies like a sudden job loss. For investors with irregular income flows, there may be a need to create up to 12 months of contingency expenses through investments in instruments like bank fixed deposits, liquid funds and short-term bond funds.

2) Ensure that you and your family have enough life, medical and asset coverage—There is a tendency to underinsure, believing that nothing can happen to "me". I'm sure none of the unfortunate victims of 9/11 knew that a plane will crash into their building, in a few seconds changing the lives of their families forever.

3) Use different horses for different courses—A large number of investors tend to have a combination of short-term and long-term goals but a single portfolio strategy, i.e. sell all stocks or buy only gold. We believe that the strategies for investments for long-term and short-term goals need to be different—for e.g., for a tuition fees that is due for your child’s education in two years, you are better off using fixed-income instruments like bank deposits and bond funds, whilst for your 5-year-old child for whom you are in the process of creating a corpus that may be required after 10 years, you can invest in more aggressive instruments like equities.

4) Be aware of sleeper cells—Just like anti-terror experts worry about sleeper cells that can be activated at any point for a fresh terror attack, investors need to worry about silent killers like inflation that keep eating away at your portfolio gradually whilst giving an impression that they are actually growing your money. It is therefore critical to have investments in your portfolio that can counter inflation threats effectively, like equities and real estate.

As I walked away from ground zero, I hummed a sweet melody in my mind—"Na jaane kyon hota hain yeh zindagi ke saath, achanak yeh mann, kisi ke jaane ke baad, kare phir uski yaad, chotti chotti si baat…"