Any financial planning for retirement obviously raises many questions like: (i) How long will I live? ;(ii) What will I earn
on my savings? ;(iii) What will be the inflation rate and its effect on my savings? ; (iv) Whether I will outlive my savings? ; And finally, (v) What, if I do outlive my savings? Ironically, adding to our anxiety is the harsh reality that literally there are no answers to any of the above questions. Inspite of the increased longitivity, government and private sector companies continue to retire its employees at 58 or 60 years rendering post retirement period painful to many who have not planned properly their finances and savings. A survey conducted by€ Nielson – ORG Marg based on a sample of 300 white collared professionals and businessmen in Mumbai, Delhi and Bangalore, though not adequately representative but yet broadly indicative, revealed an unusually high preference (87%) for long term insurance plans as an instrument of financial planning for retirement and only 10% for shares
. This low level in equity was well before the recent market fall from 12,600 in May 06 to 9600 in June 06, since the survey was carried out in early April 06. What is significant is that preference for life insurance is observed across all age groups and all three cities. Second preferred instrument was bank deposits (39%) followed by NSS/NSC/PPF (National Savings scheme/ National Savings Certifictae/ Public Provident Fund) that ranked 22%; mutual funds ranked 11%; 9% in pension plans; and 4% in company deposits. This unduly high preference for life insurance plans throws up serious gap in awareness, even among urban centres, of availability of several other innovative financial instruments and should serve as an eye opener for the marketing departments of mutual funds and other players to tap the huge potential for garnering savings for providing attractive returns at low risks.
Ideal insurance plan should be whole life policy without profit available at nominal cost to protect merely the life against premature death. Premium on such a policy should be treated as necessary 'cost' and not an ' investment' on lines of mediclaim policy for medical cost of hospitalization. Money so saved should go for investment among several diversified financial instruments as NSC, PPF, ELSS (Equity Linked Savings Schemes) of mutual funds, postal and bank Deposits and equity shares. Equity shares of listed companies is one instrument, which historically has yielded dividends and also capital appreciation. Now, that we are living in a borderless world, international events like wars, rising crude and gas prices, weakening US dollar, allocation of some of our savings in gold (not jewelry) or gold units is also suggested as a hedge against inflation and fall in value of paper currency including Indian Rupee.
Last thought for the retirees. Serious error that retirees make is to park their savings in debt instruments in the mistaken belief that these are safe compared to risky investment in equity shares. However, vagaries of inflation and taxation erode the value of and returns from debt investments rendering the plight of retirees pitiable.
To conclude, I quote an eminent financial expert who asks his audience "By not doing anything about your investments, you are doing something; you are losing money… to inflation". 'How much' do I start with for investment? is not the question. 'When' is the question? Your time to save and invest starts 'now'…
The author, Kanu Doshi, is Partner, Kanu Doshi Associates, Chartered Accountants.