How to avoid old age poverty and live a long and prosperous retirement

How to avoid old age poverty and live a long and prosperous retirement

Falling interest rates are bad news for seniors--here's the only way to manage your finances in retirement

By Dhirendra Kumar | Jun 24, 2016

According to the 2011 Census of India, 90% of Indians do not have a pension. Worse, even those among this 90% who feel they have enough savings, many are likely to run out of money sooner rather than later. The spectre of old age poverty looms over a great number of India's senior citizens, even among middle class ones who think that their nest egg is enough.
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The blame for this lies squarely on the combination of an entrenched but financially illiterate culture of savings that has failed to move beyond fixed-income investments. Paradoxically, a drop in the inflation rate (and the fiscal good behaviour of the government) is actually making things worse for senior citizens. Interest rates are dropping, dragging down the retirement incomes of those who rely on deposits. Compounding the disaster is the fact that for the actual expenses that older people need to make in their lives, the real inflation rate is not as low as the official CPI.
The recent sharp reduction in the interest rates that the government pays on the various savings schemes it runs has brought home the seriousness of this problem to many retirees. The logic of reduced rates is that interest rates and inflation in the economy are lower, and small savings rates have been brought down to keep them in sync with them. Going forward, small savings rates will be kept in line by re-aligning them quarterly with the general interest rates in the economy. A few months back, when talk of this change first surfaced, I'd written that the government should be circumspect about coming down too heavily on some of these schemes, specially the Senior Citizens Savings Scheme (SCSS). However, this didn't happen.
What's worse is that there's an obfuscation in the way the reduction of rates has been announced and has been carried in the media. We were all told that PPF (Public Provident Fund) rates are down by 0.6 per cent, SCSS (Senior Citizens Savings Scheme) by 0.7 per cent, NSC (National Savings Certificate) by 0.4 per cent and so on. Technically, this is correct. Yet, there's a sleight of hand here because this hides the huge impact on the earnings of depositors in these schemes. For example, the earnings on an SCSS deposit are actually down by 7.5 per cent.
Here's the reality. An old person with the maximum allowed R15 lakh SCSS deposit was earlier earning R11,625 a month and will now earn R10,750 a month. That's a big hit. Lower inflation and interest rates, better fiscal management, and higher economic growth are all very well but will carry no benefit for SCSS depositors because they are no longer in the earning and accumulative phase of their lives. An SCSS depositor is not going to get a better job, or a higher salary because the economy is growing. That phase of her life is over.
Moreover, a lower official inflation rate is an illusory benefit for older people. The real inflation in their lives is much higher than the official CPI rate. Healthcare and services are generally large and growing components of their expenditure. The prices of both these have risen much faster than the CPI. As society, we have no have no way for softening this blow. The only retirees who get the best of everything, along with inflation-adjusted pensions, are government employees, who in any case are a special burden that ordinary Indian citizens must carry on their backs.
Going forward, it is quite likely that interest rates on the government deposit schemes as well as bank deposits will keep going down. That's the reality that senior citizens have to face. Their income will go down, while prices will go up, even if at a reduced rate. Is there a solution that can mitigate this problem?
The answer to that is not one that fits easily in the normal attitude towards savings, specially post-retirement management of savings. It's a cornerstone of the Indian savings mindset that old people must only put their money in deposits that are guaranteed by the government. However, these deposits barely earn anything after adjusting for inflation. As I've pointed out earlier, these deposits actually earn less than the real inflation that people face. Which means that not only does the deposit actually lose money, withdrawal and expenditure from these means eating into one's capital. This is why I said that this is a sure route to old age poverty.
I'm sure financially knowledgeable readers can see where this discussion is heading. Old people need their retirement kitty to earn more, and there is really no way to suspend the fundamental rule of higher returns needing higher risk. What they need to do is to understand that focussing on the uncertainties of short-term fluctuations in the equity market while ignoring the certainty of inflation and poor fixed income returns is self-destructive.
To put it bluntly, there is no way out except to take some exposure to equity in a measured, derisked and tax-efficient way. The ideal method would be to follow these steps: First, keep roughly three years' expenses aside and gradually invest the remaining amount into a set of two or three conservative hybrid funds (balanced funds). By gradually, I mean through a monthly Systematic Investment Plan (SIP). After three years, you can start withdrawing every year, from these balanced funds, an amount that is roughly three per cent of the total remaining sum. Roughly speaking, this will give you an amount that is equal to what you are earning from a fixed income deposit today, and yet can be increased as prices rise.
But that's not all. The best part is that the value of the remaining investment will also grow at roughly the inflation rate. If you can implement this, then there is a virtual certainty that you will not be faced with old age poverty. The icing on the cake is that unlike your deposit interest, this income will be tax free.
Financially and procedurally, this is an easy plan to implement and stick to. The problem is psychological and cultural. The average Indian has been conditioned not to do this, and is not able to handle the uncertainty. The value of the residual investment will fall and rise every day, month and year, sometimes more and sometimes less. It will all even out to decent growth in the long-term, but you'll need to be more sanguine than Indian savers generally are.
The lucky seniors are the ones who have some sort of an inflation-adjusted income, which is generally either a government pension or rent from property. For everyone else, I see few alternatives except to learn that tolerance to a little bit of volatility is a skill you have to learn for a long, happy and prosperous old age.

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NPS – A new Star on the Indian firmament

NPS – A new Star on the Indian firmament

My quest for financial independence actually started in 1987 upon seeing my seniors on board.

Everyone was senior to me and had already put in quite a few years in their careers.Some were spendthrifts others were savers.At the end of the day either of them did not have much of a corpus to make them comfortable into their retirement.

They were largely depending upon their PF which they hoped , in their own minds, will outlast them and all their future needs. Out of my innocent queries when I used to ask them the approximate corpus that they may be requiring their replies were evasive.Their replies also suffered from what I call fiscal myopia.

The situation really got me worried.All those sophisticated officers on board did not seem any better than the workers of the unorganized sector whom we also called labourers.But my seniors were oblivious of the fact.I searched for pension schemes in India and abroad (if we could invest in them) but found none that were tax friendly and could actually increase the value of your money till retirement.

Even the NPS (NATIONAL PENSION SYSTEM) has been around for about 10 years. However with the last budget of 2016-17 making 40% of the total corpus tax free this has become a very very attractive and compulsory avenue  for all government officers (hence I doubt the powerful IAS lobby will ever let any scam into this).

Those who have been reading my articles and have my book on Financial Planning, will recall that I always preferred mutual funds over NPS. I am still of the opinion that MFs are a attractive option but in addition to that you must start a NPS account and diligently start putting at least 15days to 1 month's salary in the account every year. Following are my reasons for the change in this strategy:

1.       NPS has 3 schemes with only a maximum of 50% allocated to equities rest in Cprporate and Govrnment fixed income assets.In long term this will protect your corpus as a compulsory requirement and you may consider this as SAVING rather than INVESTMENT. (I trust you know the difference between the two by now).

2.       At the age of 60, you can withdraw maximum 60% of the corpus for your bulk requirements , out of this 40% will be tax free and only 20 pc will be chargeable to tax at your existing income slab. The remaining 40% that you cannot withdraw will be used by you to buy a annuity (like a monthly salary) which itself is not taxable as of now but the monthly income out of the annuity will be taxable depending on your Income slab.

3.       The management charges of NPS are almost 1/10^th of the Mutual Funds. In the long run this will save you enormous money which will get compounded too.

4.       There will be an obligatory savings in the NPS which you will not be able to withdraw, but should something happen to the person, the money will be receivable tax free in the hands of the Nominee.

5.       NPS will serve as the cheapest insurance if you do not want to take one  ( like me) and your sum assured will keep increasing every year as the money grows. Even if you have taken an insurance this will act as a buffer whch will come across without any claim procedures that Insurance companies subject you to.

6.       Now and then when you do not maintain your NRI status, you will have an option of using the Rs.2,00,000 tax benefit.

So in view of the new rules, my strong suggestion to you is to open a NPS  TIER 1 account, online with the help of your PAN or ADHAAR card, by visiting Npstrust.org.in . You will only need an online bank account transaction facility (Net banking). Deposit the money at least once a month and avoid lumpsum investing.

Choose Plan E which has 50 pc equity allocation. You will have a choice of about 8 fund managers. Preferred are SBI, HDFC or ICICI.

The NPS works like mutual funds.Only that it is strictly monitored by PFRDA.

If you are a young cadet you have a fair advantage and I’m sure your parents will be very proud of you.

If you are a young officer  and have put in about 5-10 yers of service, you must have tried out a lot of things by now .For you it will be a good start to put away at least 15-20 days of salary away for those rainy days.

If you’re very senior and in fifties like me. You stand a great advantage by  having your money locked in for a very small period as at the age of 60 you can withdraw it or delay it upto age of 70 if the returns are good or you do not need the money. It will also be beneficial to you if you haven’ yet tried out Mutual Funds.

Since as a NRI you are not alllowed to save in PPF account and any Post Office schemes, this will prove to be a good avenue.

There have been a few people asking that when MFs have no lock-in and are tax free after 1 year, why not opt for them? Yes MF is better in those respects, but NPS maybe required for the very reason that you are against it. It is required in life that certain sum is left untouched till the boots are hung out to dry.However strong willed you may be .There could be a day when you may be overwhelmed by the astronomical returns and decide to consume your spoils of war.

It is for these reasons and thoe few people that NPS must be treated as a retirement scheme WITH HANDSOME RETURNS.

Let us calculate those handsome returns:

If you are 25 years of age today and saved ONLY Rs.15000 every month (i.e.1,80,000 annually) and you got a modest return of 10% y-o-y. Your kitty will be Rs.5crore 72.40 lacs. A modest amount of tax will be deducted only on the 20% of this amount.

I have received a lot of mails critical and simply queries as to how I have suddenly become supportive of something that I was vehemently against. To you and to them my reply is that I am not fixated with any financial instrument or plan .We must  keep changing with the opportunity at hand in terms of safety, returns and tax efficiency (in that order). Earlier NPS though was fulfilling first two conditions , it was not fulfilling the third. Now it is at least half way towards tax efficiency; to this if you will add the low maintenance charges- this becomes  clear winner. To this you add additional tax rebate on Rs.50,000  and becomes suddenly attractive.

However , I appreciate the skeptics , but only those who make cautious calculations and then arrive at results in a dispassionate way. Just sitting on the sides waiting for the opportunity will only make you miss the match. 

Tier II account: There is also a Tier II account in NPS. This can only be opened if you have a Tier I account. There is no lock in for this and there is also no tax benefit. However since the taxation upon withdrawal is as applicable this is not really very advantageous as compared to a Balanced Mutual Fund. I still have to find the details of the Capital Gains on TIER II account, but other details are same as for TIER I account. Since for the same fund manager and plan (E,C or G) the returns will be same for both Tiers , it remains to be seen if this can be a cheaper and hence more viable option to a Balanced Mutual Fund.

               For further details you may visit npstrust.org.in and go thru the FAQs

The Guarantee of Return on Equity

The Guarantee of Return on Equity

A friend recently posted a question on a group, Quote;

“Are Equities really the best investment for the long run? This is the ‘mantra’ usually given to every new investor by the investment gurus. But is this always true ??? Most countries have had very long periods, during which equities have actually been losing money heavily. The longest period of negative real returns from equities was 66 years (for France), 55 years (for Germany), 51 years (for Japan), 22 years (for Britain) and 16 years for US. Considering the average human 'lifespan of investments' to be around 35 years (starting your career at, say, 25 and ending at the retirement age of 60), long term investments in France, Germany, Japan etc, would thus have not been beneficial to even long-term investors. So the important caveat is – investments are subject to market risks !!!
What about investing in 'up-and-coming' Economies ???An investor in Germany, may have started investing for (say) thirty five years starting from 1900 (when Germany was a rising star), only to see their assets wiped out in the 1940s – due to hyperinflation, as a result of the Second World War. Similarly investments made in recessionary markets like the US may never ever see any gain, for the foreseeable lifetime of even a long-term investor …”
UnQuote.
The question and the observation is certainly very and instead of a rhetorical reply calls for a serious research and treatment of our opinion that Equity pays off in the long run. The question calls for a serious treatment since on it depend our retirement benefits and peace of mind, amidst the cacophony and volatility of the markets.
By simply requisitioning Google or Wikipedia, one can instantly get information of all the countries on the two sides before during and after the WWI and in a war that consumed 7 million civilians and 9 million soldiers . It is not difficult to further estimate the economic loss to  property and the damage to the economy of the countries that were involved in the war. Loss was also incurred by the countries that were not directly drawn into the war. As their economies that depended on exports of agricultural and meat products did not have any takers.
Since our goal here is not to discuss the political upheavals, rather the economic returns we will only try to limit ourselves to the conditions that affect the economic conditions and these unfortunately means everything.
It is impossible in the matter to time and again not think of “Wealth of Nations” by Adam Smith. One may not even need to read it but when one just thinks logically regarding how a Nation’s wealth would get built with time one would start to understand the issue at hand.
The wealth of a Nation is dependent upon the economic activity that its citizens carry out both internally and  externally (export the product and services to other countries),under congenial conditions provided by its own government and the government of those countries with which it is  interacting ( or carrying on trade with).
Here the “congenial condition” is an important word. It signifies conditions that are favorable to economic activity. It may be possible that the trade between two countries may be suspended due to poor political conditions, but the requirement for certain items may still exist. Under such conditions, a third country is drawn in the equation which serves as a transit point for “exchange of goods” for both countries. The goods in such case may become expensive for both countries to import, but the trade can carry on nonetheless.
However under normal conditions a country may progress up the economic curve by simply carrying on its economic activity. The government sometimes tries to get the share of the pie , by starting its own industrial and commercial enterprises and competes with private companies of the countries in a fair or unfair manner. This becomes unimportant as the net assets of the country rises in any case. Agriculture, Industrial, Financial and Service sectors keep adding to the wealth of the nation month after month and year after year… under normal and favorable conditions ( like we say in chemistry NTP and STP conditions).
Now sometimes the conditions do not remain so normal or standard. E.g.

·         A country has a famine condition due to failed seasonal crop due to “Acts of God” like floods, Tsunami, failed rains, epidemic for humans, livestock or the crop itself. This a country is able to cope up with by importing the crop from other countries or on back of it’s buffer stock. The dent caused due to agricultural income loss may be compensated by the industrial or service sector, and the national wealth may not be affected much in the long run. In fact it may even grow further due to flourishing Industrial sector or Financial sector growth.

·         Slow down in the growth of the countries to which exports were being made. Hence the Rate of Increase of Growth may be affected temporarily.

·         Internal disturbance in country lie a civil war, rebellion causes a large scale destruction of national wealth just like the natural factors. In fact the damage may be much more to the economy as the infrastructure for producing and transporting goods  (factories, roads, railway lines , airports) may be damaged beyond imagination and prevent an immediate economic recovery.

·         External War with one or more countries. This is the most serious of the conditions . As in these conditions the whole nation starts to concentrate on the war and all productivity of the country comes to an actual halt. In quite a few countries the entire machinery starts getting used to make equipment for war and hence other productive manufacturing becomes zero. Due to exchange of fire cities, villages and towns get wiped out taking with them all the means of economic wealth generation and distribution. Eligible Human resource is diverted to the battle ground both at the front and the support system for the war. Food ,commodities  and other inputs of economic activity become expensive for the civilian population due to government procurement at elevated prices- hence the inflation- rather flares up.

·         The picture in case of war is generally well imaginable as everything wrong happens and even after the war the recovery is not easy as would be in case of a natural disaster. A decisive loss for the loser results in it paying a heavy reparation or “fines” for the loss.

This was precisely what happened in Europe, Japan and Turkey in WWI and WWII.

I agree with my friend that Germany (not in its modern geographical version) was a virtual economic powerhouse at the turn of 1900s. But the war that ensued completely destroyed it as it did England , France, Italy and Bulgaria too and many other countries. After the first war Germany was made to pay for the war in terms of A,B and C bonds, which it could not pay fully and was the main reason for the loss of self esteem of Germans.

This further impoverished Germany and led to the rise of nationalism and Hitler and further WWII.  This further impoverished England, France, Poland, Yugoslavia etc. I am again not going into the political details, rather simply stating that entire Europe virtually was under war from 1918 to 1945. During this period there were no producers, no major production, no major exports or importers and consumers as the war had it’s allies even in Asia and Africa who were being forced to support the war in terms of men and material and food. In essence the entire world came to a stand still. There was no creative production or economic growth in most part of the world except the US on whose land the war was not being fought.

Now to come back to the question of my friend. What is the guarantee of the suggested growth in equities in India or other parts of the world?

How to know that the corpus that we are collecting for our retirement will actually continue to grow.

Frankly none!!!

I have very often thought and said that the reason we invest in a company is because of our faith in it and its management. Similarly we have decided to invest in India because we have faith in our country and Its peace and progressive policies. When things don’t work with one government we patiently wait and bring another party to power and hope that they will perform for the benefit of the country.

As is the case with present government and expectations with the GST, Land Bill, Labour reforms and Rate reduction. The market went up because the industries expected to grow with favorable policies which would have been evident in the share prices and hence the MF returns.

If our government was to decide on an aggressive foreign policy with neighbors or the developed nations and had it led to a war or a economic blockade. Naturally the economic development would have suffered in the way that I mentioned in the beginning.

FIXED INCOME RETURNS: A question that my friend could have asked was , what was the rate of return in the European countries on the debt instruments or Fixed Income avenues?

How were the government bonds performing?

What was the rate of interest of banks during the era?

What about the private money lenders?

This is another question that we must inspect in close detail t another occasion.

But as would be evident to you immediately that return on such bonds would have been a suspect to say the least as there was a strong case of Capital risk and exchange rate risk in such case.

ELECTRONIC COMMUNICATION AND ELECTRONIC TRANSACTIONS

ELECTRONIC COMMUNICATION AND ELECTRONIC TRANSACTIONS

A few days back, I did a small coverage on our friendly Postman, who had served us for over 23 years. The piece was in a nostalgic tone and questioning the future of postal delivery.

This however should not set the tone of this article which happens to be in favor of electronic transfers and communications.

Most of the people to whom my articles are normally directed are seafarers, NRIs and HNIs or high networth individuals. However this may have to do with everyone who would care to read.

Normally it is very awkward for a middle aged male like me to stand up for the modern methods which everyone vouchsafes are not safe and full of risk. There is a very high level IT professional in UK whom I know( having a doctorate in Computer Science). He operates with conventional methods and does not access his bank account except by a ATM card. He may be aware of a few things that we are not aware of, however we will continue with our discussion.

ELECTRONIC COMMUNICATION:

There are stories galore how in past years people lost admission to prestigious colleges, or employment or a large investment opportunity because they did not get the required letter in time , due to whatever reason.

Nowadays it is rare to find anyone without an email address. It is in order too, as written communication has reached mind boggling speed and hence expedited the inter-personal and official transactions. Even the government offices have adopted email for official medium of transfer of information to individual stakeholders e.g. interview letters, appointment letters. Admit cards and results are freely being communicated through emails and SMS.

All this not only brings speed to our communication but also saves natural resources like trees for paper and fossil fuel for means of transportation which would otherwise be required to support the snail mail system of communication.

However the reason why I would like to support E-Communication is for another reason in addition to ensuring that you receive your correspondence.

PRIVACY: Letters and other Official documents are open to breach of privacy especially in today’s colony based culture of row- houses or apartments. I have witnessed people complaining how their letters are being regularly opened and again sealed back.

At times few missing letters from the bank may be sufficient to reveal your financial position and liability to unscrupulous elements. I have witnessed a case where the perpetrators / kidnappers came to know about the amount in the bank account from a Bank Statement passed on by the Postman.

Statement of Account: of a Bank account does not only reveals your bank balance, but a few other personal details about you like PAN No., email address, nomination etc.

While the Statement of bank account gives out your immediate financial position, SOA of your DEMAT account and Mutual Funds are even worse. They can give out your total financial standing of your lifelong savings to people. The scenario is indeed scary as it gives a sense of violation.

Primary and secondary system of email : It is also a relatively common complain that a person’s email has been hacked .To this I had come up with an idea of Primary and a Secondary system of email.

With this system there is a central email address e.g. yourname@gmail.com. This ID should never be publicized or given to anyone except family members. Now you can create few other SECONDARY email addresses for various purposes. 1 email ID for your bank, 1 for your MFs and demat account, 1 for public domains like promotions and 1 for your employer etc. Next step is to install a email client like Outlook, Eudora etc on your PC. Laptop or Tab and have all the above accounts on the same client for receiving emails. For sending emails you can individually select the email id from which the email is to go out.

Second method, is to go individually to the particular POP mail site and the individual email account and create the FORWARDING to your Primary email address , which was yourname@gmail.com .

In this way your individual email addresses will not be known by entities who should not know  that address and you will also be able to know if a particular email address has been breached.

This will also deal with the data theft of email address that has become prevalent nowadays with employees of banks, insurance companies resigning and carrying away the data with them to be misused later.

Conclusion:

Always opt for online Statement of account of banks, Demat services, Mutual funds, Insurance companies etc.

Have individual email IDs for individual uses and have them redirected to your unique central account.

Relying completely on emails will not only enable you to  receive and organize them systematically but also keep a record for an extended period of time.

ELECTRONIC TRANSACTIONS:

 Most of the Seafarers and expatriates have their salaries remitted to a savings bank account. This is even today done by depositing cheques in the accounts and the money lies there for a few days to few weeks till you can access the account or issue a cheque on it. It is seen that there is always a week or two delay between the money coming to the account and be invested further. Sometimes this delay can be of months too.

Considering even a 10-15 days delay with 7-8 months for seafarers and 12 months for other individuals there is a huge opportunity cost involved and wasted. Even if you were to use the money for opening a Fixed deposit this gets delayed by 80-120 days for that amount. If the purpose is for investing in MFs or stocks the loss in opportunity cost is huge.

  I have always gained because of the electronic transactions. One such instance I distinctly remember. I saw that it was the last day of the higher interest rate of the bank which they had hiked only for 15 days in 2012 to attract NRE deposits. They obviously do not inform you .So while I was on ship, I could open FDs on line and gain by locking into a higher interest rate for a very long time. Similarly, I have gained umpteen times by investing online in case of large crashes of the market while being on board the ship.

Hence it is definitely in order that you opt for Internet transactions. Opt for i-transactions for your bank accounts, mutual fund investments, access to demat account even if you are not interested in the online sale-purchase of stocks.

Also opt for DCB (Direct credit to bank) of your Mutual fund redemptions, share-dividends, insurance paybacks and proceeds and any other source from where you receive or liable to receive funds.

In India at least the central bank called RBI is making compulsory to opt for electronic transfers.

You may be surprised that the amount of unclaimed dividends and bonuses in the capital market is so large that the government body called SEBI has formed a Investor’s Education and Protection fund.

Similarly, unclaimed amount from PPF and Employees Provident Fund is well into over Rs. 100 billion.

All this is due to poor record keeping by individuals on their personal record keeping. Most of the time reason is also that when the depositor dies the surviving members of the family has no idea about the financial products that the deceased had invested or saved in.

Similar case is with insurance policies. Due to poor education of the family members, the only time the money is required is when the Insured Person is dead. After him mostly there is no one to form the family as to what they should do.

Few cases have come to my personal attention where after the person had passed away. Family could not file a claim as they could not get their hands on the Policy documents. The agent did not inform them since he is supposed to be paid by the company. The company was not pleased when I sent them to file their claim after 3 years.

Now there are custodians nominated by government who can do the safekeeping of your Insurance documents in a demat way, just like your shares. But for that you must inform your family.

Conclusion and takeaways:

• 1.       Opt for electronic fund transfers and internet transactions in your financial dealings.
• 2.       Keep a record of all your investments in one place.
• 3.       Opt for Direct Credit to bank of ALL your redemptions, sales, dividends, bonuses.
• 4.       Opt for SMS information also which is available freely nowadays.
• 5.       Keep an electronic record of your insurances.
• 6.       Invest in a good antivirus.
• 7.       Keep changing your passwords regularly.
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