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MONDAY, MAY 22, 2017
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Be ready for a long retirement
Increasing life expectancy and shrinking work spans mean you will have a longer retired life
Narendra Nathan
ood news for all of us. Life ex-
G
pectancy at birth in India is on
the rise. From 53 years in 1997,
it has gone up to 71 years. Life
expectancy rises with age. At
60, the age at which most Indians retire,
the average male can expect to live up to
77.2 years while the average feamle will
live up to 78.6 years. Advances in medical
science mean that over the next 20-30
years, one can easily expect to live till 90,
if not till 100. The big worry is: can you
afford to live so long? If you plan your
retirement till 75, but live longer, be ready
to spend your sunset years in penury.
Shorter working life
The risk of living longer is made worse
by shorter working lives. Earlier genera-
tions started working after graduation
at the age 20-21 years. Now, the demand
for higher education means one starts
working at 24-25. We also dream of retir-
ing early or other reasons like health
issues, inability to cope with work pres-
sure and redundancy force one to quit-
before 60. “The working life is shrinking
due to early retirements, both aspira-
tional and forced,” warns Manoj Nagpal,
CEO, Outlook Asia Capital. So, careful
financial planning becomes critical.
The family safety net has also shrunk.
“Children may not take care of their par-
ents in future,” says Jiju Vidyadharan,
Senior Director, Funds and Fixed Income
Research, CRISIL. Even if the next gen-
eration is willing to care for parents, the
burden on them will be high—one nu-
clear family could end up supporting four
parents and eight grandparents.
Not enough pension cover
At the same time, the assurance of pen-
sion is vanishing. Even government em-
ployees who joined after March 2004 will
get a pension that is linked to their con-
tribution to the NPS. Others too need to
rethink their retirement plans as their
retiral benefits may not see them through
more than 20 years. Worse off will be
those outside the formal retirement plan-
ning structure, like contract workers,
self-employed professionals and employ-
ees in smaller units.
Many people live with the misconcep-
tion that their expenses will come down
drastically after they retire. While ex-
penses like transport will reduce, others
like medical costs will surge. “Retired
individuals have to manage their health.
At 70, no insurer will give you cover. Even
if they do through co-pay products, pre-
miums will be very high,” says Santosh
Agarwal, Head, Life Insurance, Policy-
bazaar. All other expenses will also bal-
loon due to inflation. If we assume an
inflation of 7%, a modest annual expense
of `3 lakh now for a 30-year-old will mean
`96 lakh when he is 80. As Nagpal points
out, “Retirement planning is most criti-
cal because all other goals can be met
through loans.” To accumulate an ade-
quate corpus, one needs to take the fol-
lowing steps.
What they don’t teach in financial literacy
MONEY While it’s an essential tool for saving and investing well, financial literacy programmes only focus
MYSTERIES
on what you should do but pay no attention to what you should avoid, says Dhirendra Kumar
n 2006, a research study conducted
I in the US by FINRA Investor Educa-
tion Foundation found that people
who were financially literate were
more susceptible to financial fraud
than those who weren’t.
The study revealed that people who
became victims of fraudulent invest-
ment schemes had a higher score on fi-
nancial literacy tests than those who
hadn’t fallen victim, by a statistically
significant 27 percentage points. There’s
no equivalent Indian study that I know
of, but these findings echo what I have
observed in my interactions with savers
and investors in India. I think the key to
this lies in what is meant by the term
‘financial literacy’.
My argument in this regard is quite
simple: by definition, if a person is mak-
ing bad personal financial decisions,
whatever kind of knowledge he pos-
sesses does not qualify as financial lit-
eracy. It may be called financially litera-
cy by those who provide it, or those who
possess it. It may superficially resemble
what financial literacy should be like,
but it cannot actually be financial liter-
acy. If someone who has had a basic edu-
cation cannot read or write, then can
they really be called educated? Obvi-
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Life expectancy at birth
is improving
Life expectancy at 60 is higher at
77.2 for men and 78.6 for women.
53
Years
Due to better
healthcare, life
expectancy is
rising significantly,
increasing the
longevity risk.
Source:
Policybazaar.com
20 YRS AGO
The working life is shrinking
Higher education has meant people are joing the workforce late.
GRANDFATHER
STARTED
20
WORKING AT
WORKED
FOR
40
LIVED
TILL
70
All figures
Health issues, inability to cope with work pressure and redundancy
in years.
are playing a role in increase in number of early retirements.
Start early
Start planning for retirement early in
life to make the most of the power of
compounding. However, planning early
has its own limitations as the calcula-
tions may throw up a very large require-
ment. “Don’t be overwhelmed by large
numbers and give up. Allocate what-
ever you can as your income will in-
crease in future,” says financial planner
Gaurav Mashruwala.
Avoid dedicated products
Dedicated pension plans, mostly from
insurance companies, cost a lot and
come with myriad restrictions like com-
pulsory buying of annuities using 67%
of corpus, etc. “Since investors have to
buy annuities from the same compa-
nies, pension plans don’t make sense
for accumulation,” says Agarwal. One
does not really need annuities and can
ously not.
But surely there’s nothing wrong
with the knowledge provided by various
financial literacy programmes. People
learn the basics of money, financial plan-
ning, different avenues of investment,
insurance, loans, deposits, interest etc.
How can learning about these things
actually make one more susceptible to
financial fraud? The simplest explana-
THIS WEEK
TIMES PERSONAL FINANCE
3 Year 5 Year Equity: Multi Cap
21 22.96 Motilal Oswal MOSt Focused
20.33 — Franklin India High Growth Co
19.73 21.88 SBI Magnum Multicap Fund
Equity: Tax Planning
35.76 33.67 IDBI Equity Advantage Fund
30.93 — Tata India Tax Savings Fund
30.44 29.86 Birla Sun Life Tax Relief 96
71
Years
60
Years
10 YRS AGO NOW
FATHER SON
22 25
33 25
80 90
manage the corpus through other prod-
ucts as well. “I encourage people to go
for mutual funds. The flexibility allows
them to manage the new options that
may come in future,” says Mashruwala.
Don’t divert corpus
Diverting retirement corpus is a cardi-
nal mistake. Instead of withdrawing
your EPF when changing jobs, shift it
to the new company. There are tax im-
plications for early withdrawals. The
tax benefits get reversed if you with-
draw from the EPF before completing
five years. Partial withdrawals should
also be restricted. “Premature with-
drawals allowed in NPS, EPF, etc pro-
vide some flexibility and investors
should use it only in extreme cases,”
says Vidyadharan. The probability of
this kind of diversion is highest among
mutual fund investors. “I have seen in-
GETTY IMAGES
tion may lie in the saying ‘a little knowl-
edge is a dangerous thing’.
But there’s more to it than that. From
what I’ve observed, there’s a deeper prob-
lem with financial literacy programmes.
All of them focus on what the saver
should do, not on what he should avoid.
Moreover, all financial literacy pro-
grammes seem ideologically committed
to the view that there is no fundamental
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36.19 32.1 — Tata Retirement Savings Fund
30.7 25.3 26.4 L&T India Prudence Fund
26.64 23.42 22.77 HDFC Balanced Fund
Debt: Income
21.63 24.86 — ICICI Pru Banking & PSU Debt
29.39 23.35 22.52 DHFL Pr Medium Term Income
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vestors starting SIPs in mutual funds
for retirement and then withdrawing
before retirement,” says Lobo.
Enhance return profile
One way to make sure that your invest-
ment grows faster than inflation is by
investing more in equities. This is
critical for government workers, be-
cause the equity exposure of NPS is
only 15%. There is another reason why
government employees should increase
equity exposure. “Since government
jobs are more secure, these employees
can take higher risks and invest in eq-
uity,” says Mashruwala. EPF subscrib-
ers should also focus on equity funds to
compensate the lack of such exposure
in the fund.
THE DISTRIBUTION STAGE
Though all of us want to enjoy a retired
life, to stop working at 60 may be a
costly proposition. That is because life
expectancy is increasing and your re-
tirement corpus will deplete all too
soon.
Protect the corpus
Right after retirement, go easy on
spending. Withdrawing heavily from
your corpus in the initial years can be
suicidal. “I am not against people
splurging on foreign holidays in the
initial years, but they should do that
only if they have a larger kitty,” says
Mashruwala.
Continue investing in equity to gen-
erate high returns. “At the age of 60,
you can keep 20-30% in equity. The un-
winding from equity can be done slow-
ly. However, opt for less risky equity
components like index funds,” says
Roongta. On the debt side, delaying
withdrawal from instruments like EPF
and PPF is another option. You also
need to park investments in high yield-
ing investments. “Investing in products
like senior citizen savings scheme is a
must for newly retired people,” says
Nagpal. Another option is to invest in
tax efficient debt mutual funds and
withdraw through SWPs.
Delay annuity buying
Whether you should buy annuities at
the time of retirement or continue with
a SWP kind of structure is a perennial
question because the risk of managing
one’s own portfolio increases with age.
“Managing one’s portfolio at a later age
becomes difficult because the invest-
ment landscape changes totally in 30-40
years. Senior citizens also fall prey to
scams. But the main problem is the an-
nuity market is not developed,” says
Nagpal. Annuities are taxed at mar-
ginal rates in India. There are also prob-
lems with the SWP structure—the
money may get used for something else
like starting a new business for kids or
a grandchild’s marriage. So a hybrid
solution works best. Manage your port-
folio till you can and then shift to the
annuity structure. By delaying annuity
purchase, you can also get better rates.
behavioural problem on the part
of the various entities which
are selling you financial ser-
vices. This is a goody-goody
view of the financial world,
which is based on the idea that
since all personal financial ser-
vices are regulated by some gov-
ernment regulator or the other,
no harm can come upon the
saver who avails of any such
service. It’s a no-criticism mod-
el of education, which is com-
mitted to not saying anything
negative about that which is
otherwise legal.
However, this view of the
world is fiction. In reality, a good
proportion—perhaps even the
vast majority—of financial ser-
vice providers have no interest
except to maximise their own
earnings while sticking to the
most basic letter of the law. For
obvious reasons, this is espe-
cially true of the sellers or dis-
tributors of products who earn
money in the form of commis-
sions. It could be a stockbroker
who will try and make you trade
excessively, a mutual fund dis-
COVER STORY
IS YOUR HOUSE
MAKING YOU POOR?
A large chunk of a household’s monthly
income is often eaten away by housing
costs, leaving little for savings. Find out
how to avoid falling into the trap.
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1 Year 3 Year 5 Year
29.94 24.07 21.05
32
24.69 20.28 20.55
25.52 19.41 19.49
returns in
past three
10.26 9.84 9.52
years
10.24 10.5 —
10.22 10.18 — in its category
Figures are % returns. 3-year and 5-year returns are annualised.
Be frugal, but not stingy
The stingy end up denying themselves small pleasures to hoard money
Uma Shashikant
e have heard enough
W
strictures about living
within our means. Every
lesson on personal fi-
nance begins with the
need to spend less, save more, and trade
current pleasures for future comfort.
Focus on the goals, we are told. But
where does one draw the line between
being frugal and being stingy?
We may not know if we are being
virtuously frugal or abhorrently cheap,
but everyone else can tell. Misers hardly
have friends, and typically dislike most
people around them too. A frugal person
would reciprocate the dinner invitation
of friends, but a miser would take advan-
tage of others’ invitations but almost
never call anyone over for a meal he
would host. The unwillingness to spend
is different from unwillingness to waste,
and society tends to identify the differ-
ence quite well.
Many of us have friends and relatives
who will always converse with warmth
and invite us to their homes, except that
they would not firm up a date or time,
ever. When an occasion to act on their
professed intent arises, we will find them
GETTY IMAGES
making excuses. They are the stingy and
cheap lot who have no intention of
spending their money on others. They
are likely to be keeping accounts even
with their siblings and making a virtue
out of it. We also have friends who would
create a lavish spread when we go over
to dine at their homes, only to impress
us with their wealth. These are the
spendthrifts who put their spending
ahead of their ability to do so. The frugal
are the realists who stand between these
two extremes.
Frugal people find ways to get crea-
tive about spending, while the stingy
would focus on the price, and be willing
to buy something only because it is
cheap. You will typically find them com-
promising quality for price, only be-
cause they feel good about saving some
money and getting themselves a good
deal, over everything else.
The objective behind being careful
with spending is quite clear to the frugal-
tributor who will churn your
portfolio to generate commis-
sions, or insurance sellers, who
are often the worst offenders.
The interesting thing is,
those who are completely con-
servative about financial choic-
es, and simply refuse to use any
financial products apart from
the conventional ones that their
grandparents used, are rela-
tively immune to such prob-
lems. However, sticking to PPFs
and FDs is not the solution ei-
ther, because whatever you gain
will be eaten away by inflation.
What is needed is a kind of
an aggressive, negatively-ori-
ented financial literacy syllabus
which tells people what not to
do. Obviously, this won’t be de-
livered through conventional
channels. We will either learn
through our own bitter experi-
ences, or from those of others.
Hopefully, this column will also
contribute to the process.
The author has written about
personal finance for more than two
decades. He is the Founder and
CEO of Value Research
+ SHOULD YOU OPT FOR A
THE TIMES OF INDIA, BENGALURU
The three-year
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%
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Focused Multicap
35 Fund is the highest
Source: Value Research
minded. They have a goal in mind and
they know why they are sacrificing a
pleasure in the present. They motivate
themselves and their families in pursuit
of frugality, given the need to allocate
money to the goal, which is a shared as-
piration. Mothers who urge children to
eat at home, rather than buy food out-
side, so that money is available for high-
er education, are inculcating careful
spending habits, so that the limited
money in the household can go farther.
The stingy save for the sake of saving.
To them, setting money aside is a goal
in itself. The frugal are generous and
give within their means. The stingy are
wily takers, and their giving is a calcula-
tion of underlying future benefit.
Those who choose a frugal lifestyle
are not too worried about how they may
be perceived by society or how they may
fall short in the eyes of their friends or
relatives. There is an inevitable pride in
the decisions they make, and they end
up being strong advocates of their choic-
es, the honour in being minimalistic, the
virtues of reducing consumption, and
the ability to differentiate between need
and want. The stingy, on the other hand,
are quite aware of their tendency to be
cheap and therefore work hard to cover
it up. They put up an act of generosity
in words, tend to be dishonest in their
preferences and choices, and do not like
to own up to their tendency to be cheap.
They extract the benefits out of a situa-
tion rather shamelessly, telling them-
selves that they are smart to be doing so.
Even those who choose frugality do
not push the envelope so much that it
compromises the quality of their lives.
They do not deny themselves things that
they enjoy, only to be able to save some
money. They take their time to make the
decision, they consider the choices, they
seek information, but they are willing
to spend where it matters.
On the other hand, the stingy are
fully aware that the expenditure on hand
is an important one, or that it can bring
them joy. But they are unwilling to spend
and instead settle for a lower quality of
experience instead. They begin with ‘no’
when it comes to spending and it is rare
for them to find a consistent line of rea-
soning to make that a ‘yes’.
When frugal people choose a simple
lunch, they are satisfied that their choice
meets their need. The stingy would go
hungry and make a virtue out of skip-
ping lunch, but end up piling their plate
in a buffet hosted by someone else.
The choices we make and the lessons
we teach our children about money re-
veal our attitude about allocating that
money. Being a cheapstake reduces the
quality of our life as we deny ourselves
things that we enjoy doing, and suffer
needlessly. Being frugal means we value
what money can buy and use it optimal-
ly and we remain proud of those deci-
sions. If our focus remains on the mon-
ey in an absolute sense, no amount
would be enough to make us comforta-
ble. Instead, if our focus is on what we
like our money to do, viewing it as a
means to an end, we may have better
money lives.
The author is Chairperson, Centre for
Investment Education and Learning
SMART THINGS TO KNOW:
QUARTERLY AVERAGE
BALANCE (QAB)
QAB is the average of the all the
1 closing day balance of a bank
account in a given quarter.
2
It can be calculated by adding up all
the closing day balance in a given
quarter and then dividing it by the
number of days in the quarter.
Maintaining `90,000 in a bank account
for 1 full month is same as keeping
3 `30,000 for a full three months, as
90,000x30 days = 30,000 x 90 days.
Savings account holders are
typically required to maintain a
minimum QAB in their bank account
4 and most banks levy a penalty
charge if an account holder does
not of maintain this balance.
QAB requirement varies from bank to
bank, and is sometimes also based on
5 the account holder’s location (urban
or rural) and/or account category
(normal, privileged, platinum, etc).
INVESTORS NEED TO
STUDY THE MAGIC OF SIPS
Understand the maths and
psychology behind SIPs.
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