Sameer and Ashwin (names changed) started their career together. Both are of the same age and earn similar salaries. The only difference is that Sameer works for a leading private sector corporate house while Ashwin has a government (public sector) job. Both understand that to secure their future and meet their investment objectives, they need to plan and stay ahead by beating inflation and changing their investment strategies according to market forces.
While preparing a financial plan for Sameer and Ashwin, there are some basic differences that need to be looked at, mainly due to their differential employment status. Ashwin, being employed in the public sector, has two important perks which Sameer's employer does not offer: 1) housing and 2) postretirement pension. Further, the former's job is relatively more secure than the latter's. The external environment has undergone a dramatic change after the global financial crisis of 2008 and 2009, and consequently led to many private sector employers cutting jobs across levels. A similar situation in the future may have a financial impact on Sameer for which he needs to have a strong contingency fund.
Though Ashwin is entitled to post-retirement pension, the same may not suffice looking at the current costs for health care and other services (see table). Similarly, he may be staying in an accommodation provided by his employer but he still needs to plan for a house after retirement. The financial plan for Ashwin would include a housing loan much earlier in his career rather than waiting till he nears retirement. He may also avail of any low-cost housing loans (if any) that his employer has to offer else he can tap the regular mortgage channel.
While these key differences must not be overlooked, both must chalk out a financial plan which looks at the following five steps - i) risk profiling, ii) need/ goal analysis, iii) asset allocation, iv) product recommendation and v) wealth tracking. This would also include term and medical insurance for self and family to secure for any exigencies that could come in the future. The following table shows a comparison between common practices and best practices that should be looked at by the salaried class. Summing up: Besides starting early, following a disciplined long-term investment pattern and diversifying across asset classes, salaried individuals must regularly talk to experts and periodically check their investment portfolio as well as cash flows. In case of a transferable job, one can look at online investment advisors.
Courtesy:
Jiju Vidyadharan
The author is director, funds & fixed income research, Crisil Research
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