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Posts Tagged ‘goal based planning’

We all have multiple goals, which we plan to achieve at different points in our lives but retirement tends to be one of the biggest goals. Unlike other goals, which have limited periods of outflows, for example higher education for children could last for 4-7 years depending upon the choice of course, but in the case of retirement,you chalk out a plan for the rest of your life,possibly for almost 1/4th of your life assuming life expectancy till 80 years and retirement age to be 60 years. This implies that the sooner you start the better it is.

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If you are in your 40s then your kids might be in school and as you move towards the late 40s, your kids will be finishing schooling and you may be nearing you child’s graduation goal. The fact that retirement occurs very late in your life maymean that you tend to keep it aside and start working towards your near term goals like your child’s higher education. This way you will never really find an appropriate time to start saving for your retirement.

If you have not started yet, then start now.

Here is what you can do:

Determine goal value

Determine the current value of your expenses. Calculate the cost you would need in the year of your retirement by applying inflation to it. Estimate the expenses which you will incur post retirement. Remember there will be some difference in those expenses. For instance your household expenses will reduce since your kids will be independent by then. You lifestyle expenses could decrease, your medical expenses could go up, your loans could be totally paid off so you may not have any EMI burden, most insurance policies may have matured, so there will not be any premiums outflow to be planned for. Be reasonable while estimating expenses. Do not go overboard nor be overly conservative.

Investment for your goal

You may find the amount of investment that you need to make this goal achievable, will be greater than what it would have otherwise been had you started earlier. This does not mean you need to go up to 100% equity or riskier assets just to accumulatethe desired corpus in lesser amount of time. The correct approach is to have an asset allocation in place depending upon your risk tolerance and appetite. Take calculated risks. If you are too conservative, it may not serve the purpose because it will keep you from generating inflation beating returns. Being too aggressive on the other hand will also not help because risk of loss will be higher since you are not diversifying across asset classes.

After you have an asset allocation in place, you will need to choose products to invest. Since equity performs well if you stay invested for the long term, you can allocate more towards equity, little less towards debt and some amount in gold for diversification purpose. On the equity side you can look at Equity mutual funds. Go for open ended diversified mutual funds. Avoid closed ended products. Within equity funds you can look at flexi cap funds where it is a mix of large, mid or small cap. If you are in a higher tax bracket and you have not exhausted your 80 C limit you can look at Equity Linked Savings Scheme (ELSS).

As you get older, increase exposure to debt and reduce equity. On the debt side you can look at Public Provident Fund which has a lock-in period of 15 years. Beyond that it is extendable every five years. NRIs cannot open a PPF account. If you already have a PPF and in between your status changes to NRI then you will not be allowed to extend for five years once your PPF matures. The EEE ( Exempt Exempt Exempt) status of PPF makes it an attractive investment option especially in a falling interest scenario like the one we are in right now.If you are employed, look at contributions to the Voluntary Provident Fund ( VPF). You can also look at balanced funds which are a mix of ~65% in equity and rest in fixed income if you want a bit of both.

New Pension Scheme (NPS) is another option which is again a good investment option for retirement since it will provide regular income post your retirement. It will also enable you to take an additional deduction of Rs. 50,000 under section 80CCD 1 B which is over and above the Rs. 1.50 lakh benefit under 80C.

To add gold to your portfolio you can use a Gold ETF or buy Gold bonds.

Remember, we are in a dynamic environment. Therefore your investments will need to be reviewed and rebalanced periodically.

Image credits:      www.arabianbusiness.com            , www.workingmother.com

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There was a time when most Indians saved in bank Fixed Deposits, insurance policies and PPF accounts for various goals including child’s education. However, with the cost of education escalating rapidly and domestic education aspirations turning to international, there arises a need for inflation beating products to invest in, for securing your child’s future aspirations. With PPF rates traditionally being kept at an elevated level plus their significant benefits of offering tax free income, the recent decision to make them market linked, and subject to a quarterly review, makes PPF returns a significantly more volatile product in our view. Relying on them in isolation for goals like your child’s education will not help.

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What to do?

If you wish to send your child abroad the cost of education will be higher. To be able to beat the escalating costs and to ensure you do not fall short of funds when you are nearing your goal you must approach it in a planned manner. Choice of products is important but strategy is equally important. When you know how far the goal is and what is the current cost, apply inflation to it to know the future cost. Do not forget to factor in possible currency depreciation impacts.

Choice of products is important but strategy is equally important.

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Strategy: Equities perform well over longer terms. Therefore, keep a higher percentage allocation towards equity. Take exposure to gold as a partial currency hedge in the portfolio. As time passes move towards fixed income exposure. When you are 3 years away from the need for the monies shift all your money into fixed income to avoid a dent to your savings due to market volatility. Towards the end maintaining the amount that you have saved will be a priority rather than increasing them because education is a goal which cannot be delayed due to financial market volatility.

When you are 3 years away from the need for the monies shift all your money into fixed income to avoid a dent to your savings due to market volatility. Towards the end maintaining the amount that you have saved will be a priority rather than increasing them because education is a goal which cannot be delayed due to financial market volatility.

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Products: To start with, broadly divide your portfolio between equity, debt and gold. Based on your risk tolerance, choose products for yourself. Since education tends to be a goal that is hard to fully realize the scale of when your child is younger, ensure that you get into a flexible product that enables changes with minimal cost impacts.. On the equity side use a combination of diversified equity funds and equity ETFs . Ensure that you stay diversified between sectors, Asset Management Companies and market capitalisations. You can also look at balanced fund which have approximately 65% towards equity and rest towards debt. Avoid exposure to direct equity, unless you can give it time. On the fixed income side you can look at PPF, debt mutual funds, and bonds. For gold you can look at gold ETFs and sovereign gold bonds.

Since education tends to be a goal that is hard to fully realize the scale of when your child is younger, ensure that you get into a flexible product that enables changes with minimal cost impacts..

All in all, keep it simple and keep it flexible.

PPF still works, but only for a portion of the portfolio.

 

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Independence Day normally involves a short holiday, hosting gatherings or planning outings with friends and family. I’m sure a lot of you are also targeting your own financial independence ? In fact, a very large number of investors whom we work with, when asked about their financial goals, indicate that they would like to achieve financial freedom. When we ask them what financial freedom means to them, their answer is: ‘When we do not have to work for the money and can actively decide how, when, and with whom we choose to associate in our professional life.’

Financial freedom can mean different things to different people. Financial planning allows them to be financially free i.e. decide how they wish to lead their lives. Over my years of running a practice, here are two examples of people we work with, who we believe financial planning has helped achieve the freedom to do what matters most to them.

Dr. Kumar (name changed) is a cardiologist and runs a hospital in suburban Mumbai. Irregular and long work hours mean that there is very little time to spend with his two young kids and his wife. What he really looks forward to, is spending time with his family and enjoying the kids’ growing up and continuing to stay connected with his wife. Booking and planning his holidays each year – one long international holiday, another week to ten day long domestic holiday and some weekend breaks are what he absolutely loves. The finances for these holidays are a part of his financial plan. Whilst there are clearly earmarked long term investment strategies for his longer term goals like retirement and education for the children, there are also separately defined strategies for shorter term holiday goals through the use of financial instruments that can give him the most optimal returns for these goals, on a post tax basis.

Sanjay and Rashmi (names changed) are currently 41 and 39 respectively and they have a young daughter. Sanjay runs a small sized family business and Rashmi works with a chartered accountancy firm. When most couples are just about beginning to save for their financial goals, and are looking to save for their retirement and childrens’ future, both Sanjay and Rashmi have already achieved their financial goals i.e. even if they do not save any monies from here onwards, and let their existing portfolio grow, they should be achieve their financial goals. This has been possible through a combination of a conservative lifestyle with controlled expenses, a savings rate in excess of 40% of total income, controlled use of leverage on a home loan that has been prepaid aggressively, and a diversified portfolio across equities, fixed income, real estate and gold, that is rebalanced regularly.

Just like India has had many historic events which finally helped us achieve freedom, your path to achieving your financial freedom will be a long-term process, wherein there will be struggles

and various factors which you will be unable to control. However, staying on the path to financial freedom for yourself and your family is the key to pursue your dreams.

Happy Independence Day!

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