I work in an IT services company and that is in the private sector as anyone can tell. What that means is nobody is going to pay me a pension after I retire. This made me think, how do I keep cash flowing after I retire? With the advancement in medical science, I believe dying would be difficult when we grow older. So, we all should think about retirement planning.
Why Retirement Planning Is Important In India? There is no social security in India. And whatever money the government pays, that will be worthless due to the inflation. Living expenses would go up due to inflation. So it is important to work on generating cash flow after retirement. Especially if you are not a government employee and do not have a pension. Even government employees should look for other options, as the government is pretty much in debt up to their nose, I wonder if they will be able to continue paying a pension to all ex-employees.
There are a few things we need to consider before we do retirement planning. Like we need to layout our expenses. Then we need to consider inflation, and figure out how much our expenses would be when we retire. And finally, we will have to explore how much cash flow we would need and how can we generate that.
The important point here, our needs are different, some people are happy with one phone for 2 years and some buy a new cell phone every 6 months. So, one formula will not work for everyone, but I will try to lay out a plan here so that you can customize the template for your own situation.
How To Do Retirement Planning In India?
We need to approach this step by step. First thing, how old are you? I am 34, so I have around 26 years to retire.
What will be the expense when you retire? For medicine, medical insurance, will you be supporting your kids? Rent? Utilities? Write all of these expenses down.
Once you get rough estimation about your expenses, do another round of verification, will you be able to cut any expenses? Such as say, instead of owning a car, will it be cheaper to take car-sharing service or public transport? It is difficult to guess what will happen after 30 years but still think about it. And prepare the alternate budget.
Use the rule of 72. Say the inflation in India will remain 5%. So the cost of living will double every 14 years. In 30 years, it will double twice. So, if currently, you think that after retirement your monthly expenses will be 50k, that means after 30 years, that will be 2 lakh rupees.
Now, this figure might appear huge, but you can grow your investments at the same pace. And we can calculate how much we need to save in order to generate 2 lakhs per month or yearly 24 lakhs post-tax. One more thing is, say you are going to live till 90, that means another 30 years, so then monthly expense might go up to 8lakh a month.
So, your saving has to last for 30 years after you retire and then increasingly produce cash flow to cover your monthly expenses. The takeaway from this part should be whatever is your estimated expenses, it will be 4 times before you retire from the job and then 16 times by the time you retire from this planet.
Why Inflation is your worst enemy for Retirement Planning?
With time prices of all commodities and services go up. I remember 1kg tata salt was 6rs 2 decades back, now the same salt is around 50rs. Electronics and such products actually go down in price. As technology becomes better prices drop. Price for medical treatment, medicine should drop too, but in those cases, profits will drop for big pharma, which is more important than human life.
I am hoping, you understand sarcasm.
Anyway, kids education cost, food cost everything goes up. Ass government devalues the currency. This is one way to pay off debts. Debts become cheaper to pay off. Actually, when gold goes up in price, that is an indication that your currency is being devalued or losing pricing power. So you should not be delighted next tie you see gold price climbing up.
Because of this inflation, the cost of living will keep on increasing. Before you retire and after you retire. And if you keep your savings in cash, eventually the inflation will eat up all your purchasing power. So, what should you do? Buy assets.
If you buy gold, you protect your purchasing power. Provided you do not waste paying a ton in making the charge and other ancillary charges while buying and selling the yellow metal. Buy such assets which increase your purchasing power, so that you can beat inflation.
What Government Instruments are there to invest in?
The first thing that comes to mind is the government bond. Bonds issued by PSU organizations. NSC or national savings certificate, Kishan Vikash Patra. Then there are NHAI bonds. All these are fairly safe, but won’t help you make much of real return or post inflation return in the long run.
I will tell you to stay away from credit risk mutual funds, corporate bonds. After the recent debacle, we all saw what happened and there is no surety that it not happen before or after you retire.
Why Gold might not be a good option for Retirement Planning?
When you buy physical gold you need to pay above spot price plus taxes. You put it in a vault. You pay rent for the safe deposit box. IF you want to sell, you end up paying below spot price and taxes.
Moreover, gold just preserves your purchasing power, it does not increases purchasing power. During the Roman empire, 1-ounce gold used to buy a dress for a knight, and now the same amount of gold can get you a decent suit. After paying all the taxes and fees, you do not come out as the winner on another side. I almost forgot physical gold does not pay any dividend.
As an alternative, you can buy gold ETF or put your money in government gold bonds. This bond pays you a tiny interest and the ETF is priced per spot price.
Why Real Estate might not the option for your Retirement Planning?
My friend purchased an apartment near Kolkata Airport in the year 2013 for 38 lakhs. He took a home loan. today is 2019 and the flat is not ready yet. And the price of that apartment is around 45 lakhs. So, excluding the interest, he paid on home loan and maintenance charges, say he invested 40 lakhs.
Even if he would have kept the money in FD for 5 years, at 10% interest rate that that money would be touching 7o lakhs today. I know you will say no bank pays 10% on FD, but mind you, he invested in 2013, back then you could have gotten 14%.
Real estate prices definitely go up in prices. But think about the real return you make. The actual cost of investment, which includes all taxes, fees, maintenance charges you pay.
If you cannot own an outright rental property, probably real estate income won’t yield you much. And as the government provides house to everyone, the general demand will go down anyway.
Few more points to remember, real estate is not a liquid asset, you cannot sell it overnight. And usually, there are loads of fees and taxes involved. This is one reason I am yet to own any real estate. I prefer to own REITs.
Should you put your money in Stocks and how to do it safely?
We are taught from childhood that the stock market is risky. But Asia’s richest man made his money with his listed company and most billionaires did make their money the same way. But we are not business owners. And selecting stock is not easy and how do we value a business when we do not even know if the books/ numbers are fudged.
So to make money safely, the first thing you need is a long time. You need to keep on investing in a low-cost index fund over the years and through thick and thin. In India, ETFs do not pay any dividend. But, say you have 1 lakh invested in a low-cost index fund. The invest fund produces 2% dividend yield or 2000rs. At the year-end 2000rs, the equivalent will get added in your account.
I do not know what return to expect. y personal opinion is we can expect 10% growth over the next few years. Then we will need to reevaluate. And you can use Zerodha or espresso. They do not charge for any stock or ETF that you are taking delivery of.
I am telling you so that you can save on fees, brokerage, etc. And owning the index gives you mental peace that you are owning the best companies in India. Although, you will not get any dividend income from this investment.
You can buy some PSU stocks for dividend income when those are really low. I have written a post on what I do, and why I invest in PSU. You can find it here why Every Indian Retiree Should Focus On Dividend Income?.
In case you cannot go there, here is the zest, buy debt-free monopolies, which are not customer-facing, or does not provide horrible service, over the year you will earn dividend and if you are lucky prices of stocks might go up too.