September 1, 2009

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 :) )

17 comments:

sachin8778 said...

Excellent start.... can't wait to see other posts on the topic. You have started with an amasing perspective, personal touch and with huge respect/care towards our folks, I very much like that part. You are doing a fanstastic job through these posts, please continue doing so... God bless you!

I am also interested in retirement planning for self, a 32 year married IT professional with a 3 yrs old child. Please do share your views at your convenient time.

Aniruddha said...

Hi Rohit,
Thanks for the post, I will be waiting for next posts as well.

Regards
aniruddha

Joseph Jude said...

I've been reading your blog for quite sometime and found very informative.

I'm not only interested in retirement planning for my parents but mine too. So will be reading this series with interest. Keep it coming.

Thanks again

Anonymous said...

Hi Rohit,

I have liked your blog so far. What stands out in this post for me is your character.

You came across as a genuinely caring person. My regards to your parents and I hope they do well. This might not surprise you, but I have been struggling with this for quite some time now. As far as my personal portfolio goes, I have made quite a few mistakes and have benefited from quite a few flukes too..This however makes me apprehensive when planning for my parents.

Thanks for initiating this series and looking forward to reading more with interest.

Regards,
Anon2

Vic said...

Very helpful topic Rohit.

You raised some excellent points. Most of the retirees get trapped into costly insurance policies.

In my experience, it is very difficult to find an Honest Advisor.

You have listed all the important points, following these should eleminate most the pitfalls.

Vikas

Anonymous said...

While discussing asset allocation, do you mind adding your views on how should one fix it if it heavily inclined towards debt. This debt is with long term view (not flexible/liquid to break).

~s

Rohit Chauhan said...

Hi sachin , anirudha, joseph
thanks for your comments

anon2
its quite reasonable to be apprehensive when planning for your parents. most of us are ..in such case it is better to err on the side of caution

Rohit Chauhan said...

vikas
the idea of the post was to approach the issue by inverting it ..sometimes it helps to avoid a few things before you can figure what to do

hi anon - i assume you mean investment in long term debt instruments ?

rgds
rohit

Arnie said...

Hi Rohit,
I follow your posts on a regular basis. They are easy to understand and to the points.
I am keen to get your viewpoint as I have always started the exercise but have never really reached a conclusion. Accordingly, investments have never been focused towards retirement per se...
Looking forward to the series....
Arnie

AmNick said...

Well said.. it surprises me to no end the amount of people who don't understand the simple fact - "Investing is a risky DO NOT invest what you cannot afford to lose"

Rohit Chauhan said...

Hi arnie
thanks for the comment

amnick - the key reason people make this mistake is due to greed and inability to focus on risk

regards
rohit

hari vedanarayanan said...

Hi Rohit,

Nice thoughts but I have one suggestion here. In investing parents money it does ,make sense to have some equity component. After due diligence of an investment oppurtunity arises it makes sense to invest the money.
In my view what one can do to eliminate the risk is by buying portfolio insurance ( dividing the portfolio in 2 parts and investing one part in debt in such a proportion that the original capital is safe and the remaining capital can be invested in deep value stock after doing scrupulous analysis like the one you are demonstrating through this blog. My only contention is that in the markets when there is an opportunity we must make use of it.Age and people come later.

Thanks,
Hari

Vic said...

Hari,

That's what Asset Allocation is all about..:-)

Vikas

Rohit Chauhan said...

Hi hari
I do not agree with your point. The above point only holds true if you know what you are doing.

that said, i still will not do it for my family. the price of me being wrong is too high for them

If you have been investing for a long time, have the performance to back it up and can manage the risk, then it makes sense to do it for your own retirement.

rgds
rohit

Student Of Market said...

One thing I would like to add is sticking to asset allocation. In other words, if you put 20% in equities and 80% in debt, it would be prudent to rebalance every six months or when the balance shits to either 16-84, or 24-76 as the case may be.

hari vedanarayanan said...

Hi Rohit,

If is barve enough to take a chance with investing parents retirement money then one needs to have done due diligence already. On march 2009 when stocks were trading at depressed valuations any stocks picked would have given us good returns by now. That is the the reason why I used the term portfolio insurance,once we invest that proportion of money in such a manner that the original principal is in tact then one can invest the rest in areas where the probability of failure is less.But at the same time I agree that one must definitely must not handle parents money of one does not have enough experience. That aside what I mean is if there is an opportunity we must make use of it after scrupulous analysis with strict stop losses. Otherwise we have to be happy with the 8% FD which does not need any strategy.

Thanks,
Hari

Manish Chauhan said...

Its an excellent post ... Important Points put in simple words ..

from my experience with readers on my blog .. i have realised that people are putting too much effort on things which does not matter much and too less on things which really matter..

for example .. they will put so much time on Finding the "best" fund which never exists .. and because they want to be really sure about it they keep delay their decisions .. and finally invest too late ...

early investing is what will solve most of their problems if not all :)

May be people like this post : http://www.jagoinvestor.com/2009/09/key-to-excellent-financial-planning-is.html

Manish
http://www.jagoinvestor
the most important problem people face now a says is