Are you saving enough

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Healthcare – A Key Element of Retirement Plan – Vishal Dhawan in The Times of India

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Go – reach for the skies

When I was growing up, life was quite simple. Most children were bunched into three categories – aspiring doctors, aspiring engineers and others. I remember a blockbuster Bollywood movie a couple of years ago, where the father picks up his new born and gleefully says ”My son will be an engineer.” Times have changed, and as a part of building financial plans now, we meet a whole set of parents who very happily state that have no idea what their kids will be when they grow up, they will be happy with whatever they do, and they want to provide for it.

So what should be your financial plan as a parent if you really want your child to follow his or her heart? For example, if one’s child wants to do a professional education in India or overseas, how can a parent prepare himself financially to support the child’s dream without compromising on other financial goals like retirement, etc. Most parents are aware of children’s education plans, education loans, etc. However, the element of planning gets missed out very often.

 Step 1: Define the current cost:

Get a fair estimation cost for the professional program that you would like to plan for. This is hard, especially if you do not know which program to plan for as these would vary depending on choice of country, type of program, duration of program. Do remember to take all costs into consideration and not only tuition fees. You may be forced to plan for a higher amount, due to not knowing which program will finally be chosen

Step 2: Estimate the corpus required:

Considering that education inflation in both India and overseas tends to be higher than regular consumer price inflation, you would need to factor in the inflated cost of education by the time you need the corpus. To give you a perspective, a domestic education costing Rs 10 lakhs today would cost close to Rs 32 lakhs after 12 years at an inflation rate of 10% pa. Similarly, an overseas education costing USD 100000 today ie approximately 60 lakhs, would cost in excess of Rs 1.2 crores after 12 years at an inflation rate of 6%p.a..

Step 3: Systematically save monthly or annually:

Break up the target corpus into a monthly or yearly saving goal, so that it can be easily measured. For example, at a rate of return of 12% p.a., one would need to save approx Rs 10000 per month and Rs 38000 per month to achieve the goal of planning for the domestic and international corpus respectively.

Step 4: Choose the appropriate vehicle:

The vehicle to use to reach the targeted corpus would be a function of the amount of money that you can put away. For example, if you can invest only Rs 8,000 per month to save towards the domestic education goal, you will need to target a higher rate of return on the portfolio. Therefore, you will need to use products that have a large equity exposure.

Step 5: Monitor progress:

It is critical to monitor progress annually to ensure that the assumptions made and the actual output are in line, to avoid any nasty surprises at the finish line.

Help your children reach for the sky.. bit by bit.

 Vishal Dhawan is a financial planner by profession and founder of Plan Ahead Wealth Advisors Pvt. Ltd. He can be reached at vishal.dhawan@planahead.in

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How to ensure that your kitty is big enough?

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Planning for Retirement….. think deeply

 One of the sights we have been witnessing quite frequently in the international media is protests in different parts of Europe about enhancing the retirement age. Considering that curtailing government spending has been on top of the agenda of most of these countries, raising the retirement age by a few years to reduce pressure on the pension system has been touted as a solution by many.

Considering that we work closely with investors on their financial goals, one of the most common things that we hear from clients, especially younger clients, is their desire to retire at an extremely young age, ranging from 35 to 45. For most individuals, this would probably be close to the prime of their careers, unless they are sportspersons and been forced to retire earlier due to physical limitations.

As we delve further into understanding this desire to retire earlier, we find that the most common answer we receive is probably “ Not retire in a classical sense but essentially not having to work for the money.”

As financial planners, we find that most investors tend to start working seriously on their financial plans between the age group of 30 and 40. Considering that life expectancy in India is increasing rapidly and medical advancements make it very likely that we will live much longer than we currently envisage, creating a corpus of that size can be quite a challenge. To put it into perspective, investors expect savings and investments made over 10 to 15 years to support them and their families for a 35 year to 40 year period. Remember that inflation could also structurally move in India to a much higher level vis-a-vis where it has traditionally been due to supply constraints.

Whilst successful entrepreneurs and employee beneficiaries of stock options tend to be the most common group of individuals to achieve this aggressive target that they have set for themselves, most other investors need to enhance their targeted retirement age so that they can build up the requisite corpus.

Since the rate of return on their investment portfolio is another variable that investors can target to change if they wish to achieve their target, we strongly advise that investors look at investment strategies that although riskier over shorter time frames, have the potential to outperform over longer periods. Investments in asset classes like equities for a retirement portfolio should be looked at very closely for their potential to deliver superior returns over longer time frames.

In addition to the quantitative aspects of retirement, we also urge investors to answer two questions when they plan for retirement

1. What would your ideal day be like when you retire ?
2.  And will this continue to be your ideal day if you do this day after day?

We find that these answers are far more difficult for most investors to find, as a spreadsheet cannot answer this for them. We urge investors to think deeply about these answers today so that they are prepared for retirement not only financially but holistically.

This article was written by Vishal Dhawan, CFP^CM and appeared in the EXIM INDIA newsletter on 14^th October  2011 .

 

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