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Publication: The Economic Times Mumbai;Date: Nov 14, 2011;Section: ET Wealth;Page: !

7 GOLDEN RU L E S OF RETIREMENT

Experts contend that retirement planning sho ld start !rom the da" "o start earning# So nd ad$ice indeed% & t one that is seldom !ollo'ed# This is 'h" ET (ealth decided to &ring to "o se$en imm ta&le r les o! retirement planning# Steeped in !inancial pr dence% these canons ha$e &een ad$ocated &" experts thro gh the decades# Follo' them and "o can &e s re that "o 'ill retire in com!ort#

Save 10% of your income for retirement The !irst r le o! retirement planning is also the easiest to !ollo'# I! "o ha$e a reg lar )o&% then *+, o! "o r &asic salar" and an e- al contri& tion &" "o r emplo"er that !lo's into "o r .ro$ident F nd acco nt is a good 'a" to & ild a nest egg# The &est thing a&o t this option is that "o cannot a$oid it# E.F r les re- ire all emplo"ees to contri& te *+, o! their &asic income to retiral sa$ings% 'hich incl de the Emplo"ee .ro$ident F nd and the Famil" .ension F nd# It is a !orced sa$ing that &ecomes the de!a lt retirement plan !or man" indi$id als# The amo nt o! contri& tion to the E.F does not matter# Gi$en the po'er o! compo nding% e$en a small contri& tion can &loat into a &ig s m o$er the long term# Don/t nderestimate the signi!icance o! the sa$ings in the !irst !e' "ears# 0ss ming that a +12"ear2old in$estor p ts a'a" a !ixed amo nt e$er" month% his sa$ings in the !irst !i$e "ears 'ill acco nt !or 33, o! his total corp s 'hen he is 45 "ears old# The later "o start% the more "o 'ill need to sa$e# I! "o ha$e started late% sa" in "o r 35s or 15s% "o 'ill ha$e to in$est p to +52+1, o! "o r income i! "o 'ant a com!orta&le retirement# The *5, r le is cr cial !or sel!2emplo"ed pro!essionals and others 'ho are not co$ered &" the E.F m&rella# The" can opt !or m t al ! nds% choosing the ones that s it their ris6 appetite and age pro!ile# Find o t a&o t the &est m t al ! nds !or retirement planning !or di!!erent ages on page +5# 7o'e$er% "o need to ha$e the discipline to p t a'a" the gi$en s m on a reg lar &asis# SMART TIP Start an SI. in a m t al ! nd and a tomate the process &" gi$ing an E8S mandate to "o r &an6# In this 'a"% "o r retirement planning 'ill sta" on trac6#

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Increase investment as your income grows According to recruitment firm ABC Consultants, India Inc hiked salaries by 12-15% in 2011 By ho! much did your income go u"# $ore im"ortantly, did you ste" u" the %uantum of your in&estments accordingly# 'ot many "eo"le do that (ure, inflation has been on the rise and most of this year)s increment !ould ha&e been nullified by the increase in the cost of li&ing But e&en !hen there is a marked increase in the in&estible sur"lus, "eo"le don)t match their in&estments !ith the increase in income *his is understandable since it is human nature to "ut things off, es"ecially ones that re%uire sacrifices in return for future re!ards *his can se&erely undermine your retirement "lanning If a +0-year-old !ith a monthly salary of 50,000 starts sa&ing 10% , 5,000- for his retirement e&ery month in an o"tion that earn .% "er year, he !ould ha&e accumulated .2 lakh by the time he is /0 'o!, assuming his salary increases by 10% e&ery year and he raises his in&estment accordingly, he !ould ha&e a gargantuan retirement cor"us of 2 0/ crore If he does not immediately ste" u" the in&estment, but !aits fi&e years to raise it by 50%, he !ill ha&e 1 .+ crore It is im"ortant to maintain the retirement sa&ings rate at 10% so that your nest egg doesn)t fall short of your re%uirements *he icing on the cake can be "eriodic boosters !hene&er you get a !indfall, such as a ta1 refund or a lum"-sum "ayment in the form of, say, an annual bonus *he trick is to commit yourself to sa&e more in the future SMART TIP 2hene&er you get a raise, allocate half of the additional income to sa&ings 3ou might not notice the change since you !ill be en4oying the other half of the raise

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Dont dip into the corpus before you retire This might sound weird, but every time you change jobs, your retirement planning is at a grave risk. This is because you have the option to withdraw your PF balance at that time or transfer it to the account with the new employer. Besides, there is the option to withdraw your PF amount if you need the money for specific purposes, including your childs marriage, buying or building a house, or in medical emergencies. ipping into the corpus before you retire prevents your money to gain from the power of compounding. ont underestimate what this can do to your retirement savings over the long term. ! person with a basic salary of "#,$$$ a month at the age of "# can accumulate %.&# crore in the PF over a period of '# years. This is based on the assumption that his income will rise by %$( every year. )et, many people are unable to reach the % crore milestone in their PF accounts. !lthough the paperwork is minimal, a lot of people prefer to withdraw their PF money when they change jobs or for other purposes. This, despite the fact that the government discourages you from withdrawing the money. The withdrawals from the *PF within five years of joining are ta+able. The sudden flush of li,uidity can trigger a spending spree and ill-planned decisions that can cripple your financial planning. .ften, the money goes into discretionary spending, which means your retirement planning is back at s,uare one. ! late start means a smaller corpus even if you start investing more. SMART TIP /nstead of withdrawing your *PF balance when you change jobs, transfer it to the new account by filling 0Form %'0 and submitting it to the new employer. This should be at the top in your list of priorities at the new workplace.

START LATE,INVEST MORE,END

P POOR

!ithdr"# $% " ye"r initi"&&y,then step up .ne of the biggest challenges for tomorrows retirees is to ensure that they dont outlive their savings. This is a distinct possibility because of two major factors1 rising cost of living and an increase in life e+pectancy. 2igh inflation, in fact, is enemy no. % for the retired investor. 3ure, the inflation rate will not remain as high as it is right now. 2owever, over "$ years, even a nominal inflation of &( will reduce the value of % crore to "4 lakh. Besides, /ndians are living longer. 5ife e+pectancy rose from &%.' years in "$$$ to &&.6& years in "$%$. By "$"$, the average /ndian can e+pect to live till 7" years. /n urban areas, where people have better access to healthcare, and in higher income groups, the life e+pectancy could e+tend beyond 8$ years. To ensure that you dont run out of money in your old age, you must have a drawdown plan in place. The thumb rule is not to withdraw more than #( of the corpus in the first five years of retirement. This can be progressively increased to %$( by the time the retiree is 7$. This essentially means that the retiree should draw down less than the appreciation in the initial decade, but in the ne+t %$ years, he can withdraw more than the accretion to the corpus. !t 8$, even a "$( annual drawdown rate would be considered safe. The problem arises because most /ndians are not comfortable with the idea of drawing down from their corpus. There is an overarching desire to leave something behind for their heirs and dependeats. 9iven the inability of a corpus to beat inflation in the long run, the retirees should be prepared for a depletion of their corpus. SMART TIP )ou can safely draw down half the inflationadjusted appreciation every year. /f the portfolio has earned %"(, you can easily withdraw &(.

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Save 20 times your annual expenses This rule is different from others because it is based on how much you spend, not on how much your investments earn. Knowing your post-retirement expenses is crucial to retirement planning. Some expenses, such as those on clothing and entertainment, come down. Others, such as transportation, medicine and insurance, go up. Add up all the expenses you are li ely to incur after retirement to now how much you will need per month. Then, multiply this amount by !"# to now how much should be your retirement corpus. $owever, this calculation is based on a number of assumptions. %irstly, you are unforeseen $S&' health and you should the hang your earlier insurance not biggest spouse up have expenses your this concerns outstanding . should year A boots survey and shows . have for Secondly medical conducted (ndians that loans sufficient , costs when you by ) during retirement *see chart+. The good news is that (ndians are increasingly becoming aware of the need to plan their retirement. (n a !#,# survey by &harti Axa -ife (nsurance in eight top cities in the country, ."/ of the respondents said that they new how much they would need after retirement. Three years earlier, only )0/ had a fix on how much they would re1uire in their sunset years. SMART TIP &uy a health insurance cover that continues till you are .#-.) years old. (t is difficult to buy one afresh when you are older and not so healthy.

Borrow for kids edu ation!"ut save for your retirement (ndian parents love to save for their children. 2hether it is for their education or marriage, or even to provide them with a comfortable life, children are the biggest motivators of savings in the country. &ut before you pour money into a child plan, ma e sure your retirement savings target has been met. (n an effort to fulfil the needs of the child, (ndian parents sometimes sacrifice more than they should. Some even dip into their retirement funds to pay for the child3s education. This is ris y because your retirement is going to be very different from that of the previous generations. (t will be entirely funded by you and will be devoid of the cushion of defined benefits. This doesn3t mean you should compromise on your child3s education. (t can still be done through an education loan. (n the past two decades, we have seen how the 456 of a product has been replaced by its 74( in our everyday lives. $ome, travel, car, education, gold, consumer durables8you can get a loan for almost anything and everything. 2hat3s more, the government encourages you to ta e loans by offering tax brea s on the interest paid on housing and education loans. 9o ban , however, is going to lend you for your retirement. Sure, there are reverse mortgage schemes, but those re1uire your house to be ept as collateral. :nder Section ;#7, income tax deduction is available only if the education loan has been ta en for yourself, your spouse or children. Also, the loan should be from a ban or a financial institution notified for the purpose. 9o tax deduction is available if the loan has been ta en from a private source. SMART TIP An education loan helps inculcate financial discipline in the child. (f he is responsible for the repayment, he gets into the saving habit early in life.

#00 $ a%e & 'our allo ation to sto ks An investment portfolio3s performance is determined more by its asset allocation than by the returns from individual investments or mar et timing. $ow much you have when you attend your last day at wor will depend on how you divided your retirement savings between stoc s, fixed income and other asset classes. 7xperts recommend that you should have an e1uity exposure of ,## minus your age. So, at 0#, you should have about .#/ of your portfolio in e1uities. At )), the exposure to this volatile asset class should have been pared down to ")/. After you retire, your exposure to stoc s should not be more than !)-0#/ of your portfolio. 7ven within e1uities, the type of stoc s *or e1uity funds+ in your portfolio should vary with age. Turn to page !# to now which type of stoc s and e1uity funds you should buy at

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various stages of your life. This is not a hard and fast rule and should also ta e into account the financial situation of the individual. (t assumes that all people at a certain age will have the same ris appetite. This is not true. A ")-year-old person with a good income and few dependants will be able to ta e on more ris than someone who is 0# but has a low and unsteady income. Then again, there are certain rules regarding your stoc investments as well. %irstly, don3t try to time the mar ets. <ou may be luc y once or twice, but your returns will not be able to match those who buy and hold. Secondly, don3t buy and sell too often. Small investors tend to switch stoc s on the basis of daily news. (nstead, review your portfolio once in =-,! months. (f it re1uires twea ing, go ahead and change. SMART TIP (nvest in asset allocation funds that redistribute the corpus depending on the age of the investor. As he grows older, the exposure to e1uity is progressively reduced.

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