 "Place of retirement will be key to your financial planning")
Non-resident Indians (NRIs) often lack clarity about where they will settle down after retirement. The decision becomes difficult owing to factors like the need to look after aged parents back in India, reasonable cost of quality medical treatment, and the desire to have children connected with their roots. Due to this, families sometimes defer retirement planning. Instead of doing so, they should adopt a strategy that suits their circumstance.
Based on how much clarity there is about their retirement destination, NRIs can be divided into four categories. In the first are those who are absolutely clear that they will retire in India. The second comprises people who will retire in the country that they are currently residing in. The third consists of NRIs who will retire in a country that is different from the one they live in, but not India. And finally there are people who are absolutely unsure about their retirement destination, and unlikely to know the answer in the near future. Each of these categories needs to have its own tailor made approach to retirement, though those in the second and third category can pursue a similar strategy.
Retiring in India
Inflation rates in India tend to be significantly higher than in most other parts of the globe. Hence it may be difficult for most NRIs, who left India many years ago, to estimate the cost of living after retirement. They should take help of an advisor to decide the retirement kitty.
These NRIs should first identify the city they wish to retire in, since the cost of living can vary sharply from one city to another. They may be tempted to invest in real estate in city of retirement. It is, however, advisable to purchase a home closer to retirement. If bought much in advance, wear and tear can make the property unsuitable for living by the time they actually retire.
Next, NRIs should begin to invest a significant portion of their retirement-oriented savings in India itself. A range of options is available for this goal. There is the New Pension Scheme (NPS), a range of mutual funds with excellent long-term track records, specific tax-free bonds, and NRE/FCNR deposits that are attractive due to the relatively higher interest rates in India compared to those prevailing in most other countries.
Tax-free return, however, may have different connotations for NRIs living in different geographies. For an NRI in the West Asia, where there is no personal tax, an NRE fixed deposit is truly tax free, while for someone based in the US, which taxes global income, the interest earned on NRE deposits is tax free in India but may be taxable in the US.
NRIs also need to plan for their healthcare needs by buying adequate health insurance in advance.
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Retiring in country of residence or another country
For these NRIs, while India may be one of the options where they can invest since they are familiar with the markets, they need to do the larger part of their retirement planning in the geography that they will retire in. They should try to understand the specific retirement products in their geography. US-based NRIs, for example, who plan to retire there, need to look at 401K solutions due to the tax benefits they offer. They also need to buy adequate medical insurance, and keep in mind estate planning laws there.
They also need to be aware of the tax implications for investments and assets they hold overseas. In addition, currency values could play an important role in their choice of instruments. Lastly, ease of administering the product becomes critical especially as one gets older. Assets like real estate may be less preferred compared to financial assets as the latter tend to be easier to manage.
Unsure, and unlikely to know soon
For these NRIs a flexible investment strategy is the key. They may need to plan for the most expensive retirement destination among their possible options when budgeting for inflation, so that they are better off having planned for more rather than less. Products that have lock-ins, are difficult to liquidate, or require long-term commitments should be avoided as these NRIs may need to revise their retirement strategy whenever clarity emerges. Buying retirement-specific products or real estate should be avoided due to their relative lack of flexibility.
The lack of clarity should not result in deferring their saving and investment plans. In fact, this category may need to save and invest at a much higher rate than those in the other categories, due to the lack of clarity on where they will finally retire. Issues like tax-efficiency of product choices, coverage for medical needs post retirement, and succession planning of their estate are likely to pose challenges. Ideally, this set of individuals should run very diversified portfolios across geographies and invest in liquid asset classes like equities and bonds, and also in different currencies, so that they are protected from risks that emerge from a retirement destination that is very different from the one they had originally envisaged.
The writer is founder of Plan Ahead Wealth Advisors
