Why should retired people undertake

financial planning?
NEW DELHI: A basic financial plan includes sources of money and
provisioning for expenses. As you advance into financial planning,
expenses are prioritised to optimise savings. Many people think that
financial planning is only for working individuals or younger ones.
But it is as crucial for retirees.
Santosh Joseph, founder and managing partner, Germinate Investor
Solutions LLP, said, "Whether you are working or retired, the rules of
the game don't change. We have to ensure that our money is
optimised, i.e. our expenses and income must be well balanced. Even
though one may not have an income and have not saved enough
money for retirement, they need to understand how to efficiently save
and invest that money to fund their income during retirement.
Secondly, whether you are salaried or retired, the inflation or the
devaluation of the rupee is a real phenomenon. Your value of money
is at stake. Therefore, keep in mind that irrespective of whether you
are young, old, working or not working, the inflationary effect is
common for all of us."
But once you retire, potential sources of income dwindle. Therefore, it
is better to plan well and ensure that you don't compromise on your
standard of living and are able to absorb the increase in living costs.
"Most retired people are worried because they feel insecure that they
don't have an external income…When you know how much money
you need and have a built-in enough safety margin, you can live
extremely stress-free or tension-free during retirement. Secondly,
when you know how much corpus you have, what yield the corpus is
giving and how much money you need, you can be a little more
relaxed or a little more generous with your month-on-month expenses
as far as your retirement expenses are concerned," Joseph said.
With a retirement corpus, one can plan for vacations, take up
philanthropy, among others. Moreover, if you invest your savings well
even after retirement, creating the right kind and right type of assets
ensures your own safety and security. Also, it leaves behind a good
legacy for generations to come.

The best time to start an SIP

At 43, Damodar Jayaram Shenoy G. has accumulated ₹3 crore through his mutual
fund holdings and earmarked it for his retirement. The Mangalore-based IT
professional has achieved this feat through a simple step–he started investing early. “I
started SIPs (Systematic Investment Plan) of ₹2,000 in two equity mutual funds at the
age of 25. It formed 20% of my salary at that time," said Shenoy.
In Delhi, 33-year-old Neha Bahri has a similar story to tell. “I started SIP at the age of
20 years in my first job itself. I had a small salary of ₹ 20,000 but I was conscious
about saving from the start. Saving via an SIP allowed me to start with a small
amount," said Bahri. She doesn’t have a plan for her investments yet but it gives her a
sense of security. “Being a working mother, I want to be financially secure," said
Bahari.
The early start made by Shenoy and Bahri is commendable, yet cases like these are
still far and few. A 2021 survey conducted by Aditya Birla Sun Life Mutual Fund
with its own investors revealed that only 24% investors started their first SIP in their
20s, whereas 42% respondents did so in their 40s.
 

Experts say that the financial excitement of a first job and aspirations in young age
often prompt young earners to give spending precedence over investing. Moreover,
urgency to save doesn’t kick in as the financial goals seem far in the future. “Instant
gratification compels people to spend today rather than postponing it for an elusive
tomorrow. As one nears their goals, such as retirement, they wake up to investments,"
said Hemant Agarwal, CFP and founder - Rupaiyaah.
Prableen Bajpai, founder, Finfix Research & Analytics, calls out another common
fallacy among youngsters that they start saving when they are earning enough after a
few years into their career.
“With age, income increases but so do the percentage of expenses that cannot be
reduced. On the other hand, at a young age, even if an individual is earning less, the
liabilities are mostly limited. This makes it easier to take a plunge into investing
without undue pressure."
Benefits of long investment horizon
By starting early, investors have time on their side, which translates into various
benefits. One, compounding has a significant impact on their portfolio compared to
those who invest for a shorter term. Even if someone starts late and invests more, they
will still accumulate a smaller corpus due to missing out on compounding. For
instance, a 25-year-old who invests ₹10,000 every month at 12% yearly return will
accumulate ₹1.9 crore by the time he turns 50 years of age, while a 35-year-old with
an SIP of ₹20,000 will have ₹1 crore. Also take note that the 35-year-old would have
invested ₹36 lakh in total, whereas the 25-year-old’s investment amount stands at ₹30
lakh.
Even if people don’t have a defined financial goal at the start of their career, they can
simply save to build their wealth or save for retirement. The earlier you start, the
smaller will be your SIP outflow and you can comfortably save up without burdening
your overall finances ..
A long-term investment horizon also gives room to take maximum exposure in high-
risk equity investments. Take the case of Shenoy, whose entire mutual fund portfolio
is in equity funds as he is still at least 15 years away from retirement.
The reverse is also true, as per Kartik Sankaran, founder, Fiscal Fitness. “An early
start allows investors to target moderate returns and there is no need to hit a proverbial
six with every ball. A ₹10,000 SIP for 35 years at a reasonable 12% gives you a ₹5
crore corpus. However, if you delay to 40 years, then you either need to earn 26%
yearly return for 20 years, which is highly improbable and forces you to take
unnecessary risks, or you need to save ₹55,000 a month, which also might be
challenging."
Easy for early starters
Numbers aside, inculcating an investment habit in your 20s is key to achieving
financial freedom.
Sankaran said people’s attitude to money and savings is generally formed when they
are young. “Starting a savings exercise early in one’s career ensures that the habit is
formed and solidified early on. It is difficult to change one’s attitude towards money
in their late 30s or 40s and hence the ability to save becomes even more challenging
as one ages."
He added that by planning early on, young earners put themselves in a better position
to gain financial independence at an early stage. “This gives them the full flexibility to
plan their time and lives better."
Bajpai said those who start investing in their 20s also have a bigger opportunity to
learn from their mistakes as the cushion to withstand a setback is more. One gets
ample time to build a dynamic investment plan as per their risk appetite and they can
change the asset allocation as per market conditions and timeline of financial goals.
For instance, while Bahri started with equity mutual funds, she has slowly diversified
in debt options as she cannot stomach the massive fall in her portfolio during market
downturns.
Accordingly, she has adjusted the investment amount she needs to set aside every
month as per the return expectations from her debt investments.

Action plan for a stress-free retirement

The three major risks after you retire are – Longevity Risk,
Lifestyle Risk and Health Coverage Risk. 

Anup Bansal, Chief Investment Officer, Scripbox explains,

“Longevity risk is that one outlives his/her corpus, lifestyle risk is
that one has to compromise on one’s lifestyle after retirement
and health coverage risk is that one’s corpus and health
insurance are inadequate in supporting medical expenses due
to health issues.” 

Therefore, according to experts you need to address and plan

for these risks, to have a stress free retirement. 

Here are some actions that you can take towards

retirement planning;

1. You may not have given a thought to your life goals and things
that you would like to do once you have more time at hand.
“Understanding the purpose of money, life goals and planning
for them will keep one energized and motivated during one’s
sunset years,” says Bansal.

2. Review your current expenses and needs at the time of your

retirement factoring in inflation and your lifestyle. Some of the
expenses may not be incurred after retirement like kids’
education but some other expenses like life goals planning,
healthcare may be additional. 

Bansal adds, “Once an individual establishes the expenses

need, he/she can arrive at the retirement corpus requirement
with some assumptions on return rate, inflation rate and life
expectancy (typically 85-90 years).”

3. Experts believe the expenses exercise should be conducted at

least once a year and course corrections should be made based
on the latest available data.
 4. Plan your investment portfolio taking into account the
retirement corpus requirement, financial goals until the time of
retirement, income growth, savings rate and other parameters. 

Bansal points out, “The investment portfolio is constructed with

one’s risk profile (ability and willingness to take a risk) and
liquidity needs in mind providing optimal diversification between
risk and non-risk assets.”

5. You should review your portfolio and asset allocation at least

once a year and make changes based on how the progress has
been against your retirement plan.

6. Take adequate health cover for you and your partner (assuming
kids will have their own health cover once they turn into adults)
for healthcare-related expenses after retirement.

According to experts, you should work with a qualified and

experienced financial advisor to plan your retirement and track
your progress against it. 

Bansal adds, “In the end, it is a good idea to focus on one’s

health now and in future years with proper diet, exercise, sleep
and stress management. This will ensure that he/she not only
have lesser healthcare expenses but also lead a stress-free and
happier retired life.”