Start,before it is too late

While you are busy with your life,do plan for retirement.

There are numerous examples of people around us who had it easy throughout their working life but have a troubled post-retirement life. It is only a result of bad planning and living under the assumption that good days are going to last forever. It is important to know that the financial progression in a persons life is never linear,while it may be turbocharged in the haydays,on other occassions you may struggle for finances. Events such as disability,unemployment,divorce etc can severely dent a persons financial progression and well being and hence to manage your finances and create wealth it is critical to understand the financial life cycle. It can be divided into three stagesformative,accumulation,and the conservation phase.

FORMATIVE YEARS

It all begins at home and a persons financial life is greatly influenced by what he sees at home and the way s/he has been educated about money during childhood. Kids pick up and imitate what they see and feel at home,so parents that are poor handlers of money are likely to pass on similar habits to their children.

A piggybank could be the first step to introduce the concept of saving to your child. By the time the kid hits teenage,s/he is aware that one needs to earn money. Parents need to make them realise that they can earn that little extra interest on their savings and the easiest way to do this is to take the kid to a bank and open an account. The drill might take several trips to a bank branch spanning over couple of years to make your child understand some of the basics like earning interest on the money saved,the benefits of compounding and the availability of credit from the bank etc.

During teenage one goes through peer pressure and is exposed to different types of comparisons in life. One can either grow to become wise or stay foolish. It is during these times when the kid will get exposed to the usage of debit/ credit card by parents and it needs to be taught that it requires discipline to make timely payments while using a credit card and it is similar to a loan which has to be repaid. Set a goal for the kids and let them save towards that goal. For example,buying a bicycle after a year. This method will help kid to develop sense of accountability and ownership towards money,8221; suggests Kartik Jhaveri,Mumbai based financial planner.

ACCUMULATION YEARS

Normally there are three stages in accumulation phase foundation stage 20-30 years,early accumu-lation 30-40 years and rapid accumulation 40-50 years. Experts suggest that during the first stage a person should save at least 10 per cent of the annual income and must avoid taking excessive consumer debt. If there are dependents,one must buy health and life insurance on priority. Buying a term insurance policy at young age would mean locking oneself to a much lower premium for life. For example,a 30 year term cover worth Rs 1 crore,for a 25 year old will cost less than R 12,000 per annum. Secondly,one can start investing in two to three mutual funds preferably a mix of a debt fund,a balanced fund and an equity diversified fund. Money saved at this stage would help in creating assets,for example,real estate at later stage.

Let us assume,you want to retire with a target of R 5 crore by the age of 60 and the rate of return on your investment is 12 per cent. Now,if you start at the age of 25,you will need to invest R 7,700 per month,but if you start at 30 you will need to pool in R 14,300 per month. And if you wake up to start at the age of 35,then you will have to invest R 26,600 per month to meet that same goal.

The early accumulation stage 30-40 years is the time when one starts thinking about diversification of investments. In India,real estate is on top of the mind of most people. The money saved during the foundation stage would help fund the margin money required to buy a house. For eg,If you buy a property worth R 50 lakh,you need to have at least 20 per cent or R 10 lakh of liquid money to get a home loan.

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By the rapid accumulation stage 40-50 years arrives,a person has already built up some assets in the form of gold,property,stocks and fixed income instruments. This is a period to look at tax efficient investment options as most likely a person would be in the highest tax bracket in this stage. One of the biggest mistakes is getting caught in the web of mis-selling by insurance agents. Focussing on public provident fund,mutual funds,fixed deposits,debt funds,term insurance and maintaining some cash for emergency would be the best strategy at least till the age of 40-45,8221; suggests Suresh Sadagopan,CEO,Ladder7 Financial Planners.

CONSERVATION YEARS

The time period between 50 to 70 years of age is the time when one would want to know what exactly s/he would like to do after retirement. This is the stage when the proper diversification into bonds,cash and stocks must be in place and should be reviewed periodically. Instruments like debt funds,FDs,and bonds would assume importance now as there might be sudden requirement of money at this age.

When one decides to stop working altogether,say beyond the age of 70,s/he must be ready with a corpus large enough to tide through the course of rest of the life. There will be a serious problem in case a person outlives his/her retirement corpus as getting a job or earning money becomes all the more difficult at that stage. Unfortunately how much you have already saved decides when you can retire. If you haven8217;t saved enough,you may have to work all through your life to fend for yourself,8221; says Sadagopan.

Money is one of the important needs in life which provides a sense of security. However,only through disciplined savings and investments done throughout one8217;s lifetime can a corpus large enough be created which can help one take an early retirement. The earlier one starts,better it is.

ritukant.ojhaexpressindia.com