What Not to do While Planning for Retirement?

According to Sander Levin “Retirement security is often compared to a three-legged stool supported by Social Security, employer-provided pension funds, and private savings.” This may be true in some countries and/or some individuals, but in others, where the social security system is not as robust, or the pension fund and personal savings are not adequate, the stool might topple.

A pragmatic approach to retirement planning can help to avoid certain traps that can prove to be gravely detrimental to the economic status of an individual, post-retirement.

Retiring today is different:

Today’s life style is different from what it used to be a few years ago. Work life has also become hectic and stressful so it is often that people look to seek early retirement. While early retirement can relive one of the regular stresses of work life, it means more number of years to live without a regular earning in the form of a steady salary. Building of a large corpus is the key to a contented life after retirement.Being aware of the mistakesthat are commonly made while planning for an adequate retirement corpus, will better equip the readers to make wisechoices.

Let not thy pension make you feel satisfied:

Pension is paid out of annuities and the rates of annuities hover between 5.5% and 7%. Which is quite low. Moreover annuities are taxable in the hands of the individual who need to pay income tax on them. Pension plans from insurance companies are no different. In all cases annuities are taxable and since they are not linked to the inflation rates, its value remains the same throughout, almost.

Insurance policy alone will not serve thou purpose:

It is often that insurance agents recommend apparently lucrative policy schemes.However, more often than not, these policies are low return yielding options, with the returns hovering around 5% to 7%.

Other apparent drawbacks of insurance policies are that the premium needs to be paid for long term and the returns are neither large nor immediate. The returns are however tax-free but a corpus evolving out of regular investments over a very long term in a low-yielding product like insurancepolicy can actually be counter productive.

An example would be a person investing Rs. 10000 per month for 10 years will receive a return of 76 lakhs in 20 years if the rate of return in 10%, however the same money would grow to Rs. 49 lakhs in the same period of time if the yield rate is 6.5%.

This relative inflexibility of life insurance policies makes it a less than ideal choice for investments with respect to retirementplanning. Overall, life insurance polices are rigid, low yielding and does not come with any option for opting out and diversification.

FDs’ and other fixed income products shall not grant thou good returns

It is often that people choose to invest in low risk items like FDs’ and other fixed income products in order to minimize their risk to market fluctuations. While this choice might be good for investing a small part of the funds, it will never yield good returns for the investor.

All these options are subject to tax and hence the overall return after tax will be even lower. Individuals, by opting to play safe, lose out on the opportunity to earn greater returns. Moderate to balanced risk investments can help to garner better returns thereby resulting in the creation of a bigger corpus.

Thou will not get guaranteed returns by investing in property:

ome people believe that investing in land or property is a fabulous option for making money grow. They dream of buying it cheap and selling it big. However one should remember that there is many a slip between the cup and the lip.

There are instances where the property value has nose-dived leaving the investor woefully dejected.

Encroachment is one big risk if the property is not regularly monitored.

After buying a residential or commercial property one might invest in its décor, renovation and upkeep. However this additional cost is not factored at the time of sale of the property.

At the point of sale, taxes also have to be borne by the seller.

In an emergency when liquid cash is required readily, a property may not come in handy as its sale can take a long time to materialize.

For those wanting rental returns from property it can be said that as per current trends rental returns from residential property is about 2-3 % while for commercial property it is pegged around 3-6 % on the prevailing market price.All of this income is taxable.

The consequence is low yields and hence not always justifiableas an investment option at the time of retirement.

Conclusion:

Based on the analysis it can be said that people on the verge of retirement or due to retire in the near future would do well to invest in financial assets which offer liquidity , predictability, better returns

and taxationbenefits. By avoiding the above stated mistakes while planning for retirement one can be safe and happy.

Too many Investment Advisors Whom to Choose?

Who will bell my cat?

Perplexed? Can’t make up your mind? Yes, sometimes having plenty of choices can be unnerving. For helping out with financial and investment planning, you are now spoilt for choice. There are a number of specialists who are ready and willing to help, albeit a commission or fees. However, the choice ultimately rests with the individual and is purely based on the preference and requirement.

What are the options?

Whose help do you need?

Certified Financial Planner? A Mutual Fund distributor or Insurance Agent; or do you need toseek the assistance of your bank’s relationship manager or a SEBI Registered Investment Adviser (RIA)?

A decade or so ago, a question of this sort would invite quizzical looks. Today, it is a question of considerable substance and importance.

Thanks to specialization and the increasing trend towards horses-for-courses solution to different situations in life; now all the above types of investment-facilitators are relevant, albeit for different needs and situations.

There is the additional dilemma of choosing between a fee-based planner and a fee-only planner. All the above categories of investment-facilitators could be either fee-based or fee-only and they could be a combination of both at the same time. The only way to resolve this fix is to categorize them into two broad categories:

1. Commission based Investment Scheme Seller: They earn their commission by selling a financial product to the investor. Banks, Mutual Fund distributors and Insurance agents belong to this category. They do not charge any separate fee for their services

2. Fee Based Financial Advisors: They charge only for the professional services in the form of financial planning advice that they provide. The CFPs’ and SEBI RIAs’ come under this category.

It is often that a Product Seller tries to go beyond his role and influence the investor to go for a particular investment. More often than not, this might be detrimental to the interest of the investor. The product seller will try to sell those products, which fetch him more commission, and this leads to a conflict-of-interest situation. The particular investment, which the seller is trying to sell, might be of little or no value in the investor’s scheme of things.

Pure advisors, on the contrary, are more focused and provide advice, as per the requirements of the investor. They can handle a bigger canvas, as products don’t tie them down.

Let us have a peek at the profile of the investment-facilitators whom we encounter in our daily lives:

What kind of rental agreement to choose?

Mutual Fund Distributors

Distributors come under the category of Independent Financial Advisors (IFAs).

This tribe of advisors typically recommend different mutual chemes for making investments, either on a lump sum basis or periodically through SIPs’. They earn upfront and trailing commissions from the AMC (Asset Management Companies, i.e. the mutual fund houses.As long as the investor remains invested, the agents earn commissions out of the payments made by them. Other than the commissions earned, the Mutual Distributors do not charge anything beyond that from the investors.

Insurance Agents

Insurance agents are, well just insurance agents. They help people to purchase insurance products and the good agents maintain their relationship with the client throughout the tenure of the policy. They even help at the time of lodging and settling claims.

Insurance commissions are front-loaded. This means that the agent earns the maximum commission out of the paid by the policyholders during the initial years. After this phase is over, it would not bother them if the insured/policyholder does not continue with his policy. This results in a substantial conflict of interest.distributors, Insurance agents do not have any compulsion to keep the policyholder invested and even if the policy lapses they are not affected.

Ideally one should not combine investments and insurance. It would be sensible to seek opinion on different insurance plans and policies from Insurance agents, but beyond that they would not be of much help.

Relationship Managers (RM) at Bank Branches

It is often that our bank’s relationship managers reach out to us with an “i-have-your-best-interest-in-mind’, kind of approach. They try to gain the confidence of the customer through convincing sales talk and even manage to sell some investment products.

These products may not be remotely beneficial to the customer, but the RM is driven by his own targets and has scant regard for the customers needs.

The RMs’ is also not a permanent fixture in the bank’s scheme of things. They jump the boat when they find a better opportunity and hence the relationship building is not a priority for them.

There are a lot of instances where the wrong product has to be recommended to a client, which has resulted in considerable loss for them. It is like selling a long term ULIP to a senior citizen who is above 70 years of age and who in the first place had sought the help of the bank to suggest good investment opportunities for his retirement corpus.

It is therefore advisable to stay away from Bank Relationship Managers as far as investment-planning advice is concerned

SEBI Registered Investment Advisors (RIAs)

The RIAs’ are Fee-Only Financial planners meaning that they provide investment advice for a fee. This frees them from any ‘conflict-of-interest’ situations and can thus provide unbiased views, which are in line with the financial plans of the client.

The SEBI website (http://www.sebi.gov.in/cms/sebi_data/pdffiles/32004_t.pdf) provides a caveat to prospective investors  before choosing a particular RIA. Even though RIAs’ are supposed to be unbiased about their opinions in reality they may not always be so

Clients and investors often encounter RIAs’ who run their trade along with the distribution and brokerage business under their cloak. They provide financial advice for a fee and then ask the investor to purchase a particular investment product from their friend or family member.

If one chooses to go with an RIA then it is always advisable to negotiate a fee beforehand and make it implicit that investments will not be made through them or their recommended parties.

How to choose the most competent planner/advisor?

 
It is always a good idea to make your own research. Education and experience are the primary criteria that should be looked into before deciding on a particular planner/advisor.

It is worthwhile to talk to the planner to gauge his honesty and integrity. Whether he is forthcoming about the risks involved in a particular form of investment and has a clear idea about the planning process. Probe him to find out if he actually understands your needs and is drawing up a plan based on them.
Overall discretion is advised before making the final choice.