The layman's retirement guide

As they enter the twilight years, the Khannas have earnestly started planning for their post-retirement life. Corporate Head Ramesh Khanna, 58, (name changed) plans to retire by 2008, but with a current expense of around Rs 12 lakh, his corpus is a wee-bit short.

To maintain the same standard of living after apportioning adequate funds for his kids’ education, weddings and other contingency funds, the Khannas have to fill a need gap of Rs 70 lakh, with a current corpus of just over Rs 3.4 crore. His financial planner suggests that the Khannas slim down to a moderate profile from his current equity-heavy portfolio.

Viraj Ghatalia/ IL&FS Investsmart: “There are many variables to consider in retirement planning. So, it is difficult to lay down a thumb rule”

But for 55-year-old Venkat Rao (name changed), the goals are different. With an annual family expense of around Rs 3 lakh, this middle level employee with a private company plans to retire by 2011.

Rao wishes to maintain a similar standard of living. By that time, his planner reckons Rao will have to build a corpus of Rs 63.5 lakh, excluding expenses on kids, a holiday home and a car. But to achieve his goals, Rao needs to bridge a gap of Rs 22 lakh.

As Rao currently has a debt-heavy portfolio, his financial advisor has told him to invest aggressively till 2011.

Asset managers and financial planners suggest your planning for your post-retirement years should be goal-based. If you are near retirement, you have to decide on the kind of lifestyle you wish to maintain, what it will cost you at today’s prices and if you are retiring at 60, extrapolate the same for a 25-year period, taking inflation into account.

Separate provisions have to be made for dependents (children, spouse and parents) and their financial requirements. Since each individual’s needs are different, essentially the rule of thumb does not apply.

Himanshu Kohli/ Client Associates: “Appreciation in returns during the first 10 years should be covered by debt instruments, in the remaining 15 by equity-based instruments”

“There are many variables to consider in retirement planning and each individual has different goals and aspirations,” says Viraj Ghatalia of IL&FS Investsmart. “So, it is difficult to lay down a thumb rule.”

Should your investments, therefore, be risk-averse or should you adopt an aggressive approach? Says Ghatalia: “Irrespective of whether you adopt a conservative, moderate or aggressive portfolio, you should beat inflation by at least a couple of percentage points.” In other words, at current rates of inflation, you should aim for a minimum growth of 8-9 per cent.

The Allocation

Asset allocations differ between individuals according to their risk appetites and comfort levels with volatility. Broadly, however, allocate fund to equity from your corpus depending on the liquidity you desire.

Financial planners suggest that even after retirement, about 35-55 per cent of your corpus can be allocated to equity. If you are retiring with a substantially large corpus and have benefits like pension, stock options and residential or commercial property that can generate rental income, your equity component can be as high as 80 or 90 per cent.

“You should ensure that after retirement, the appreciation in returns during the first 10 years is covered by debt instruments and in the remaining 15 years by equity-based instruments, which offer high returns in the long-term,” says Himanshu Kohli of Client Associates Private Wealth Management.

Kartik Jhaveri

Kartik Jhaveri/ Transcend Consulting: “People look for safety of capital, in bonds and FDs, but they ignore the fact that there is an opportunity cost to locking your money”

While investing in equities, ideally take the mutual fund route. Agrees Surya Bhatia, Certified Financial Planner, Asset Managers, but adds: “Over-diversification is harmful. Moreover, take a long-term perspective while investing in mutual funds.”

 Within the equity segment, you can invest up to half the amount in mutual funds and the balance in systematic investment plans or SIPs to hedge against market volatility.

Another strategy is to apportion 30-40 per cent of the equity component to large cap and diversified funds (growth options) and the remainder between small-cap funds and overseas funds.

Planners advise against investing too much in the 8 per cent (taxable) Government of India bonds or fixed deposits as they offer no liquidity and are tax-inefficient.

“While investing in bonds and fixed deposits, people look for safety of capital, but they ignore the fact that there is an opportunity cost to locking your money up,” says Kartik Jhaveri, Director, Transcend Consulting.

So, while 40 per cent of the debt portion can be divided into short-term fixed maturity plans (FMPs), which have seen post-tax annualised returns of about 8.75 per cent and senior citizen bonds that offer 9.5 per cent taxable returns, a similar portion can go into arbitrage funds and liquid funds.

Also, consider instruments like public provident fund (PPF) that offer 8 per cent taxfree returns.