Essential things to do before you retire

Mr Sanjeev Sharma, 50, is working as head of operations in a leading auto ancillary company. Sanjeev has been a conservative investor but most of his savings were consumed either in down payment of the house or for daughter’s wedding.

Sanjeev’s take-home salary is Rs 30 lakhs and his annual expense includes Rs 12 lakhs living expense and Rs 9.25 lakhs home EMI. The EMIs will continue for another ten years and the current home loan outstanding is Rs 58 lakhs. Other than employer’s health coverage, Sanjeev also maintains a personal health plan for his family.

Although Sanjeev expects to receive Rs 2.5 crores from the provident fund at the time of retirement but he is worried, whether that is enough funds to retire at 60.

Just like Sanjeev, if you are also worried about your retirement, you can do a few things so that your retired life is more comfortable and enjoyable.

Protect your emergency fund

Emergency expenses can happen any time. However, the possibility goes up, as you grow older. The emergency reserve must increase year on year, based on the inflation and change in your expense levels. Sanjeev must always maintain six months of his living expenses for the emergency.

Payoff all your loans

If you are taking a housing loan, personal loan, car loan or any other loan make sure that you repay them on or before your retirement. You need to choose the term of the loan in accordance with your retirement age. You can truly enjoy your retired life when you have 100 per cent financial freedom, not when you have to repay your loans.

Sanjeev has an outstanding home loan of Rs 58 lakhs. The home loan will be paid off before he retires but in case he has additional income say an annual bonus, he can partially reduce the home loan.

Understand your retirement needs

You need to visualize your retired life well in advance and need to create a budget for your retirement. Most of the people start to plan for their retirement when they are close to their retirement age. Often it is too late to have a structured approach to creating appropriate fund before you retire.

You can always consult a professional financial advisor who can set realistic expectations and create a right asset allocation for your retirement fund. However, here is a simple formula to know your retirement corpus.

Current annual living expenses X years of retirement.

Assuming, Sanjeev’s life expectancy to be 85 years, retirement corpus at 60 would be Rs 12 lakhs X (85-60) = Rs 3 crores.

Rs 2.5 crores will be available through the provident fund and that will leave a deficit of Rs 50 lakhs. Sanjeev maybe required to invest Rs 3 lakh annually for the next ten years to cover the deficit.

Examine your cash flow

Assess your cash flow situation and consider any income that will continue post your retirement such rent, interest income, etc. You must realign your existing policy and other investments in sync with your retirement age.

Sanjeev has a cash surplus of Rs 5.75 lakhs after meeting living expenses, home EMI and retirement savings. An additional saving of this amount can create further retirement cushion.

Consider inflation withdrawal strategy

When someone retires, the bulk of payout is made through an employer. In case you have not created a plan for withdrawal you can either commit your funds to wrong investment channels or park in an extremely safe option that does not cover your retirement life. One simple rule is to spread your retirement savings across various vehicles and then strategize with withdrawal strategy to ensure continuity, stability and tax-efficiency.

The monthly income you need when you retire is not going to be the same even after 5 years of your retirement. Inflation will increase your retirement expenses year after year. Therefore, your retirement portfolio should grow more than the inflation.

Sanjeev expects Rs 2.5 crores from his employer’s provident fund in ten years. Careful due-diligence of investment vehicle well in advance can reduce Sanjeev’s tax during his retired life.

Get sufficient healthcare coverage

The moment you retire, your employer will stop covering you under the group medi-claim. Therefore, you need to plan for your individual medical cover. If you have not planned it properly then all your retirement plans can go haywire.

Sanjeev must continue to maintain his personal healthcare plan and if required, evaluate super top-up plan to increase coverage.

Appropriate action by Sanjeev can ensure his peaceful retirement.

Do not put off today what you cannot afford to do tomorrow. Understand your retirement goals and structure your current investments so that you can retire comfortably.

Investing in kids is not a good investment ?

Investing in kids is not a good investment

In India, often people place more importance on spending on kids than understanding their other needs. Its extremely important to acknowledge that if you do not save for your child’s higher education, he or she may be able to take a loan. But unfortunately, there is no loan available to fund your retirement.

This also helps in answering the most common question “How should I prioritize my investment objectives?”

 You should always prioritize your financial freedom over your child’s future planning.

Usually, both the goals can be funded provided you have a decent number of years to save and grow your money.

Here is an example

Age: 35 years; Retirement age: 60 years; Current monthly expense excluding EMIs: Rs 1 lakh p.m.

Retirement corpus required: Rs 14.5 crores

Let’s say you have two kids, one who is 2 years of age and elder one who is 5 years. Usually, school fee does not require major planning, parents are primarily concerned with higher education cost.  

The current cost of Indian college education: Rs 15 lakhs. Education inflation in India: 10% p.a. 

College fees will be Rs 69 lakhs and Rs 50 lakhs respectively for two kids. You would need to save Rs 14,000 for 13 years and Rs 9,000 for 16 years.  

Cost of Foreign under-grad education:Rs 1 crores. Education inflation: 5% p.a.

College fees will be Rs 1.9 crores and Rs 2.2 crores respectively for two kids. You would need to save Rs 50,000 for 13 years and Rs 27,000 for 16 years.

Often when kids are young, people don’t plan. When a child is 15 or 16 years of age, parents start saving but that is not sufficient time for them to have the required corpus. When the child is actually seeking admission, parents tend to dip into their retirement fund say PF / PPF / LIC etc. These investments on their own are not sufficient to fund your retirement but when you withdraw your funds, you force yourself to have a dependency on kids.

When you spend money on your child, you should treat that as an expense anyway. If your child, later on, supports you, that’s fine but while planning your retirement you cannot go with the assumption that your child will support. 

In fact, given the changing times and high discretionary expense, investment in the form of PF/PPF etc. may not be even sufficient to meet your financial freedom requirement. You need to take charge of your retirement because no one else will fund it. Plan for your child’s future but don’t give it priority over your own retirement. 

Disclaimer: The article is not meant to hurt or challenge anyone. We believe relationships are better managed if you are wealthy and self-dependent.

When and how to rebalance your investment portfolio ?

When and how to rebalance your investment portfolio?

Rebalancing a portfolio is similar to flying an aeroplane.

That probably scared you a bit because you most likely don’t know how to fly a plane. And if someone told you tomorrow to crash land a jet, you would understandably freak out.

However, just as a pilot monitors and adjusts, if necessary, the plane’s altitude, speed, and direction to make sure that the plane ultimately arrives at the predetermined destination, your money needs similar timely and regular attention to grow and meet the goal it was growing for.

Thankfully, rebalancing a portfolio is much easier than flying a plane and you can do it on your own. Or if you are strapped for time, then you can hire a financial advisor to help you with it – What’s important is that you understand exactly why your portfolio needs to be rebalanced and how it is being done.

Rebalancing starts with the investment allocation, i.e. the percentage of assets that are part of your portfolio.

When you rebalance, you’re essentially reducing some assets that have performed better than other holdings for the year and increasing others to get your asset allocation back in line with your portfolio objective.

For instance, if you’re rebalancing a retirement account which you’ll need after 20 years, you may choose a more aggressive mix of equity and debt products, since you have enough time to make the money back should the market fall temporarily.

If your goal has a shorter time horizon, such as a down payment on your dream home in three years, you may want to invest this money very differently. In this case, you may want to take on less risk, since you won’t have enough time to earn the money back should the market go south.

Let’s say you’ve determined that you want to have a moderate asset allocation consisting of

  • 50% stocks and
  • 50% bonds

After a year, you might have 60% in stocks and 40% in bonds, because your stocks may have grown over the year.

To rebalance, you will need to sell 10% of your stocks and buy 10% worth of additional bonds to bring your allocation back to 50/50. This is the basic concept behind rebalancing.

Generally, you should rebalance your portfolio at least once a year. However, this is a best practice and not an absolute law, which needs to be followed, and you can sometimes choose to not rebalance your portfolio.

For example, If an investment holding has changed by less than 5% (meaning your 50/50 became something more like 55/45), you might want to wait for some more time before you rebalance. That’s because there are often fees (brokerage/commissions) to buy or sell assets that may negate or reduce the overall effect of rebalancing.

How to structure your investment portfolio

How to structure your investment portfolio?

Time, energy and money are usually limited in life. Therefore, it is essential to strategize and prioritize in order to make the best utilization of them.

Just as daily tasks have allocated time slots, similarly you need to have a slot in your life to manage and grow your money. It’s easier to do this if you are aware of your portfolio.

An investment portfolio is a consolidated record of all your assets, which define your net worth. It includes stuff like stocks, bonds, real estate, gold, cash equivalents etc.

Your portfolio is not a static number – Its dynamic and changes over time as your needs vary and your assets grow.

Since each asset class has varying risks, structuring your investment portfolio with the right mix of risk-adjusted assets is central to your aim of meeting your financial goals.

How to structure your portfolio?

1.) Firstly, being aware of when and how much money you will need will help you get started.

  • Long-term focus: When you’re saving for a long-term goal, time can smoothen the returns from volatile investments. If you are investing for the long-term, you should allocate more towards equity and real estate in your portfolio.
  • Short-term focus: If you’re saving for a short-term goal, like buying a car, volatile investments may work against you, sometimes plummeting right before you need the money. Investment in fixed deposits and bonds is recommended.
  • Watch out for inflation. Retirees or anyone dependent on a fixed income needs to worry about the damage that inflation can inflict on both buying power and income (E.g. regular interest from bonds may fluctuate) Rentals from real estate as well as a healthy dose of stocks can help moderate the impact of inflation.

2.) Create a portfolio after considering your risk tolerance.

  • Investing involves risk. All investments involve some risk, even seemingly safe investments like large-cap stocks or government bonds. If you need some money for a short-term goal and you cannot afford to lose a penny of it, put it into a fixed deposit or a liquid fund.
  • No pain, no gain. Riskier assets—such as mid-cap and small-cap stocks—tend to have greater returns over time, but can also have violent swings. These investments are suitable only if you are comfortable with high short-term volatility.

Here are a few scenarios, which can help you understand how to structure your portfolio investments for specific goals and at an overall portfolio level.

Scenario 1: Planning to buy a car in two years time.

Asset category Conservative

Investor

Moderate

Investor

Aggressive

Investor

Fixed deposit 60% 50% 40%
Liquid bond 40% 40% 40%
Short-term bond 0% 10% 20%
Total Portfolio 100% 100% 100%

So if you are planning to buy a car in the next 2 years worth Rs 5 lakhs and are a conservative investor, you should put 60% or 3 lakhs in a fixed deposit and 40% or 2 lakhs in a liquid fund. 

Scenario 2: Saving for child’s college expenses (five years from now).

Asset category Conservative

Investor

Moderate

Investor

Aggressive

Investor

Short-term bond 70% 60% 50%
Medium-term

bond

20% 20% 30%
Short-term bond 10% 20% 20%
Total Portfolio 100% 100% 100%


Scenario 3: Saving for your own retirement (twenty years from now).
 

Asset category Conservative

Investor

Moderate

Investor

Aggressive

Investor

Fixed deposit 80% 60% 40%
Liquid bond 20% 30% 40%
Large-cap equity 0% 10% 20%
Total Portfolio 100% 100% 100%

These are general guidelines and will vary based on individual specifications.

Prudent investment allocation can help you ride out the ups and downs of long-term market performance. No single asset class will outperform another consistently and no single investment allocation strategy may be right for everyone. Some investments may be up while others may be down helping minimize the overall potential impact of market decline and enable you to reach your goals smoothly.

That’s why its better discuss your portfolio with a financial planner or advisor to arrive at the optimal breakup based on your individual needs and requirements.

What is a mutual fund?

What is a mutual fund?

It is a pool of money collected from a large number of investors by a professional entity with an aim to invest in different avenues for a variety of purposes. These avenues could be equity, debt, gold, commodities, real estate and so on.

Presently in India, Mutual Funds are not allowed to invest in real estate directly, though they can invest in equity shares or bonds of real estate companies. Equity markets, debt markets and gold are the most popular asset classes that Indian MFs invest in.

The purpose of investment will vary according to the asset class chosen. Equity is usually a vehicle for long-term wealth creation; debt for some regular income and an attempt to protect your capital; and gold as an inflation hedge.

When do mutual funds work…

Unlike bank fixed deposits—where, whichever deposit you choose, you get a fixed rate of return—Mutual Funds don’t assure returns. The degree of risk varies from scheme to scheme. So, be mindful of which one you select. The good news is that risk is not a bad word; it means volatility and volatility can be managed.

…and when do mutual funds not work

MFs are not the right choice if you want guaranteed returns.Mutual Funds never guarantee returns; regulations prohibit them from doing so. Since they invest in equity and fixed-income markets, your money is subject to the volatility that these markets bring.

But since you end up taking risks, the chances that you earn returns higher than a typical assured-return instrument are also high. If you are certain that you need assured returns, avoid Mutual Funds.

Types of mutual funds

Broadly, there are four types of Mutual Fund schemes.

Equity

These funds invest in equity markets. They could either invest in large and well-established companies or medium- and small-sized companies. Some include a healthy proportion of both segments and are called multi-cap funds. There are thematic and sector funds as well, which invest in a few sectors or just a single sector, and are meant for those who have timely and informed views about the fortunes of select sectors.

Among the four categories of funds, equity funds are the most volatile. Use equity funds if your financial goal is at least five to seven years away.

Debt

These funds invest in fixed-income instruments such as bonds, government securities and short-term instruments such as certificates of deposit and commercial paper. Although they do not assure returns, they are less volatile than equity funds and are, therefore, used to earn regular income.

While liquid funds are least volatile (since they cater to investments of up to three months), bond funds rank high on the risk ladder since their underlying instruments mature after 3-5 years. Debt funds make money by managing credit risk and interest rate risk.

A credit risk is managed by investing in low-rated companies with the view that if credit ratings improve, their scrip prices would also go up. Interest rate risk is managed by managing the maturity of the underlying securities, depending on where the fund manager believes interest rates would go.

Hybrid funds

These funds invest in equity and debt markets at the same time. Here, too, risk profiles differ depending on how much they invest in equity markets. Balanced funds typically invest 50-70% in equity markets.

Monthly income plans (MIPs) invest between nil and 20% in equity markets and the rest gets invested in fixed-income markets. Therefore, balanced funds are meant for long-term goals. Whereas, MIPs are more conservative and are used for goals that need to be reached within 5 years with measured risks.

Gold funds

These funds invest in gold. They have passively managed funds and they track the price of gold. Instead of buying physical gold and then having to store it—which will require adequate safety and space—investing in gold funds is a good alternative to buying physical gold.

If you have a demat account, you can invest in a gold exchange-traded fund (ETF), which is a passively managed fund that gets listed on the stock exchanges. Or, if you don’t have a demat account, you can invest in a gold MF scheme, like any other scheme, which then invests your entire sum in a gold ETF.

So which category of mutual fund will suit you

Ascertain your investment time horizon

Ask yourself for how long would you need to stay invested, at the minimum? This depends on how distant is your financial goal. Say, you want to buy a house after 5 years, or you want to send your kids to a good college after 10 years. Or, you want to retire after 20 years and need to build yourself a retirement kitty.

Ascertaining the tenure is important because you need to choose an appropriate fund that matches it. That’s because different MFs cater to different tenures. For example, liquid funds are meant for short-term (parking) needs. Equity funds are meant for long-term goals, but you need to wait out for at least 5 to 7 years, sometimes even longer.

How to better achieve your financial goals

How to better achieve your financial goals

Taking control of finances to achieve your goals is the first step towards securing your financial freedom. A robust financial planning process ensures a sustainable and secured financial life. The following tips can ensure that you reap maximum benefits from the entire planning process.

1.) Stop leakage first: Correct your past financial mistakes

Each one of us makes some mistakes in our financial decisions. Mistakes like buying the wrong insurance products, or a home we cannot afford, credit card abuse, taking loans at higher lending rates or a bad investment are few common financial mistakes. It is important that one is aware of the past financial mistakes and commit to correcting them in the future.

2.) Know that goal setting is a tradeoff: Prioritize realistically

Though financial planning would help to set your financial life in order, it cannot cast a magic spell to turn all your dreams into reality. It is important that you prioritize the goals you want to achieve.

You will probably have to let go or defer some of your dreams which may be less important than others. Once you prioritize the goals, you have to be realistic while translating your goals into monetary terms. It is not advisable to expect unrealistic returns on your investments.

3.) Go for a credible expert

Most folks usually rely on neighbourhood agents, friends or family for financial advice. The Internet has also emerged as a huge source of free financial information. It is important that you always assess the credibility of the source before taking financial advice.

Financial mistakes can have a major influence on your future well-being. Choose your advisor wisely to make sure that you always make well-informed financial decisions.

4.) Don’t sit on your plan, implement immediately: Costs of delay are huge

Getting a plan and recommendations on financial products through expert advice is a job half done until put into action. The success of a well-planned financial roadmap depends on how soon you start walking on it. The early starters always have a huge advantage of the power of compounding and a flexibility of saving lesser amounts.

5.) Managing and monitoring

The financial situation of every individual is dynamic in nature.

Your goals and priorities change from time to time. You must review your financial plan periodically in order to ensure that it is in tune with the current situation in your life and on course to meet your long-term goals.

How does your money grow ?

How does your money grow ?

While money is not a living thing, it can still grow! That growth is possible because of the power of investing and compounding over a period of time.

So what exactly is compound interest?

Its earning interest on the interest already earned. In other words, your interest on savings also earns interest. Suppose you deposit some money in your account today. There will be an increase in the value of it after a year, on account of the interest earned.

Let’s say you have Rs 1000. It is invested in an asset where it earns interest return of 10% p.a. Here is how it will grow in 10 years.

Year Amount Interest
1 1000
2 1100 100
3 1210 110
4 1331 121
5 1464 133
6 1611 146
7 1772 161
8 1949 177
9 2144 195
10 2358 214

 

As you can see in the interest column, the earning for the first year is Rs 100, which increases to Rs 110 in the second year. This happens because interest is earned on the interest also in the second year and onwards.

It’s a beautiful and almost a magical concept, which enables the creation of large amounts of wealth by investing small amounts of money every month.

And the higher the interest rate or return, the more your money can grow. There have been investment assets like equity and real estate in certain pockets, which have delivered 15% to 20% returns per annum.

If your Rs 1000 grew at 15% per annum, it would have grown to Rs 4045 in 10 years.

If it had grown at 20% per annum, it would have grown to Rs 6191 at the end of 10 years – or grown almost 6 times.

Of course such high growth rates are not without risk, which is why you should have a diversified portfolio so that your money can grow in a balanced and risk adjusted way over the years.

The earlier you start investing your savings, the higher the benefit.

However, even if you are older and haven’t started, it’s not too late. As they say, “Better late than never!” – The most important action you need to take is to START INVESTING NOW!