Financial Planning for NRIs: What Makes It Different?

Financial Planning for NRIs: What Makes It Different?

There is a particular aspect in which NRIs lag behind their native counterparts. It is the domain of financial planning.

Until recently, a high salary was relatively rare in India, and the lack of funds made resident Indians masters of financial planning even without any expert help.

In contrast, NRIs tend to take a slightly lazier approach due to their higher pay. The standard retirement fund or 401(k) and an apartment or two in India and abroad are all they have.

This is not to say that they do not have a high net worth. But an average Indian resident can easily save vast quantities over several years due to an active investment strategy. That same thirst cannot be seen among NRIs.

Why is NRI Financial Planning Different?

An NRI has to save and invest, keeping in mind that his needs are very different. Several factors make an NRI different from a resident investor.

  • An NRI owns property in more than one country and also a retirement fund in two jurisdictions.
  • The annual income and relevant asset details have to be filed in two jurisdictions under the Double Taxation Avoidance Agreements.
  • Exchange rate management is essential. It is no use having assets appreciate at 10% per annum while the rupee declines against the dollar at the same rate.
  • Repatriation ceilings can cause peculiar bottlenecks for an NRI. An NRI might require $2 million from his savings in India to fund his startup, but the amount cannot be withdrawn in a single financial year.
  • The critical question to ask at a reasonably young age is if they will be returning to India or not. Though that might seem hard to answer after a decade abroad (by age 36), most have decided one way or the other.
  • The other factor is that the cost of living in India rises quite fast. The average inflation rate in the U.S. for the past 20 years stands at 3%. In India, it is close to 10% or more. Retiring can be tricky unless it is well planned. Add in inflation at a rapid clip, and the matrix becomes quite unfathomable.
  • There is another unique fact about NRI retirement and financial planning. They might return to India, but their children (being the second generation abroad) would not. This means the property they accumulate must be easily disposable upon the NRI’s death.

Tips for Successful NRI Financial Planning

What is the way out? Let us provide some suggestions on how an NRI can put his financial house in order.

  1. Plan your goals.

  2. There are a few significant events in your life when you would need a substantial amount of funds. These include education, the marriage of children, and buying a house.

    Unless you plan carefully what amounts you will need during certain intervals, your investments will not meet your needs.

    In a typical example, you would be buying your first home at about 35 (a 30-year mortgage ends your liability at 65), require funds for your children’s education at 45–50, and for their marriage at 50–55. Based on this, your investments have to be seeded into debt and equity funds.
  1. Take advantage of emerging markets.

  2. India is the obvious choice. But there are several other options, including Indonesia, Mexico, and Turkey.

    Of course, to invest aggressively in the markets, you would need an expert advisor’s guidance. Thankfully, nearly every investment house worth their salt offers emerging market funds that allow you to multiply your savings without a lot of worries.
  1. Repatriate at intervals.

  2. It is easy to invest in India. The rate of return is mouth-watering. But the problem is that there is a cap of $1 million each year that you are allowed to take out of the country.

    This means your wealth is intact but might be out of your reach when you need it most.

    For this reason, it is best to liquidate your assets slowly and transfer them in anticipation of upcoming expenses.
  1. Buying a residence.

  2. Of course, this goes back to where you would live during your sunset years.

    While the U.S. property market goes into a correction every decade, it is steadily rising in India. If you are planning to settle here, you should make your move early, by age 40.

    What is priced at ₹1 crore today could easily cost thrice that in a decade.

    If you have decided to not return, then of course your dream home will be abroad. You would probably look forward to retiring to a dedicated community that offers you all the facilities one needs as one grows older.
  1. Plan for medical expenses.

  2. This is an issue of prime importance that too many people neglect. No matter what kind of coverage your employer offers, never neglect to build up a financial reserve for medical expenses.

    If you are going to return to India, buy a medical insurance plan by the time you are fifty. The premium is not much in dollar value, but it lays the groundwork for claims when you are sixty and older.

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