Tag: Retirement Planning for armed forces Officers

30 Sep 2012


There are any number of websites, articles and experts extolling the virtues of realigning your asset allocation to ‘safer’ avenues as one inches towards his retirement. Some go to the extent of advocating a 100% debt portfolio the day one retires. Many arguments are advanced in favour of this shift – emotional ones (‘need to protect one’s life-long savings’), pseudo-logical ones (‘cannot afford to lose even a single paisa now as the earning are much reduced while expenses only rise’) and even medical reasons (‘cannot afford to have another stress-point in old age’). But the truth actually lies far away from these appeals. Let us look at the arguments that dictate that we should actually move towards lower safety instruments to ensure that we remain financially safe!!

The biggest threat to the retirement corpus, painstakingly built up over the years, is inflation and income tax. Inflation eats into the purchasing power of this corpus and thus, there is a need to ensure that this money earns at least as much as inflation to retain its value. Similarly, taxation ensures that, if you are in say 30% bracket, a seemingly great 9.5% FD gives you post-tax returns of only 6.56%! Thus, if the average yearly inflation is 8% while our post-tax returns on this corpus are only 6.56%, then effectively Rs 10 Lakh corpus will have a purchasing power of only Rs 8.65 Lakhs after 10 years. To elaborate this point, if something costs Rs 100 today, it will cost approximately Rs 216 ten years later at an inflation rate of 8% per annum. However, with a 6.56% post-tax return, your money would have grown only to Rs 188 during that period. You may feel that your corpus has almost doubled in 10 years, but actually it can buy lesser number of thing 10 years later than now. Thus, instead of increasing in value, it has actually lost its value over time. This has happened due to the tendency to go in for absolutely safe instruments which have actually given negative effective returns and made your money lose value.

Second threat to this money is the fluctuating interest rates. Safety net instruments are primarily fixed interest ones. But, almost all of them have defined term maturities like Senior Citizens’ Savings Scheme (SCSS) or Post Office MIS (POMIS) and tenure Fixed Deposits. Only PPF has longer tenure but with stringent withdrawal regime. The issue of reinvestment will always come up after the maturity period. Since interest rates too have their own cycle, it is not necessary that interest rates will be high at the time when your matured money has to be reinvested.

Third issue here is the very long investment periods for the retired people. It is well-known that equity-linked investments give the best returns over long period and their ‘riskiness’ declines over a period of time. Some analysts also quote statistical data to show that Indian equities become almost risk-less after 12 years of consistent equity-related investing. Most of the people retire at the age of 60 years. Taking life-expectancy to be around 85 years, almost a quarter of a century has to be lived consuming the retirement corpus. If this is not long period, then what is? Then, it does not make sense for such people to keep off equity related investment avenues for meeting their needs in later part of their living years.

Hence, we see that resorting to so-called 100% safe investments of fixed income instruments actually erodes your corpus as also exposes you to reinvestment risks. If that be so, what should a retired or retiring person invest in? The best solution for such a person would be:-

  • Instead of looking for investment solutions at the word go, look for your balance requirements instead, which should guide the kind of investments to make. Look at your financial liabilities still pending and a pragmatic assessment of your monthly expenses, including medical needs, over the rest of your lifetime.
  • Short-term needs beget a comparatively safer investment solution which is not dependent on the vagaries of financial instruments. Thus, the money required for next 3-5 years should not go into equity or real-estate related instruments. They should go into fixed return investments like bank/company FDs, SCSS, POMIS, debt mutual funds etc, which are sure not to erode your capital though the returns may be lesser.
  • Longer term requirements, generally your retirement living expenses approximately 5 years onwards after you retire, should go into equity-related products. Prefer equity mutual funds over direct investment in stocks unless either you are very confident of your stock-picking prowess or have a very reliable stock agent. These equity instruments should progressively be switched to debt products one year’s requirement at a time so that your next 3-5 years’ financial requirements remain in fixed income avenues at all times.
  • Real estate, well-researched for the builder, location and price point, also has the capability to give good returns provided not more than 25-30% of your corpus is invested in it.
  • Gold, despite the recent bull run, actually is just a hedge against inflation. It simply implies that it is not likely to create long-term wealth for you since its returns are likely to just about match the inflation rate. One may have a small exposure to it though, typically about 5% of your money, mostly in the form of Gold ETFs or Gold Savings Funds.
  • Insurance is a neglected area by the retired or retirees. If there are dependents or liabilities which need your financial protection umbrella even after you retire, do take or continue your insurance policy till that requirement exists. The best product here is a Term Insurance Plan for you.


With regards,


CEO, Hum Fauji Initiatives,
Your Long-term Partner for Wealth Creation
9999 022 033, 011 – 4054 5977 (Off),  humfauji.in

Visit our Blog, humfauji.in/blog or facebook page http://www.facebook.com/HumFaujiInitiatives or follow us on Twitter  https://twitter.com/#!/humfauji  to get latest insight on matters financial

01 Jun 2012


Prashant Jain is one of the most respected Mutual Fund managers in India. In a recent article, “Its Tomorrow That Matters”, he makes out a very persuasive case for investing in equity-linked products NOW. By giving behavioural, fundamental and philosophical aspects of equity investing, he asserts that this is the time to invest in equity linked products like diversified equity mutual funds. Some excerpts of the same article are given below in point form for easy assimilation. To download the full article, use the link http://poweraxis.com/projects/emailer/hdfcmf/2012/may/6/pdf/its_tomorrow_that_matters_prashant_jain_hdfcmf.pdf


Good returns are seldom made on investments made in good times.

Rather, Good returns are typically made on investments made in adverse times.

1. Look at the performance of investments made in stock markets at different times:-

Table A: Performance of Investments made in good times

Time Sensex Level 1 yr forward P/E Main news / reason Total returns after 3 yrs Total returns after 5 yrs
Jan 00 5205 25 High optimism in technology stocks -38% 26%
Dec 07 20287 26 Booming global economy, optimistic markets 1% -15%

Table B: Performance of Investments made in adverse times

Time Sensex Level 1 yr forward P/E Main news / reason Total returns after 3 yrs Total returns after 5 yrs
Oct 01 2989 11 9/11 attack on WTC, global markets collapse 91% 334%
Jun 04 4795 10 Unexpected defeat of BJP in elections 61% 99%
Nov 08 9093 11 Sub-prime crisis – Lehman collapse 77% NA


2. Buy low and sell high is what everyone suggests and that is what everyone would like to do. The reality however for a typical investor in equity markets / equity mutual funds is somewhat like this – buy high, buy more higher, buy even more even higher, buy less when market falls, buy lesser if markets fall more and buy nothing when markets are really down.

3. This pattern of an overwhelming majority of investors mis-timing the markets repeatedly and consistently is a key reason for the unsatisfactory experience of the majority from equities and for the poor equities ownership in India. While there can be many reasons for this collective expertise at mis-timing, the key reason probably is that a majority of investments in equities are not done with a long term view, despite the fact that the best that equities have to offer is only over long periods. This is unfortunate, as by investing with a short term view, investors are not benefiting from the compounding potential of equities.

4. As the horizon is short term, the entire focus is on guessing the near term market movements. This inevitably leads to extrapolating the markets in either direction and therefore, in rising markets, expectation is that markets will keep on rising. Greed of quick returns leads to higher inflows in equities and as the trend sustains, the confidence and greed both keep on increasing, leading to even larger inflows. Similarly, in downward moving markets, the expectation is that the markets will keep on moving lower, leading to lower inflows; the lower the markets move, or the longer the markets do not move, higher is the confidence that markets will fall further or that markets are going nowhere, resulting in drying up of fresh investments or even redemption of existing investments.

5. When markets are moving up, the news flow is generally good and vice versa. Therefore, generally, in rising markets the perceived risk is low whereas the actual risk is higher as valuations are high. On the other hand, in adverse times, when the markets are not doing well and the news flow is not good, the perceived risk is high whereas the actual risk is lower as valuations are attractive. The net result of all this is that, time and again, a majority of investors end up investing large amounts at high valuations and small amounts at low valuations.

6. Such an approach to investments is not returns friendly and it therefore comes as no surprise that a majority of investors probably do not get rich by investing. Faced with unsatisfactory returns, most blame the markets when instead, it is their investment approach that is flawed and needs to be corrected.

7. However, in case of Gold in India, nobody looks at real returns as the time-period of investment may border on even indefinite. Comparative returns are as below:-

5 year returns (Compounded Annual Growth Rate) of Equities and Gold in India
Period BSE Sensex Gold returns % Excess returns of Sensex over Gold
1981-85 28.9% -3.3% 32.2%
1986-90 14.7% 11.9% 2.8%
1991-95 24.3% 14.4% 9.9%
1996-2000 5.0% -1.4% 6.4%
2001-05 18.8% 12.9% 5.9%
2006 – Apr 2012 10.1% 23.3% -13.2%


8. It is true that the economy is currently passing through a difficult phase. However, this is neither the first nor will it be the last time the economy is facing challenges. Besides, the problems facing the economy are such that should get resolved over time and through some specific steps. In the face of so many issues and adverse news flow almost on a daily basis, it is easy to forget the several strengths of the Indian economy.

9. Bargains are available only in challenging environments / in markets characterized by weak sentiment and seldom when the going is good / sentiment is strong. That’s why, from an investor’s perspective, a more appropriate way to describe the current markets would be bargain markets and not difficult markets.

  • By the end of June or shortly thereafter, Greece will either be in Eurozone or it will not be. Over the same timeframe, steps if any that are undertaken by the government to resolve some of the issues facing the Indian economy will also be known. Irrespective of what happens, markets should discount these outcomes fairly quickly.
  • Times such as present, when the markets are not doing well should actually be looked upon as a window of opportunity for savers to invest more into equities, so that when the good times come, there are meaningful investments in equities to reap the benefits from. The lower the markets are, the bigger is the opportunity and the longer the markets remain depressed, better is the opportunity for savers. In a lifespan of investing of say 30-40 years, it is unlikely that the markets will provide many such windows. In the last 20 years there have been only 3-4 such windows.


With regards,


CEO, Hum Fauji Initiatives,
Your Long-term Partner for Wealth Creation
9999 022 033, 011 – 4054 5977 (Off), humfauji.in


Visit our Blog https://humfauji.in/blog,   or facebook page http://www.facebook.com/HumFaujiInitiatives or follow us on Twitter  https://twitter.com/#!/humfauji  to get latest insight on matters financial


13 Aug 2011
Retirement funds investment for Defense, army army Officers,


Guaranteed pension, assured returns from government schemes, relatively low inflation and the security of a joint family – all the four pillars on which has previous generation’s retirement planning rested, have either gone or will disappear soon. Tomorrow’s retirees will balance high income with uncertain returns, better means of capital appreciation with longer lifespan, and all new earning and career options with an urge to hang up their boots early. And all this, without wanting to compromise on their lifestyle.

The other big challenge for retires comes from an enemy that is both stealthy and relentless – inflation. Just as compounding works to grow your corpus, inflation eats away at its value. The sum of Rs 1 crore may seem like a lot of money today but over 30 years, an inflation of 8% can reduce its equivalent purchasing value to less than Rs 10 lakhs of today!! And to think that consumer-level inflation today actually is in double digits. A low-to-moderate inflation rate of 7-8% does not attract attention of the working class. That’s because incomes prices of products and services do not seem to be shooting up ‘fast’ but it nevertheless erodes your money-value ever so quietly!

Dangers of Living Long Only on Govt Pension

Let’s take the example of a Colonel who retires at the age of 54 in June 2011. He will get a pension of approx Rs 26,000 pm after tax (assuming 50% commutation of pension) which grows by approx 5% per annum due to the DA component. We assume that his household expenses are Rs 25,000 pm which increases with inflation at approx 8%. The calculation further assumes he has no other liability and lives in his own house. A very preliminary calculation shows that, if he is dependent only on his pension for his living, then, due to this difference of 3% in the growth rates of his pension and inflation, his pension will fall short of his expenses by Rs 1394 per month after 3 years. This figure will shoot up to Rs 9641 per month 9 years after retirement, Rs 25252 pm 15 years after retirement and Rs 83166 pm 25 years after retirement. Remember, since we live well and maintain ourselves well, our life expectancy is comfortably at 85 years of age – ie, we will live more than 30 years after our retirement!!

And in case somebody feels that he has approx Rs 50 lakh corpus of retirement benefits which will help him live well, calculations again show that if he invests this sum at 8% per annum in very safe investment avenues and gets the returns, he will start eating into this corpus from the age of 66 years (ie just 12 years after retirement) and by the age of 80 years (ie 27 years after retirement), there will be no corpus left! Also remember that we are only talking about normal day-to-day living, no big purchases – not even change of a car ever or gifts for children / grand-children or holidays or repayment of a home loan. And if inflation goes into double digits as it is today, heavens will surely fall!

So it is clear that inflation eats away your entire guaranteed pension. There is a significant gap between the income and expenses and this gap can create a serious problem in future. It is advisable to invest adequate a disciplined amount regularly in some high growth investment avenues while you are serving, which generates high return that will not only support your expenses after you stop earning but will help you pursue your dreams post-retirement.

Follow this four-step retirement strategy to build up a healthy nest-egg:-

  • Know how much you need

The income that you would need to live off on after retirement is approximately 65-70% of the income that you live off on while working, considering no big purchases or expenditures. However, this rule of thumb may not be accurate for everybody since people are living longer than ever and retiring in good enough health to incur additional expenses (travel, entertainment, and so on). This estimate applies if your situation fits the following criteria:

  • Your house will be paid off (no rent/loan).
  • No work-related expenses (commuting, changing of clothes frequently, shifting, etc).
  • Your children will be financially independent.
  • Fewer taxes because of lower income and No debt of any sort.
  • Decide your asset allocation

Don’t pull all your nest eggs in one basket. That’s too risky a strategy for something as important as retirement. The nest egg should be a mix of different asset classes and investment instruments. Equities offer a distinct advantage because they can deliver significantly higher returns than other investment over the long term. Investors whose retirement is 20-25 years away should ideally park their investment in equity mutual funds. For older investors in their 40s and 50s, a larger allocation to debt is advisable. However, this is a generalized statement and finally, everything depends on your risk attitude and aptitude (calculate your Risk Aptitude from the calculator on our website www.humfauji.com).

  • Choose appropriate products

Once you have decided your asset allocation, choose the investment vehicles that will take you to your destination. Instead of investing in a single scheme, do so in a bunch of instruments, which not only assure regular income but also allow your corpus to grow in tandem with your withdrawals and rising inflation. This strategy should alter with the age or stage of the life after retirement. So, for the first 6-8 years after you retire, allow your funds to grow at faster rate than the withdrawal. Even as you use the interest earned through debt options to meet your expenses, invest in equity through mutual funds or monthly income plans. However, the crux of all investment remains a very aggressive monitoring after you have parked your funds in them.

  • Formulate a withdrawal plan

The final step in your retirement planning is to formulate a withdrawal strategy. Your retirement portfolio must have two essential components: liquidity and growth. It should provide you regular income and also grow fast enough to take care of future expenses. Systematic  Withdrawal Plans (SWP) options of the Mutual Funds and rentals from a good residential / commercial property are ideal in this regard.


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