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JUNE 19, 2005
 Cover Story
 Personal Finance
 BT Special
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Sabeer Bhatia
The poster boy of the Internet boom is back, this time with a collaborative software product that he is touting as the next big thing.

Biotech's Allure
The Aditya Birla Group is reportedly mulling a foray in biotech. What is it about the sector that's drawing India's big industrial houses like the Tatas, Reliance, and now the Birlas?
More Net Specials
Business Today,  June 5, 2005
Retirement Planning
...And They Lived Happily Ever After
Life after retirement can be blissful or miserable, depending on how well you plan for it. Here's what you need to do.
John James, 30, Senior Training Manager, Vertex India, Gurgaon
Family: Wife Monisha, 29, HR Consultant with Aviva Life Insurance; son Joshua, 5, student; daughter Myra, 2
Annual Family Income: Rs 15.5 lakh
Retirement Plans Executed:
1. Has a retirement policy from LIC worth Rs 20 lakh
2. Has a life insurance policy from LIC worth Rs 25 lakh
3. Bought property measuring 1,375 sq. ft. worth Rs 28 lakh at Sushant Lok, a residential apartment complex in Gurgaon
4. Plans to start a soft skills-training institute after retirement

Elderly models are suddenly the flavour of the season. Pick up any newspaper or magazine or switch on any TV channel; chances are you'll find grandfatherly and grandmotherly figures lounging by poolsides, paragliding across exotic beaches and generally enjoying lifestyles that seem like straight lifts from the lives of the rich and famous. All the ads are hawking variations of the same product: retirement solutions. Indians, it seems, are planning for retirement like never before. And feeding this demand frenzy is a slew of financial products-from practically every financial institution in the country-"tailored to suit every individual's unique needs". These ads address a very real fear all of us have: of an abrupt descent into hardship after retirement.

And standing between those two old-age extremes is one eight-letter word: planning. As the Americans say, there's no free lunch. After all, for post-retirement life to be comfortable, you'll need money; and with your regular income drying up, you'll have to depend on what-and how well-you have prepared for it. Most people opt for the easy way out: they stash away a part of their income every month in a bank. In an age when practically everything (house, car, furniture, electronic gadgets and even personal accessories) can be-and are-bought through EMIs (equated monthly instalments), tucking away a fixed amount every month works like just another EMI. However, there are other options as well. Here's a detailed look at some of them.

Planning For Retirement

First, you need to know how much money you'll need every month after retirement. For this, sit with your investment planner and work out an estimate; issues such as your age, salary, lifestyle, inflation and expenditure on dependents have to be factored into this equation. The next step is deciding what investments you need to make to generate that amount after you retire.

Most retirement planners advise you to save 30-35 per cent of your annual income. The first priority for investments, according to Nilesh Shah, President, Kotak Asset Management, should be life insurance. It offers two benefits: it ensures that you get an assured amount after a given time period; and it also ensures that your dependents are financially covered in case of your accidental demise. The next investment option is a mix of public provident fund (PPF), employee provident fund (EPF), post-office schemes, ULIPs (unit-linked insurance plans, which have a combination of equity and insurance components) and mutual funds or stocks.

How you allocate your resources between debt and equity depends entirely on your risk appetite. Investments in equities give average annual returns of about 15 per cent, but carry huge downside risks. Debt instruments are safer but give only 7-9 per cent annual returns. It's your call, and you have to weigh the pros and cons carefully before deciding. The thumb rule says younger people can afford to lean towards equity, simply because they have more time to recover in case an investment goes horribly wrong. Women are increasingly joining the workforce and, consequently, adding to the family income. Says Kapil Mehta, Vice President (Strategic Intiatives and Business Development) at Max New York Life: "I see the intent (in planning for retirement) in women. They are also more aggressive while saving, but need to be more savvy." Women have more or less the same savings options as their male counterparts, give or take some. For instance, life insurance is cheaper for women than men (because women on average live longer and need to pay less premia), but pension plans are more expensive for them (because companies have to pay out money over a longer period of time). So, a working couple can optimise returns if the wife invests in insurance and the husband in pension plans.

Nitin.K. Asthana, 43, Manager (Industry Affairs), ITC, Bangalore
Family: Wife Seema, 42, housewife; sons Shavang, 16, and Sharang, 13, students
Annual Family Income: Rs 12 lakh (from salary and family property), plus Rs 5 lakh in perks
Retirement Plans:
1. Invested in stocks now worth Rs 22 lakh
2. Has a life insurance policy from LIC worth Rs 5 lakh
3. Has Rs 17 lakh in EPF and PPF
4. Bought a plot of land in Bangalore worth Rs 12 lakh

Investing in property (second house or commercial property) is arguably the best option, though. Real estate, typically, gives 15-20 per cent annualised returns over a 10-15 year horizon. The rental income can be used to pay off the EMIs (if you've taken a loan to buy the property), during the term of the loan and provide additional cash flows thereafter. Alternatively, you can sell the property after a few years and invest the lump sum you receive elsewhere. But even here, Mehta of Max New York Life offers a word of caution. "People should be very careful about where they invest, because property prices in several areas are artificially inflated and, therefore, bound to fall," he warns.

Now, let us analyse the retirement plans of three individuals who belong to different age groups, and determine what they need to do. These can then serve as benchmarks for your own retirement plans.

Age-group Analysis

It's never too early to start planning for retirement; experts say the best time to start is in your late 20s or early 30s, when most people have settled down in their careers. John James, 30, belongs to this category. James, a senior training manager with BPO firm Vertex India in Gurgaon, lives with his wife Monisha, 29, an hr consultant with Aviva Life Insurance, son Joshua, 5, and daughter Myra, 2. His annual family income is Rs 15.5 lakh, and his investments include a Rs 20-lakh retirement policy, and a Rs 25-lakh life insurance policy, both from Life Insurance Corporation (LIC). He has also bought a Rs 28-lakh property in Gurgaon, which is likely to give him handsome returns in future.

V. Rajagopalan, Chief Actuary, ICICI Prudential Life Insurance, feels that given James' lifestyle and a 5 per cent rate of inflation, he will need at least Rs 1 lakh per month after retirement in 2030. To achieve this, James needs to save 25-30 per cent of his income every month for the next 25 years. The insurance policies are not hefty enough, feels Rajagopalan; they should be ramped up by another Rs 80-90 lakh. James also needs to increase his risk appetite and invest in stocks or ULIPs. And finally, he should review his financial status every three years.

Ravi Grover, 53, Vice President (Sales), Eveready Industries, Kolkata
Family: Wife Vrinda, 52, housewife; son Dhruv, 25, pursuing a PhD from the University of Southern California
Annual Family Income: Rs 16 lakh plus perks
Retirement Plans:
1. Has already received Rs 1.5 lakh from a life insurance policy from LIC
2. Has Rs 10 lakh in PPF
3. Invested in stocks now worth Rs 5 lakh
4. Has a lifetime pension plan from ICICI Prudential, which will bring in Rs 1,067 every month after retirement
5. Bought a plot in Gurgaon worth Rs 35 lakh

The next age group we consider is 40-49, when you need to increase the tempo of your retirement planning. Some of your earlier investments should be maturing by this time. You can use this to pay for your children's education, for any big ticket items you might want to purchase, or you can re-invest this amount. At this stage in life, health insurance is also a must. Nitin Asthana, 43, Manager (Industry Affairs) at ITC in Bangalore, fits the bill. Asthana-who lives with his wife Seema, 42, a housewife, and teenage sons Shavang and Sharang, and has an annual family income of Rs 12 lakh (plus Rs 5 lakh in perks)-appears more inclined towards equity than James, and has invested in stocks that are now worth a neat Rs 22 lakh. He also has an insurance policy from LIC worth Rs 5 lakh, and has accumulated Rs 17 lakh in EPF and PPF. Further, he's bought a plot of land in Bangalore that's now worth Rs 12 lakh.

Asthana, according to ICICI's Rajagopalan, will require around Rs 70,000 per month after retirement in 2017. For this, he needs to save 30-35 per cent of his income, increase insurance investments to Rs 25 lakh, and scale down his exposure to equity now when the going is good. He also needs to choose a balanced ULIP with appropriate life cover, go in for health insurance, and review his financial status every two years.

The third age group we'll consider is the 50s. When you're in your 50s, all the planning should have been done already. Some really big-ticket expenses, such as children's marriage, or their education abroad, may be around the corner. Here, we'll analyse the investment profile of Ravi Grover, 53, Vice President (Sales), Eveready Industries, who's based in Kolkata. Grover has an annual family income of Rs 16 lakh plus perks, and his family consists of wife Vrinda, 52, a housewife, and son Dhruv, who's pursuing a PhD from the University of Southern California. Grover's investments-a life insurance policy from LIC worth Rs 1.5 lakh (an amount he has already received), stocks worth Rs 5 lakh, and Rs 10 lakh accumulated in PPF-look inadequate. The only plus is a plot he's bought in Gurgaon that's now worth Rs 35 lakh; its value is likely to escalate further by the time he retires. Rajagopalan reckons Grover will require around Rs 40,000 per month after retirement, assuming he does so at 58. To tide over the shortfall he's likely to face, Grover has to invest around 60 per cent of his savings in ULIPs that have high debt content, invest in post-office schemes, government bonds, and go in for medical insurance with a critical illness rider.

These examples should help you get a fix on what you need to do to ensure a comfortable retired life. Remember, starting early is the key. If you haven't done that already, you can't afford to delay any further.




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