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Most people dream about having an ideal retirement like having your own beach house or taking a painting class. But in reality, balancing between your immediate needs and saving for retirement is easier said than done. Take the case of the Kulkarnis who had saved hard for their retirement while raising two children, Rahul and Sunita. Their joint income sufficed for modest comforts for their children like vacations, etc.
As the children grew up, Rahul wanted to do an MBA, Sunita to be a doctor. Kulkarni diverted most of his funds, which he had saved for a home for himself, towards his children's education, believing that they were his best investment and that they would care for him and his wife in their sunset years.
Rahul managed to secure a good job and supported his parents early on. But, after he was married, he began to cut back gradually on the amount he proffered to his parents. With their growing years came mounting medical expenses. Kulkarni had no choice but to dig into his modest investments, which soon began to dwindle and quickly ran out.
Earmarking funds
That's the case with many Indians today. Early into retirement, many retirees find that their retirement incomes are not enough to keep pace with inflation largely because of poor savings. Ideally, Kulkarni should have earmarked some funds solely for his children's education and some solely for retirement.
He should have taken into account his retirement age and the approximate number of years he would want the corpus to last. Since women tend to outlive men, he would have had to provide for the extra years, the rate of inflation, the rate of return of the asset class he planned to invest in to build his corpus and the returns he expected his corpus would yield, post-retirement. Depending on the number of years to retirement and his risk appetite, asset classes should be opted for.
The first thing to do is to clearly demarcate between various goals and create a fund for each. Retirement, education, foreign travel, etc, should all be a part of this goal-setting, exercise. Retirement should be somewhere on top of the list so it not compromised.
Account for inflation
Inflation is another factor which should be taken into account. If, today, a family can run on a budget of say Rs 20,000, 10 years later even at a modest, 7 per cent per annum, rate of inflation, the same family will require Rs 39,000, 20 years later Rs 78,000 and 30 years later Rs 1,52,000. The figures appear alarming but if one checks back 10 or 20 years and compares the cost of living with today, these figures add up.
Balance your allocation
Often, children's educational requirement takes priority over the longer-term retirement goal. Asset re-allocation becomes the urgent need of the hour. Equity instruments, though risky in the short term, have the potential of higher inflation-beating returns over a longer stretch. A judicious mixture of debt and equity can be utilised to achieve the required corpus. If you still have at least 10 years to retire, you can allocate a larger amount of your investible surplus towards equity. As you come closer to retirement, this should gradually be moved to debt. Even after retirement, ideally there should be some investment in equity based on your risk appetite.
Children's education is very important. So is retirement. The number of working years is restricted but there is no cap on the years, post-retirement. The earlier a person starts, the lower the amount s/he would have to set aside. By investing in debt and equity judiciously, the limited amount available for investment could be well utilised. Allocate assets prudently and, when required, alter the allocation keeping in mind the goals of children's education and your retirement.
It is never too late to plan for your retirement. If you don't want to compromise on your child's education, you will have to look at other means of funding your retirement or your child's education requirement, even during post retirement. If needed, allocate more towards the initial years for your retirement. Today, there are more pension and retirement products available that not only provide tax incentives but also go some way into funding your retirement.
Don't blame the underfunded retirement account on your children as there's no other way but to fund accounts with extra contributions in many retirement schemes that you cannot be easily broken and is locked-in till you retire.
The author is proprietor, VENSIVA Financial Solutions
