A trainer, columnist, blogger and now an author Subramanyam spends a few moments with Cafemutual to talk about retirement planning and how IFAs could incorporate this theme as groundwork for advising clients. Edited excerpts….
How did you get the idea of writing this book on Retirement Planning? I was surprised to find many US based books on retirement planning, but nothing in the Indian context, hence the plunge. I was asked by my friends in Moneycontrol to write the way I speak. Around 70 per cent of the book was already written and stored electronically. So I just had to collate it.
Given the total absence of social security in India, is the vast majority aware of the importance of retirement planning?
Talking about Indians is wrong because there is a huge section of the population that leads a hand-to-mouth existence. But the educated and the upper middle class have earned more than what they would have expected, thanks to the booming economy. But most of their money is parked here and there. They never sat down to plan their retirement. In our culture, we are conditioned to think of life with our children forever, accepting the joint family, and pretending that everything is fine. It suits the government because people invest their money in products that offer around 8 per cent returns. There is no public debate happening on retirement planning.
While the rich and upper middle class are earning and saving enough for retirement, are the middle and lower middle classes prepared?
No. Many of them are not prepared but they will not accept it because they are happy with the feeling that they have much more wealth than their father. They are content saying 'My father had only Rs 20 lakh while I already have Rs 75 lakh. How much more will I need?'
What are the risks for the people who are 'under-prepared for retirement'?
Life expectancy has gone up compared to what it was in earlier days. So people live longer and are dependent on children. Medical expenses have gone through the roof. So, not being able to buy adequate medical cover and not having enough money to pay for medical expenses are a cause of concern. Children not having enough money to look after the parents can put the entire family in a tight spot.
What about the people in the unorganised and self-employed categories?
I do not really deal with this category and hence, not the right person to comment. It is very rare that such people can understand a NAV based product. The most important requirement is financial inclusion and financial education before they can be asked to do a long term SIP.
What are the key challenges according to you in retirement planning?
There are four key challenges. First is managing your money. People who claim that they can manage their money actually may muck it up. Second is asset allocation. Too much money is in debt and too little in equity, if there is something at all. The third challenge is rising life expectancy. There is a possibility that a person will outlive his or her savings. And the fourth challenge arises from the absence of long term care insurance in India. This could result in increase in medical expenses.
In helping their clients prepare for retirement, should advisors look at the so-called retirement products (Pension plans by life insurance companies, mutual funds)?
They should look at normal investment products and depending on the age of the customer, park a chunk of the money into equity plans. If a person is retiring in 2-3 years, there is an inherent risk in the aggressive portfolio. They should not consider pension plans from life insurance companies. The plans from mutual fund are slightly better. But the charge structure of the insurance plans offered by mutual funds might hurt.
What investment products in your opinion are best suited for retirement planning?
For any goal which is more than 10 years away, it is equity, equity and always equity. For a lesser duration goal, one can have a mix of equity and debt.
How can IFAs grow their business by helping clients save for retirement?
Almost all clients will want to save for their retirement. Younger clients should be asked to start with smaller amounts in SIPs and as they grow older, increase savings through SIPs in more number of funds. Even for older clients, the shift out of equity should happen only at an age of say 70 years! For the advisor, long term SIPs and long term SWPs will ensure a great trail commission and good leads.
Are IFAs using retirement planning as a theme to talk about retirement and investment products?
IFAs don’t have a product to sell other than the Templeton India Pension Plan which has a withdrawal lock-in. Even IFAs who are doing big ticket SIPs are not much focused. I don’t think earmarking for a goal based investment is happening.
As in the US, retirement planning is nowhere close to becoming a big business in India?
The growth in the mutual fund industry in the US happened because of 401k plus schemes (retirement schemes). There is no such plan in India. No mutual fund company in India ever went to the ministry of finance to demand a product which is 80C deductible and a pension plan. The only two firms who did it were Kothari Pioneer and UTI. There is no choice of how to get your money back in pension products of insurance companies. They decide how much money you will get back and you have to buy an annuity. I got an annuity of five per cent from an insurance company. Now that’s miniscule when I can get nine per cent return on a bond issued by leading banks! Buying a good equity fund from a mutual fund company is better than buying a pension plan from an insurance company.
What room do you think could be there for products that are sold as retirement solutions by mutual funds? How good are products offered by mutual funds which rebalance the portfolio after you reach a certain age?
I don’t know whether the market has the ability to sell such a product. There are very few people selling Templeton’s Pension Plan. The distribution system is still chasing AUM. Not many people are happy to doing an auto pilot mode for 20 years. People think that they can time the market in spite of empirical evidence to the contrary.
National Pension Scheme – how suitable is it?
It’s too complicated as of now. I am not sure about the fund management expertise. The rates are too fine but I guess it will surely change. If that is not done then good fund managers will not be willing to come in. I am willing to talk about it only after I see its performance for 4-5 years. Also I am not very sure how the annuity will be priced.
Your next book?
It is telling doctors about money - Wealth Prescription for Doctors.
Source: http://www.cafemutual.com/News/InnerNews.aspx?srno=29&MainType=Ana&NewsType=Interviews&id=43
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