Crossed 45 and panicking?

It’s never too late to work out retirement needs. Check the options for investing and get aggressive.

For many, the realisation that they need to secure their future financially dawns a little late in life. Mostly, when they are on the wrong side of 40. What can they do? A lot really. No matter what age one has crossed, becoming aware of the need for future security is a beginning in itself. Let’s start with Vatsal’s case.

At 47, Vatsal is acutely aware his situation is in stark contrast to that of his friends and colleagues. He had not been a great saver and time was running out. His only asset is his home. Some of his savings are in fixed deposits (FDs), mutual funds (MFs), equity which amount to about Rs 7.5 lakh and his provident fund (PF) accumulation is about Rs 11 lakh. His only liability is a home loan of Rs 3 lakh.

With the responsibility of supporting his parents and siblings early in life, Vatsal has not had much of a chance to save. But he is determined, he does not want to spend his retirement years in penury.

There are many like Vatsal who are just a decade away from retirement and are panicking now. while taking up financial planning for those on the wrong side of 40, certain aspects need to be focused upon.

Cover your bases: Ensuring the family is covered medically should be the first priority. High medical costs can make a pauper out of even those who are financially well- off. Medical insurance including a critical illness cover, cashless hospital cover of at least Rs 5 lakh for adults and Rs 3 lakh for dependent children is a good idea.

Ensuring the family’s security. Depending on the income coming in every month, your family has a certain lifestyle. When the income stops suddenly, it would put a huge pressure in terms of maintaining the same lifestyle. This is a good reason why a person needs to take adequate insurance. But how much would that be? A ball park figure would be seven to eight times the gross income for someone about 45 years. Add to that any liabilities and subtract insurances already there.

Drive away the retirement blues: Not being adequately funded after retirement can give those above 45 years of age, sleepless nights. There is a way to estimate and act on this. One needs to project what the expenses will be (say, Rs 6 lakh ) in his first year of retirement. Multiply that by 12 (Rs 72 lakh in this case). That should be the corpus at retirement, a person needs to have. Now add a 25 per cent buffer for the rise in inflation by the time one would retire. The corpus needed would beRs 90 lakh. Assuming that the person’s retirement benefits will amount to Rs 20 lakh, he needs another Rs 70 lakh to be financially sound.

Now he needs to consider his sources of income to attain that corpus. Suppose one has another 13 years of earning life; he needs to save Rs 25,700 every month till his retirement . One can easily make a spreadsheet or use one of the free internet calculators available these days to draw up a plan and estimate how much will be needed for the golden years.

Meeting other goals: Besides funding for the future, there may be other short term goals, like children’s education that have to be met.

In Vatsal’s case, he has a son studying in first-year engineering whose education needs to be funded for the next three years. The estimate is about Rs 4 lakh for these three years. Vatsal can easily meet this requirement from his savings and surpluses collected in these years. But if the amounts are huge, one could take a loan, draw from his PF account and save up every month to meet the goal.

Liquidity: It is a good idea to have at least three months expenses kept aside as liquid cash at hand. A portion of this, say at least two months expenses, can be in the bank and the rest can be in ultra short-term funds (to earn a little more income). If one has access to an overdraft, offered by his bank, then a smaller amount needs to be kept aside. A good idea would also be opting for sweep-in deposits offered by most banks. These bear a higher interest rate than a savings account. Here, money becomes accessible on demand and earns interest till that point.

It would be a good idea to provide for any lump sum payments one has to make like insurance premium payments, fees for education and so on. Depending on when the money is required, it can be invested in debt funds, FDs or other instruments.

Investments: The good news for those who begin late is that the last few years can make all the difference in one’s savings. By this time, most loans are over or coming to a close. So at this stage, income is high, expenses related to children’s education come to an end and lifestyle-related expenses are mostly moderate. Hence, in the last decade, one’s savings will be much more than what one has done till that point.

Typically, it is good to invest about half the surplus one has in equity or equity oriented assets. Land and other property investments can also be a good idea, but due diligence needs to be done here before investing, as all properties do not appreciate to the same extent. Investing in gold is a hot topic today. Do it to the extent of 5-10 per cent of the portfolio. In case of debt instruments like FDs, bonds, national savings certificates (NSC) and so on, calculate the net return after taxes and decide the place to invest. Public provident fund may be a good idea, as it gives eight per cent tax-free returns. It could be a good vehicle to plan one’s retirement. New pension scheme (NPS)could also be looked at for funding one’s retirement plans.

Vatsal was happy that there was a road map, a plan he could follow. He was happier that he would be able to achieve his goals if he followed this rather simple path. With a decade or more for retirement, things can still be made to work. That should give solace to the 45-somethings.

The writer is a certified financial planner