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Here's how to plan for a secure future

Last updated on: May 16, 2011 14:12 IST

Here's how to plan for a secure future

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Arvind Rao in Mumbai

Developing your financial plan entails a lot of assumptions on how your financial life will shape up. Simply because nobody has access to accurate information on one's future.

Your life span, growth in income and value of investments, increase in cost of vacations are some of the areas which require assumptions.

It is obvious that the assumptions are crucial, as any material deviation from these could easily be a recipe for disaster.

While positive deviations are always welcome, it is important to be aware of the assumptions in the plan beforehand to prevent any dangerous outcomes.  Five such common assumptions are discussed here.

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Life expectancy

One of the biggest risks to retirement planning today is living too long. With increased health care facilities and new medical discoveries, one can expect to live longer.

It is better to assume a higher life expectancy than a lower one and being forced to make ends meet during the last stage of life.

Inflation rates

Most of the objectives have different cost drivers. For example, children's education is driven by the price rise in fees, lifestyle and cost of living drives retirement costs, rising costs of building materials drive home-renovation costs and so on.

Relying on the inflation rates announced on a weekly basis may not be correct for all goals. Or even choosing lower rates to keep the inflated values of goals.

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A word of caution here is that these rates also have to be closely monitored during the annual reviews, along with the investment growth rates.

Your investments may yield good returns. But if the increase in the inflation rate for a particular objective is not rightly factored in, then it's a job half-done.

Similarly, keep in mind that the average growth rate of investments for a particular objective is at least equal to or higher than the expected inflation rate for that goal.

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Post-retirement income

It is essential that these projections be realistic. Thumb rules put the post-retirement income requirement at 75-80 per cent of pre-retirement income. But this may not be true in every case.

For example, consider a government employee who is today provided accommodation by his employer, which may not be the case after retirement.

Here, the post-retirement income will have to factor in additional costs like rent for the new home, maintenance costs, electricity and so on.

This may increase the actual requirement by 25-30 per cent. Healthcare costs are often not considered separately. With a rising number of diseases and increasing susceptibility to these, healthcare costs can easily consume up to half your monthly bill after retirement.

It is advisable to assume higher healthcare costs and provide for a bigger and separate corpus accordingly.

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Equity returns

Most financial plans base the long-term returns from equity investments (shares and mutual funds) at 15-18 per cent yearly.

These figures are basically derived from the history of average stock market returns over the past 18-20 years. But with the changing dynamics of stock markets, it is important that this assumption be checked and reviewed at least once every year.

The increasing volatility in markets in recent times could be one reason.  Also, assume a lower return from equities in the plan, to avoid any rude shocks.

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I, me, myself

Planning, executing and managing one's finance requires a diversity of skills and resources to be effective. It is always better to seek advice from an expert or at least take a second opinion.

Most people assume managing finances independently helps save costs. However, they don't realise that the cost of wrong investments or planning could be much higher.

Summing it up, it is possible that many assumptions made for your plan may be forgotten with time.

Hence note them down and develop a good financial plan. It will require a lot of dedication and skill. Let it not get futile for want of justifiable assumptions.

The writer is a certified financial planner.

 



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