Retirement planning - I

I recently received an email from anirudha asking my suggestions on retirement planning for his parents. The timing of his question is good as I have been working on this topic for the last few weeks for my family.

I will try to detail out my thoughts on the above topic in a series of posts. This is however my own idiosyncratic way of doing it. It may make sense for some of you to approach a licensed financial advisor (if they exist in India!) for advice.

Before I discuss about the above topic, let us look at the above issue by inverting the problem. We need to identify what we should absolutely not do when planning for retirement – especially for our parents

1. Chasing returns: Repeat after me – I will not put my parent’s or family’s funds at risk in pursuit of returns. Please read this a few times and memorize the statement. I cannot stress this enough. It would be completely stupid and irresponsible to chase an investment idea for extra returns with your parent’s money when they are depending on this capital to support themselves for the rest of their lives

2. Due diligence – Do not put your family’s money in any instrument without complete due diligence. This includes the obnoxious ULIP schemes sold by most banks and guaranteed return policy sold by friendly insurance agents to unsuspecting seniors. The agents in question are not targeting your parents out of malice. Most of them have good intentions, it’s just that they do not fully understand the product they are selling. So please avoid all such agents unless you are sure you are buying something worth it.

3. Be realistic – Do not assume returns in excess of 10-12% for a conservative, low risk portfolio. Even if you have made 30% returns in the past and consider yourself a finance whiz kid, please hold your horses and spare your folks of your brilliance. If this performance turns out to be a fluke or you hit a bad patch, they will suffer and you will carry the guilt (which is a horrible feeling)

4. Face the facts – If your parents have unfortunately not been able to save enough for their retirement, do not target higher returns to cover for it. It could mean tough decisions for you and your parents in terms of lower standard of living (though assured) or help from you to maintain their current living standards.

5. Paper work and admin – Do not develop an intricate investment portfolio where your parents have to spend half their time filing documents, visiting banks and other such administrative tasks. I have done this in the past and made it difficult for my family.

6. Teach – Do not keep them in the dark about where their money is being invested. Teach or atleast educate your parents about the investment options you are selecting for them. Do not make it mumbo jumbo for them – When the market hits the top and retracts 5%, I will sell 6% and move to cash! Keep it simple and understandable. It will also ensure that you will pick some sensible options for them.

I will cover the following topics and more in the subsequent posts

Risk and return planning
asset allocation
Administrative tasks
Portfolio rebalancing and tracking

The subsequent posts will not be a how to guide which you would be able to use to pick the right investments and build a portfolio. I will only discuss my thought process on the above topics. In order to execute it, you may have to work on it yourself or find an honest advisor.

Final point: If you are completely new and have no clue where to invest for your parents, please invest the entire capital with a safe bank till you have figured it out with your own money. The last thing you want to do is to have your parents pay the cost of your learning how to invest (after spending all the money raising you :) )