7 Secrets of Successful Retirement Planning

We live in an era of instant gratification. Planning for the next few years let alone retirement is not everyone's cup of tea.

Now a days there are even those who claim that they would never wish to retire, including yours truly. But the only constant is change. 

This brings us to the dreaded question: Will we be ready for retirement?

Here are 7 secrets of successful retirement planning:

THE FIRST SECRET

Start Early

Kal karey so aaj karey, aaj karey so ab (Rather than doing it tomorow, do it today. Rather than doing it today, do it now) - This is a famous couplet by the saint-poet Kabir. He might have not guessed back then that his words could prove to be gospel truth for financial planning. 

If you start early, you get more time. 

Let us look at a couple of examples:

At the age of 20, if you begin investing Rs 3000 per month and are achieving a CAGR of 15%, you would create a corpus of Rs 9,42,11,266 by the time you are 60

At the age of 35, If you begin investing Rs 10,000 per month and are achieving a CAGR of 20%, you would create a corpus of Rs 8,62,67,081 by the time you are 60.

Amazing isn't it?

Well this is because of the power of compounding - which according to Einstein was the 8th wonder of the world! 

THE SECOND SECRET

Don't be burdened with Equated Monthly Installments (EMIs)

There is a popular joke doing the rounds these days. It goes like this: 'If you hate your job, take a home loan. You will start loving it!'

Due to the pressure to conform, many young professionals end up taking big loans very early into their careers. This makes them sacrifice their entrepreneurial ambitions and continue working as an employee even if they feel that they aren't meant to work as employees. EMIs also eat up into the opportunities you could have created if you had invested the same amount. 

Presently India is also dealing with large scale job cuts. This is a fairly new experience unlike the US where hiring and firing has been a part of the professional culture for long.

Imagine being fired and unable to get a suitable job for 3-4 months.

Scary?

Now imagine this with a huge home loan EMI due every month!

THE THIRD SECRET

Buy health insurance

A long stay in hospital can wreak havoc on one's finances. Room rent, consultation fees, medicines etc can bloat your healthcare bill to such an extent that most of your savings might get depleted. Most people do not buy health insurance seperately as they feel the corporate health insurance would save them. However what if a mishap happens between jobs or worse - when you are unemployed?

Health insurance will not only protect your wealth but also ensure you can get tax benefits.

THE FOURTH SECRET

Manage Risk

Learn to understand and manage risk rather than avoiding it. Investing in mutual funds or directly in stocks through systematic investment plans for the long term isn't risky. However buying stocks on the basis of tips is risky.

Deciding to only invest in fixed or recurring deposits because they offer fixed returns and do not reduce your principal is the riskiest decision ever.

This is because over a longer period of time you end up destroying your wealth.

THE FIFTH SECRET

Plan Taxes

A capable tax consultant or chartered accountant can help you save a few thousands or in certain cases even a few lakh on your taxes. Do not mind paying the fee that they quote if you can seek their guidance to ensure substantial savings.

THE SIXTH SECRET

Create Passive Income Streams

Do not rely on only one source of income. Make sure that you are making money even when you are asleep. That can happen if you are able to create multiple streams of passive income. Some examples are:

a) Dividends from stocks

b) Earning through ads shown on your blog or videos

c) Rental income

d) Invest in buying an ATM

From the day when your passive income exceeds your salary, you can decide to quit. 

THE SEVENTH SECRET

Stay Healthy

Do you know Warren Buffet made 99% of his wealth after his 50th birthday. He is 86 today. If you end up dying in your 60s or 70s due to poor health, then there are two problems:

a) You aren't giving yourself an opportunity to enjoy your wealth

b) You aren't letting your wealth grow over a longer period of time.

Therefore it is important to ensure that you exercise and eat appropriately to enjoy the evening of your life.

Advantages and Disadvantages of mutual funds

(Source)

The Good EMI

A popular asset management company has re branded a systematic investment plan as a good EMI. Indians are loving to invest via SIP in various mutual funds. According to a popular news website, the end of 2016-17 witnessed that India has 1.35 crore SIP accounts and more than 43 thousand crore rupees being bought into the equity markets through SIPs.

However this has happened in parallel with low returns seen across the traditional asset classes which Indians have invested in including real estate, fixed deposits and India's favorite asset - gold. Smaller cities in India have also contributed to the rise of SIPs.

With everyone and their tailor talking about investing in mutual funds, it would be prudent to get perspectives on both the pros and cons of mutual funds. We have listed down both of these.

Advantages:

a) Inculcates sense of discipline -> Apart from patience, discipline is required to succeed as a long term investor. When you set up auto debit for money to be invested in mutual funds from your bank every month, you are creating a process that ensures you are setting aside money to invest regularly.
b) Can outsource to a knowledgeable person -> Most fund managers have stellar academic credentials as well as an envious record in selecting the right time to not only invest in stocks but also exit from them. You can focus on your business or service and the fund manager would make sure that your money is being used to buy and shares at a favourable prices.
c) Start small -> Most SIPs can be started with as low as Rs 500 per month. This is roughly equivalent to the cost of one pizza from Dominoes. At some point of time, only wealthy or enterprising individuals could get to invest and hence participate in the wealth creation journey of stock markets. Thanks to the low entry amount, creating wealth over the long term has become a democratic affair.
d) Easy to compare - There are platforms such as Moneycontrol or Valueresearchonline through which one can compare the performance of several mutual funds across different time frames. One can also check out the portfolios of each of these funds.


Disadvantages:

a) No dividends -> Don't be fooled by the dividends that mutual funds claim to pay you. It is not extra money which you are getting as it would be in the case of dividends earned from shares. In this case, a small part of your mutual fund portfolio is stripped and presented to you as dividend.
b) Cannot take brave calls -> Heard about that company which is making a stellar turn around and is poised to create substantial share holder wealth over the next three years? But your mutual fund manager may not buy its shares unless certain hygiene factors are in place. Follow the herd mentality also develops as most fund managers may end up buying only if the leader among their pack has bought.
c) Lack of concentration -> A mutual fund would have deployed your investment across various companies. But serious money is made when you back your conviction with capital.Fund managers cannot afford to skew their investment deployment in the favor of any such promising company.
d) Cannot decide -> You cannot decide shares of which stock your fund manager may buy or sell.

I personally evangelize investing in mutual funds through a systematic investment plan to new investors. However, as we are in an overpriced market, it would be prudent to look at mutual funds in a comprehensive manner and decide the quantum of exposure.

                                     

HAPPY INVESTING!

The importance of an all-rounder

Ever since I have been writing  personal finance individuals within and outside my network have been reaching out to me for seeking advice about financial planning. Although I inform them to seek the guidance of a qualified financial planner, I do share my experience and insights on the same. Quit often, the best way to engage with an individual is to converse in a manner which he would understand.

One such person was Mr Anant. He would come to my office twice a month. For every hour that he would spend with me, for forty minutes he would speak about cricket. I used to be a cricket fan but not anymore. However old habits die hard and I continue to keep myself abreast about the game. However Mr Anant still followed the game as enthusiastically as most of us men did when we were young boys.

Once while explaining about different financial products I was trying to compare them with cricketers. So a small or a microcap equity fund could be compared with an aggressive batsman such as David Warner An insurance product that offered protection could be compared with a compact batsman like Cheteshwar Pujara. When the topic came to all rounders we invariably discussed about the glory days of all rounders like Imran Khan, Kapil Dev, Sir Ian Botham and Sir Richard Hadlee. Even Gary Sobers – possibly the greatest of them all was paid obeisance to. The last genuine all rounder was Jacques Kallis post which the cricketing world has seen a dearth of these magical players. Mr Anant couldn’t help but ask whether there is an equivalent for an all rounder in the financial space. He felt that he hadn’t come across a product which could also help him with different aspects of financial planning as most of them focused only on one aspect which were either wealth creation or protection. I replied that there is. And surprisingly it is a life insurance product. Just like how an all rounder could offer a three in one option for his team – batting, balling and fielding; this product can offer protection, wealth accumulation and wealth enhancement.

I spoke about Edelweiss Tokio- GCAP. It is a guaranteed returns plan which also offers life insurance coverage. I informed Mr Anant that firstly this offers protection in case of an unforeseen event. Secondly it is a product through which wealth can be accumulated for important milestones in life as it offers good returns. Thirdly wealth is enhanced thanks to the loyalty additions which are guaranteed. The fact that this is a tax saving plan, which offers tax benefits [80C and 10(10D)], makes it a well rounded product.

Mr Anant seemed satisfied that we could complete drawing suitable analogies. And like most days, we could never figure out how time flew by as another interesting session came to an end.

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8 easy ways to destroy wealth

(Image source: https://goo.gl/gvN4sv)

I usually write about creating wealth. A humid Monday night deserves a post on wealth destruction.

Here are 10 simple ways to destroy wealth:

Taking an education loan: Planning to pursue MBA from that top ranked Indian B School which promises lucrative placements? Let not the tuition fees of Rs 20 lakhs hinder your plans. Go ahead and get that education loan which the friendly neighbourhood public sector bank is offering. Check this calculator out through which you can easily calculate your education loan EMI. At an interest rate of 10.25% and a repayment period of 7 years your EMI is Rs 33,461. Assuming your starting salary is Rs 1,00,000 per month and taking into account other expenses it would be interesting to note how much you can actually end up saving of investing. The worst part of an education loan is that you cannot pursue a break or any dream of starting up unless you pay that amount off completely. And it becomes worse if the economy suddenly takes a downturn as you are stuck with either a job that doesn't pay well or you may not have a job at all!

Taking a housing loan: Had written about how it is better to rent a house rather than to buy one. There is also a popular joke:




Taking a housing and education loan destroy the opportunities you would have taken otherwise to create wealth rather than destroying wealth itself.

Timeshare: Timeshare is supposed to offer you benefits of spending holidays in the future at today' cost. One has to pay an upfront fee which in the case of a popular Indian company varies from Rs 2.5 lakhs to about Rs 17 lakhs. Apart from this one also needs to pay a maintenance fee every year. This fee can begin at Rs 17,000 every year and can go up. Timeshare forces one to take a holiday every year to get the best ROI and also does not account for other expenses like food and travel.

Let us do the maths -

Buying timeshare holiday ->

Cost of Timeshare holiday will be Rs 3 lakhs + Rs 17,000 (During Year 1) +Rs 17510 (During Year 2)+....+ Rs 34558 (During Year 25) [Considering inflation of 3%] = Rs 9,19,807

Have not even added the other costs such as for travel, food and the cost of losing freedom to holiday elsewhere because your money is locked here.

Starting SIP ->

Assuming just the maintainence fee of Rs 17,000 is divided by 12, we get Rs 1416.
Starting an SIP with this amount and increasing it by 3%  every year, we invest close to Rs 6,20,000 over 25 years.
A conservative return of just 14% can offer us a corpus of Rs 56.3 lakhs.
All this with the freedom of holidaying whenevr and wherever one wants.

Money back life insurance plan: This is the best way to destroy wealth. Purchase an endowment plan which, in any case, offers highly insufficient insurance coverage. Keep paying a huge amount as premium every year. Deal with the paltry yearly returns which are offered as scraps.

Not buying health insurance because your company offers it: Will you be covered when you are in your notice period? What if you suffer an accident then? Neither can you use your existing employer's health policy nor your future employer's policy. Some times the coverage might not be enough or certain aspects of the policy might have changed without you being intimated.

Not talking to children about money: This is one of the most popular ways of destroying wealth. Warren Buffet bought his first share at the age of 11. Business communities in India educate and expose young members in their families to the world of personal finance due to which they end up being financially savvy and literate as they grow older. This helps them preserve wealth over generations. The most important factor for creating wealth is time. The sooner children are taught about money and how it works, the better it is for their well being as adults. However in India discussing money with parents is almost as taboo as sex.

Trading without knowledge:  Wish to make a quick buck on a hot tip? Does getting rich fast through trading in futures and options tempt you?

Your first few bets were profitable and you feel you have mastered the art of trading?

Check out the Dunning Kruger Effect:



There is nothing worse than your first few bets being successful while trading especially if you are doing it only by instinct. The moment the tide changes you may lose everything that you have.

You don't automate it: Haven't automated your SIPs yet? This is a sure shot way to spoil the returns that can be offered by long term investing through systematic investment plans. One may forget or just be lazy to deposit the cheque. Setting up a auto debit SIP mandate ensures discipline as well as consistency.

4 alternative tax saving instruments

Benjamin Franklin had once quoted that there are only two certainties in life:

Death

&

Taxes

It would be both morbid and unrelated to write about 4 types of death.

So let us stick to writing about 4 types of tax saving instruments for you to consider:

ELSS: 

ELSS stands for Equity Linked Savings Scheme
This is presently the best tax saving instrument in India
The benefits of ELSS are:

• Investing in it helps you to claim exemption of upto Rs 1.5 lakhs under section 80C
• Across a 3-5 year period, it offers better returns than a Public Provident Fund
• Over last three years the ELSS category has offered more than 15% returns (Source: http://www.moneycontrol.com/mutual-funds/performance-tracker/returns/elss.html)
• Despite a lock in period of 3 years ELSS offers higher liquidity than PPF or NSC

ULIP:

Due to mis-selling ULIPs have ended up getting a bad name. There are many who do not even wish to explore this instrument.  Earlier there was no cap on fees and other management charges. Since commissions that were offered on selling ULIPs were very high they were often mis-sold.
ULIPs are best used for milestone centric planning. They have a lock-in period of 5 years. After the lockin period is lapsed, one can make partial withdrawals not exceeding 20% of the fund value of the policy.
The benefits of ULIPs are:

• Premium invested upto Rs 1.5 lakh is tax deductible under section 80C of the Income Tax Act
• It allows the policy holder to not only choose a preferred asset class but also switch between them. So initially the ULIP can be skewed towards equity and later allocation can be made towards debt
• The insurance cover that it offers.

Sukanya Samriddhi Scheme:

This not only encourages the growth and progress of girl children but also helps in financial planning. This is nothing but a small savings scheme. Historically the girl child has been perceived as a burden in Indian society. The Sukanya Samriddhi Scheme has been created to assist in the destruction of this heinous belief.
The benefits of Sukanya Samriddhi Scheme are:

• The account can be opened with a small amount -> an initial deposit of Rs 1000 is enough after which one needs to deposit in multiples of Rs 100 subject to the maximum limit of Rs 1.5 during the financial year
• The account can be transferred to anywhere in India
• This scheme is 100% tax free which means exemption will be offered during deposit, growth as well as withdrawal
• It provides the highest rate of interest among all savings schemes in India. The government sets the rate every year. For 2016-17 the interest rate is 8.6%.

Senior Citizen's Savings Scheme (SCSS):

For all you seniors out there, do not fret about the bank interest rates falling down. There is still a ray of hope! To invest in this scheme one must be atleast 60 years. There can be an exception made and the eligibility can be 55 years in case the individual has taken a VRS (Voluntary Retirement Scheme). VRS takers must open the account within a month of receiving their retirement benefits and the amount invested in this scheme cannot be more than one's retirement corpus.
The benefits of Senior Citizen's Savings Scheme are:

• Rate of interest offered is 100 basis points more than the 5 year government bond yield
• This year the rate defined has been 8.6% pa
• The interest is paid out every quarter on the first working day of April, July, October and January.
• The investment made is exempted from tax under Section 80C however the interest earned is completely taxable.

As tax season is almost coming to a close these instruments might make you evaluate your tax management for this fiscal!