How to plan for recurring financial goals

Why are young Indians severely unprepared for retirement?

What comes to your mind when you think of retirement? Peace? Luxury? Health?

For many individuals, retirement is the golden time when one can finally relax and pursue their leisure goals. With no active income, this is a phase in life where one needs to be financially well-prepared in order to live a hassle-free retired life.

However, the Indian youth do not seem keen on planning for their later years. According to a survey conducted by Max Life Insurance India in 2021, 80% of young Indians in urban areas are not prepared for retirement. It revealed that 1 in 4 have not even thought of retirement, which highlights concerns over financial preparedness.

The young population places greater emphasis on other financial needs like a kid’s education, wedding, purchasing homes over retirement. The focus on current satisfaction which when combined with a “You only live once” attitude can leave insufficient funds for future safety.

But why do young adults need to pay attention to early retirement planning?

Easier to save

Firstly, it is easier to save for retirement during the early stages of one’s career when there is no pressure to support a family and minimal health expenses.

Let’s take the example of Mr and Mrs. Rahul who are currently 35 years old. They intend to retire at 60 years and have annual expenses of Rs. 6 lakhs (Rs. 50k per month). Assuming 7% inflation, expenses at retirement can be estimated to be around Rs. 23 lakhs. With a life expectancy of 85 years, the corpus required would be around Rs. 5.7 crores in order to receive inflation-adjusted income for the post-retirement years. Yes, that’s quite a huge sum but that’s where the importance of early retirement planning comes into place.

Better inflation adjusted returns

Second, India has been witnessing a steep cost-of-living for years now which hurts the retired class the most. Inflation can eat up the value of your money and impact your lifestyle, medical and other expenses in the future. Strategically mapping out your retirement can help tackle inflation and maintain your future expenses and savings.

Avoid financial dependence 

Lastly, many Indians are largely unprepared for retirement as they rely on their children to bail them out during difficult financial circumstances. This financial dependence can create troubles between families. Thus, selecting and investing in the right retirement plan means you will not have to depend on anyone else for your needs.

So, planning as early as you can even with a small amount of money can go a long way to accumulate a significant pool of money.

Next, what should you do to improve your preparedness for retirement?

First, it is important to accept that retirement is an inevitable scenario and not having a financial plan can result in undesirable consequences for you and your family.

Second, identify and quantify your retirement goals to see where you stand and where you have to reach. This can be based on several factors like age of retirement, inflation, lifestyle, taxation etc. Using a systematic approach such as goals-based investing can help in your journey of accumulating wealth towards the decided retirement corpus amount.

Third, investors need to adapt to simple but intelligent investment techniques during their working years to build an appropriate nest egg. Below are some common ways to start retirement planning.

• Equity Mutual Funds: Young Indians have a relatively higher risk tolerance than other age groups. This means they can allocate a significant part of their portfolio toward equities, especially when starting early for retirement.
  
  Equity Mutual funds are a popular monetary vehicle that generates wealth by pooling money from investors and investing in different segments of the Indian Equity Market including large cap, mid cap, flexi cap and value stocks. Such schemes allow investors to invest either a lump sum or in small amounts regularly through Systematic Investment Plans (SIPs).
  
• Exchange Traded fund (ETFs): Exchange-traded funds or ETFs are passive funds that are similar in many ways to a mutual fund except the fact that they can be purchased and sold on a stock exchange. The underlying investment funds are generally invested in stocks passively mirroring the composition of indices. The underlying asset can be an Equity Index, Bonds, Commodities and Gold. For example, if the bechmark is Nifty 50, the ETF invests in the same constituents as the benchmark as per their weightage in the index. This is particularly suited for young investors as it requires a very low investment, is easily accessible and does not have any fund manager bias. Click here to learn more about investing in ETFs.

• An Insurance plan ensures regular monthly returns at the time of retirement and is an appealing option for many investors because of the perceived safety and tax breaks available.

• Small Savings schemes such as Public Provident Fund (PPF), National Savings Certificate, and Senior Citizens Savings Scheme are managed by the central government. These schemes provide returns higher than bank fixed deposits but lower than equity. Since it provides guaranteed returns, these schemes are considered safe modes of investments and is suited when someone is very close to retirement.

“Invest in wealth for a better tomorrow!”

Retirement investment is a matter of choice and working towards it is key to leading the retirement life you hoped for. The secret is to start early. Plan your retirement under the guidance of a professional financial advisor who will help you build a portfolio that safeguards your interests while ensuring high returns.

Ways to avoid personal loan scams

Digital and technological advancements have been a boon to the financial services sector. However, it has also given rise a to new wave of cybercrimes and online frauds.

The recent pandemic witnessed a surge in various financial frauds. In fact, nearly 550 of the digital lending apps available during February 2021 were illegal.  The immediate need for funds can make availing a loan through the regulated system difficult. Many fraudsters exploit this “urgent need” and dupe people out of their hard-earned money. In many cases, these lenders harass their borrowers for loan recovery, sometimes even leading to death.

However, once you are aware of the signs of such scams, it is unlikely that you will fall for them.  Here are a few ways in which illegitimate loan providers lay out their traps:

Clickbait language: The most popular loan scams advertise attractive offers like “Guaranteed loan approval” or “No credit check required”. A legit financial institution will look at several factors such as your creditworthiness, income sources, existing loan commitments and verify your repayment ability before approving a loan.  

Creating a sense of urgency:  Be wary of mails or ads that promise you offers for limited period of time. Such tactics are used to create a sense of urgency and trick you. Genuine lenders do not make such limited period offers and give sufficient time for customers to make their choice.

Demanding Up-Front Payment: Regulated financial institutions charge a processing fee before granting the loan but the amount is deducted from the loan advanced to you. However, in a typical scam, they demand money or a fee beforehand for “insurance” or “processing”.

So, what must you do to avoid such traps?

• Check the identity of the lender through their official websites or visiting their branches
• Always double check the web address. For example, if the lender’s website has only “http” instead of “https”, immediately stop surfing as it allows the scamster to obtain personal information.
• Ensure that the lender is registered with a regulatory body such as the RBI or works with RBI-approved institutions. Such lenders are usually transparent about their fees, practices, and policies.
• Check if the lender has positive or negative reviews on the internet.
• Find out the exact interest rate cap for the category of loan and lender, and make sure what you are being charged is within the limit.
• Obtain details about repayment schedule as well as prepayment penalties. Make sure the lender offers a degree of protection and flexibility in terms of repayment and default.
• Ensure that the lender has a public available grievance redressal system or a working customer helpline in place.

In case you do fall prey to such scams, keep your commination documented and file a complaint on the Cyber-crime website at https://cybercrime.gov.in/ or call up their 24×7 Helpline 1930.

Research is key.

Always do a thorough investigation about the company’s credentials before sharing confidential financial and person details over a loan offer. Selecting a lender after doing your research and making sure that they abide by regulatory mandates is a fool-proof way to a hassle-free and transparent loan journey.  

3- How to plan for recurring financial goals?

Every individual has a diverse set of goals – be it long-term, short-term, or even recurring. Recurring financial goal is one where the same goal needs to be accomplished at specific intervals. This can include your kids’ school fee, yearly vacations, insurance premiums or even upgrading your gadgets.

How to plan for recurring financial goals?

Clarity is Key. Define your financial goal in advance, both qualitatively and quantitatively, and decide when you will need the money. With the help of your financial advisor, determine your risk tolerance and risk appetite based on current income levels and financial goals. This can help get clarity on the type of investments to undertake and accordingly maximize benefits.

Which products to use for recurring financial goals?

There are two ways to plan for recurring financial goals.

Option 1: Recurring Deposits (RDs)

A recurring deposit is a financial tool offered by banks across India where investors deposit a predetermined fixed amount each month and earn a monthly interest for a stipulated period. On maturation of that period, the total investment along with interest is handed back to the investor. Simply put, it is the adult way of piggy bank saving but with interest.

Like Fixed Deposits, the interest rate remains constant throughout the investment period. The only difference is that one needs to invest a big chunk at once for fixed deposits but RDs can be done in monthly installments of amounts as small as Rs.1000.

This tool is particularly suited for investors who do not want to risk their capital and are not looking for high returns. 

Click here to use Tavaga’s Recurring Deposit Calculator.

Option 2: Systematic Investment Plan (SIP)

SIP is a way of investing in the market by choosing a specific sum of money to invest at regular intervals. It is an investment vehicle used to invest periodically in Exchange Traded Funds (ETFs) as well as Mutual Funds. The investors can choose funds based on their investment objective, risk appetite, and time horizon.

SIPs work in a similar fashion to RDs. However, the key difference between the two is that RDs offer fixed returns as per interest rates offered by banks and SIPs offer variable returns that fluctuate as per market performance. SIPs also offer the flexibility to make investments on a weekly, monthly, and quarterly basis at any amount as per the convenience of the investor.    

Although SIPs can provide greater returns, it comes with the risk associated with market movements. A combination of carefully chosen Equity SIPs can prove to be beneficial if you are willing to take higher risks and your recurring goal is based on a longer investment horizon. However, if you want to minimize the risk, you should consider debt or hybrid SIPs.

Click here to use Tavaga’s SIP Calculator.

Practical Application: Arun needs to spend Rs. 1,00,000 annually on his child’s education for 12 years. He decides to invest in a RD to fund the first 6 years of his child’s education. For the subsequent years, he decides to start a SIP.

Now, suppose the payment needs to be done in April every year, then he must start a RD where monthly payments of Rs. 8,333 are made for a year. Once the RD matures, Arun will receive the entire investment and the interest. Accordingly, the school fees can be paid, and a fresh RD can be started immediately for next year’s fee.

For the SIP, Arun can choose to make monthly installments starting from now which will be deducted from the bank account for a specified period. This is invested in ETFs or Mutual Funds where units of the fund are purchased at the market rate and added to his account. In the 6^th year, these units can be sold to fund his kid’s education.

Takeaway: Regardless of the choice between SIPs or RDs, you need to start early to achieve your financial goal. Always consider your goals, income levels, risk appetite and investment horizon before choosing a financial instrument. This will ensure that your money grows in a stable way that can fund your recurring goals. If you do not plan well in advance, then you may face sudden pressures in particular months.ToBuild an investment portfolio customized to your needs, visit Tavaga.com