7 Secrets of Successful Retirement Planning

We live in an era of instant gratification. Planning for the next few years let alone retirement is not everyone's cup of tea.

Now a days there are even those who claim that they would never wish to retire, including yours truly. But the only constant is change. 

This brings us to the dreaded question: Will we be ready for retirement?

Here are 7 secrets of successful retirement planning:

THE FIRST SECRET

Start Early

Kal karey so aaj karey, aaj karey so ab (Rather than doing it tomorow, do it today. Rather than doing it today, do it now) - This is a famous couplet by the saint-poet Kabir. He might have not guessed back then that his words could prove to be gospel truth for financial planning. 

If you start early, you get more time. 

Let us look at a couple of examples:

At the age of 20, if you begin investing Rs 3000 per month and are achieving a CAGR of 15%, you would create a corpus of Rs 9,42,11,266 by the time you are 60

At the age of 35, If you begin investing Rs 10,000 per month and are achieving a CAGR of 20%, you would create a corpus of Rs 8,62,67,081 by the time you are 60.

Amazing isn't it?

Well this is because of the power of compounding - which according to Einstein was the 8th wonder of the world! 

THE SECOND SECRET

Don't be burdened with Equated Monthly Installments (EMIs)

There is a popular joke doing the rounds these days. It goes like this: 'If you hate your job, take a home loan. You will start loving it!'

Due to the pressure to conform, many young professionals end up taking big loans very early into their careers. This makes them sacrifice their entrepreneurial ambitions and continue working as an employee even if they feel that they aren't meant to work as employees. EMIs also eat up into the opportunities you could have created if you had invested the same amount. 

Presently India is also dealing with large scale job cuts. This is a fairly new experience unlike the US where hiring and firing has been a part of the professional culture for long.

Imagine being fired and unable to get a suitable job for 3-4 months.

Scary?

Now imagine this with a huge home loan EMI due every month!

THE THIRD SECRET

Buy health insurance

A long stay in hospital can wreak havoc on one's finances. Room rent, consultation fees, medicines etc can bloat your healthcare bill to such an extent that most of your savings might get depleted. Most people do not buy health insurance seperately as they feel the corporate health insurance would save them. However what if a mishap happens between jobs or worse - when you are unemployed?

Health insurance will not only protect your wealth but also ensure you can get tax benefits.

THE FOURTH SECRET

Manage Risk

Learn to understand and manage risk rather than avoiding it. Investing in mutual funds or directly in stocks through systematic investment plans for the long term isn't risky. However buying stocks on the basis of tips is risky.

Deciding to only invest in fixed or recurring deposits because they offer fixed returns and do not reduce your principal is the riskiest decision ever.

This is because over a longer period of time you end up destroying your wealth.

THE FIFTH SECRET

Plan Taxes

A capable tax consultant or chartered accountant can help you save a few thousands or in certain cases even a few lakh on your taxes. Do not mind paying the fee that they quote if you can seek their guidance to ensure substantial savings.

THE SIXTH SECRET

Create Passive Income Streams

Do not rely on only one source of income. Make sure that you are making money even when you are asleep. That can happen if you are able to create multiple streams of passive income. Some examples are:

a) Dividends from stocks

b) Earning through ads shown on your blog or videos

c) Rental income

d) Invest in buying an ATM

From the day when your passive income exceeds your salary, you can decide to quit. 

THE SEVENTH SECRET

Stay Healthy

Do you know Warren Buffet made 99% of his wealth after his 50th birthday. He is 86 today. If you end up dying in your 60s or 70s due to poor health, then there are two problems:

a) You aren't giving yourself an opportunity to enjoy your wealth

b) You aren't letting your wealth grow over a longer period of time.

Therefore it is important to ensure that you exercise and eat appropriately to enjoy the evening of your life.

Advantages and Disadvantages of mutual funds

(Source)

The Good EMI

A popular asset management company has re branded a systematic investment plan as a good EMI. Indians are loving to invest via SIP in various mutual funds. According to a popular news website, the end of 2016-17 witnessed that India has 1.35 crore SIP accounts and more than 43 thousand crore rupees being bought into the equity markets through SIPs.

However this has happened in parallel with low returns seen across the traditional asset classes which Indians have invested in including real estate, fixed deposits and India's favorite asset - gold. Smaller cities in India have also contributed to the rise of SIPs.

With everyone and their tailor talking about investing in mutual funds, it would be prudent to get perspectives on both the pros and cons of mutual funds. We have listed down both of these.

Advantages:

a) Inculcates sense of discipline -> Apart from patience, discipline is required to succeed as a long term investor. When you set up auto debit for money to be invested in mutual funds from your bank every month, you are creating a process that ensures you are setting aside money to invest regularly.
b) Can outsource to a knowledgeable person -> Most fund managers have stellar academic credentials as well as an envious record in selecting the right time to not only invest in stocks but also exit from them. You can focus on your business or service and the fund manager would make sure that your money is being used to buy and shares at a favourable prices.
c) Start small -> Most SIPs can be started with as low as Rs 500 per month. This is roughly equivalent to the cost of one pizza from Dominoes. At some point of time, only wealthy or enterprising individuals could get to invest and hence participate in the wealth creation journey of stock markets. Thanks to the low entry amount, creating wealth over the long term has become a democratic affair.
d) Easy to compare - There are platforms such as Moneycontrol or Valueresearchonline through which one can compare the performance of several mutual funds across different time frames. One can also check out the portfolios of each of these funds.


Disadvantages:

a) No dividends -> Don't be fooled by the dividends that mutual funds claim to pay you. It is not extra money which you are getting as it would be in the case of dividends earned from shares. In this case, a small part of your mutual fund portfolio is stripped and presented to you as dividend.
b) Cannot take brave calls -> Heard about that company which is making a stellar turn around and is poised to create substantial share holder wealth over the next three years? But your mutual fund manager may not buy its shares unless certain hygiene factors are in place. Follow the herd mentality also develops as most fund managers may end up buying only if the leader among their pack has bought.
c) Lack of concentration -> A mutual fund would have deployed your investment across various companies. But serious money is made when you back your conviction with capital.Fund managers cannot afford to skew their investment deployment in the favor of any such promising company.
d) Cannot decide -> You cannot decide shares of which stock your fund manager may buy or sell.

I personally evangelize investing in mutual funds through a systematic investment plan to new investors. However, as we are in an overpriced market, it would be prudent to look at mutual funds in a comprehensive manner and decide the quantum of exposure.

                                     

HAPPY INVESTING!