Factor in retirement planning and other goals before going overboard

Income levels have been swiftly increasing for Indians, yet many impediments line up the savings street. High spending is the biggest deterrent today to savings for important goals such as retirement. Statistics point out that consumer spending by Indians is at an all-time high of Rs 15,94,581 crore during the first quarter of 2015 as per the Ministry of Programme Implementation.

Part of the savings too are being channelized for spends, which earlier weren’t as exorbitant, say financial planners. The goals listed out by clients are a tad different they say. “In every second case, we have cashflow issues, not because they are earning less, but because people want to live a flamboyant life. We encourage them to have realistic goals, which are fairly modest as life is not linear,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories.

The high expectations from the society are leading investors to spend rather than save. Financial planner Vivek Rege, who is MD of V R Wealth Advisors, observes, “The social fabric is changing and there is an urge to prove something to avoid being looked down upon. If you have mutual funds worth crores, no one is going to talk about it. But if you own a luxury car, then the world notices.”

Hence, planners are requesting clients to rethink their goals before going all out to save for the bucket list. To cut the clutter out, Vivek Damani, proprietor of advisory Jeevan Prabandhan, says, “While we all have ambitions, one should understand the necessity of the goal. When we are planning for their goals, we ask them, ‘What is the need behind the goal?’” He further adds, “It is essential that the goals are realistic, within the economic and social framework that one is set in.”

The consumerism trend is forcing planners to restrict spends in an innovative way. Rege says, “We now create an impulsive spending budget to provide for things that clients think they would never buy. We encourage clients to spend this money. As these limits are set, we have observed that they restrict impulsive buying, which otherwise would have shot up beyond these levels. Some clients end up saving this money at the end of the year, which they feel proud about. We divert them toward goals such as holiday.” Holiday budgets, which earlier ran into 5-digit numbers, aren’t so any longer. “Going abroad for a vacation has become a mainstream trend,” says Sadagopan. As a result, vacation budgets have shot up astronomically. “A domestic holiday for the family is taken care of within Rs 1.5 lakh. However, if you opt for a foreign destination, you would need Rs 7 lakh for a family of five, including shopping,” as per Rege. He adds, Another fad is sending children to study abroad. Parents roughly know the costs involved, but they aren’t accounting for inflation. “People are unaware of how much it will cost to educate their son or daughter in US, 10 years down the line.” Inflation isn’t the only worry for parents have to deal with. “We realized inflation doesn’t impact foreign education as much as currency fluctuation does,” points out Rege. There are parents who are willing to liquidate all that they have to enable expensive study abroad. Damani recollects, “Two years ago, a widow said she wanted to send her daughter abroad for education using all the funds possible.

‘It doesn’t matter if I am not left with anything as it all belongs to my husband, who wanted her to study abroad,’ she said. It took me six months to convince her to skip the foreign study idea as she would need funds not just for her daughter’s education, but also for her marriage, apart from planning for her retirement within the income that they have.” On the other extreme are parents who don’t want to fund the child’s education for reasons beyond finances. Rege talks about the emerging trend, saying, “There are parents, who say, ‘Let the children fund their own education. We have come up the hard way in life, let them earn it too.’”

Another growing obsession among Indians is to spend or save for a 3-5 BHK home for their nuclear families. “When we question clients about why they need a 5 BHK flat for a family of 4, they give vague replies,” says Sadagopan.

But advisors ask investors to exercise caution on their housing goals as they are fulfilled on huge loans and can hinder future goals. “The decision to buy a big property can be really crippling as you need to pool in multi crores. During a downturn, investors face problem. They may not be able to sell the property and also be stuck with a long-term payment. Big property purchases are risky decisions and they need to be taken carefully,” Sadagopan adds.

Cash Flow issues, which may grip many riding the consumerism wave, can have far reaching effects. “Such clients get into a cycle where savings are lower and credit card bill payments are delayed as they face a liquidity crunch and retirement planning derails. As a financial planner, you cannot interfere with the decisions. We cannot pass a judgment on their decisions unless it is going to affect their cash flow,” Rege points out.

But planners cannot go all out and scale down the goals for the investors. They have to tread on a thin line between interference and cautioning the investors. However, they put their foot down in certain situations. Sadagopan elaborates, “If there is a cashflow issue, we have to talk to them. We start questioning them as to why do they require two cars or can’t they sell the existing car later as it is just three years old. Some clients are open to make adjustments, while others are not.” They step back if the clients are not willing to scale down the goals. “We cannot force our value system on them,” says Rege.

About the tricky situation Sadagopan says, “I may have a viewpoint, but my client may have a different viewpoint. Hiring a driver may sound a wasteful expenditure to me, but not to someone else. We cannot force them to accept our viewpoint, as long as they are not going overboard, with their cash flow. If the cashflows don’t permit the clients to fulfill each goal, they chart out a way around the overall framework, recommending changes.

“We cannot compromise on essential goals such as child education and retirement planning. For the rest, we work with them on goals that are feasible. If they say they want to go for a foreign vacation every two years, which they won’t be able to achieve, we recommend them to probably take a foreign vacation every five years,” says Sadagopan.

To fulfill all the goals you either have to increase the income or earn higher investment return. “Increasing the income is not always in their hands. Decreasing the expenditure is feasible to the extent of 5-10%, but not to the level of 30-50%. With regards to investment returns, we communicate to them if within their risk profile they may be able to earn 10% return and not an 18% return,” points out Sadagopan. But a different approach works for such clients. “One needs to counsel clients, instead of getting into excel sheets. If you make them realize holistically using a bird’s eye view they are able to understand. Many have even reversed their decision,” says Rege. This realistic goal setting comes at a price for planners. “When we question the need behind the goals, some investors – less than 20% - refuse to be our clients,” says Sadagopan.