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Posts Tagged ‘Income’

retirement

India is a saver’s economy. During the working years sacrifices are made for the benefit of the  family and retirement is keenly looked forward to. Advertisements of retirement products paint a picture of a comfortable retirement by the sea and that your life could be one happy vacation. However, in our experience as and when individuals start approaching their retirement they start to dread it. Questions such as are they well prepared for retirement, have they saved enough, and biggest dilemma faced is  where to invest this large sum of money in order to get a regular cash flow to become financially independent. What do you do to actually turn your retirement into one big happy vacation?

Effective cash flow management is the key to a successful retirement. The magic lies in creating a strategy that generates a regular inflation adjusted income for you and your surviving spouse, lasts you a life time and offers liquidity.

Strategy 1: Create a regular income stream

Every individual wants to be financially self sufficient. In the absence of a joint family, being financially independent is not a desire but a must have in your golden years. If you need money for your day to day expenses, then getting a payout once in 3 or 6 months doesn’t help. A lot of retirees rely on dividend income either from stocks or their mutual funds. This is a huge mistake which becomes evident with time when the steady income from salary has stopped completely. Receiving a dividend from your investments when you have a  salary feels great because it provides an additional income. What most people don’t realize is that the dividend is actually paid out at irregular intervals and the amount is also inconsistent. Similarly, the interest payout from your corporate FD might be on a quarterly basis or twice a year and now locked in until maturity.

How to execute this strategy?

To be financially independent at all times you have to ensure you have created multiple income streams and timed the out flow to suit your requirement. If you need to pay salaries and bills towards the start of the month, then set the payout around that time. Opt for monthly interest payout from FDs and set up a Systematic Withdrawal Plan (SWP) from your Mutual Fund investments on a monthly or bimonthly basis. This way you will know exactly when your next payout will happen and manage your expenses and bill settlements better. You will also be more in control of your finances rather than being helpless because of a bad strategy which can now not be easily changed.

Strategy 2: Generate an inflation adjusted income

Thanks to the increase in programs aimed towards investor education, many individuals understand and are aware of the impact of inflation on their income and wealth. The income that you receive should be able to beat inflation and help you live your life comfortably and on your terms. The current consumer inflation rate is at 4.17% however, it is essential to consider your lifestyle inflation which rises faster than food inflation. It would be wise to adjust your income against an inflation of 7-8%. The income that would have sufficed today will not manage to cover the same expenses next year due to inflation. On a yearly basis, you will notice that your bills are rising, so will the salary of your staff.

How to execute this strategy?

The interest income coming from your Fixed Deposits will not be able to implement this strategy since the returns are fixed and the amount is locked until maturity. You would not have the option to choose a higher payout even at the cost of wealth depletion.

This strategy can only to executed through a Systematic withdrawal Plan (SWP). With an SWP you have the option to increase or decrease the amount that is withdrawn from the investment. For eg. If your cash flow requirement is Rs 25000/month for the 1st year, then with a Systematic withdrawal Plan you have the flexibility to adjust the payout by increasing it to Rs 27000/month which would be inflation adjusted. This way you can increase the payout from your debt funds using SWP strategy.

Strategy 3: Avoid excess liquidity as a part of contingency planning

Most senior citizens seek comfort in keeping large amounts of cash lying in their bank accounts. This they say is for emergencies and contingencies in case they need a lot of cash all of a sudden. Assume you have Rs 50 lakhs for your retirement corpus out of which if  5-10 lakhs are kept in your bank account for comfort then this is a very expensive way to deal with emergencies. With high inflation and increasing life expectancy, one can not afford to keep 10-20% of their wealth idle. At your age you will need every cent and penny to work as hard as it can.

How to manage liquidity?

If you have parked a large sum in your bank account, the reason has  less to do with emergencies and more to do with liquidity. With most of your money parked in illiquid assets like bonds, fixed deposits or real estate how do you get your money if a need arises. Liquid debt mutual funds are a perfect option since they provide both higher returns and offer liquidity. Liquid funds can generate a return of up to 6.5% and are highly liquid as the name suggests. You can redeem your units from a liquid any time and encash your money. You will receive your money in your bank account the next day.

Strategy 4: Plan your cash flow to avoid wealth depletion during your lifetime

With the advancement in medical sciences the average life expectancy in India has risen to be around 85 years. There is also a risk that both you and your spouse might outlive your life expectancy and live longer than what you had accounted for. This poses a threat to your financial independence as there is a possibility of your wealth getting depleted while you both are still alive. It therefore becomes important to invest your money in such a way that your portfolio can provide a steady cash flow not just for you but for your surviving spouse too and a little over your assumed life expectancy.

How to make this strategy work without compromising on your dreams?

As a retired person wealth preservation is of utmost importance however, if inflation and longevity poses a threat to your wealth and goals then you have to go beyond your comfort zone and add more growth assets in your portfolio. However, if there is a gap between the income that your portfolio can generate and your needs, then instead of taking excess equity exposure it is advisable to taper your expenses instead.

An expert financial planner will be able to execute and implement this strategy for you by creating a realistic portfolio which meets your income expectation and risk profile. A combination of debt and equity mutual funds should do the magic.

The secret to a successful retirement is a little bit of planning which can go a long way to turn your retirement into a happy vacation.

 

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Anxious times lie ahead for employees across India as the season for the annual bonus starts in full swing. People often consider bonuses as “money found” rather than “money gained” and therefore almost always consider using these pots of income for discretionary expenses such as gadgets and treats and vacations. While there’s nothing wrong in indulging oneself, it is also equally important to have the big financial picture in mind.

And whilst the list of to-do items can be endless, we at Plan Ahead Wealth Advisors have distilled that list into a few essential options.

  1. Payoff those Debts: As crucial as it can get, reducing those crushing debts can go a long way to ensuring long term financial happiness. With that thought in mind, one should ideally those pay the ballooning credit card and personal loans which have very high interest cost. This could be followed by any car or educational loans, though do remember that an educational Loan has certain tax benefits. If nothing else, prepaying your home loan should also be considered though the pros and cons of prepaying the loan might be best arrived at after consulting with a registered investment advisor.
  1. Replenish Emergency Funds: Keeping funds aside for unforeseen events is a handy tool. And ensuring that tool is always at optimal levels is critical. Therefore, if you had dipped in those funds previously, the bonus is a good opportunity to return them to their originally intended levels. Ideally, anywhere between 3-6 months of expenses, including any EMI or insurance premiums, should be available in such funds.
  1. Revisit your Insurance Needs: Speaking of insurance premiums, it is common knowledge that with age, insurance requirements change. Chances are high that as you age, your health insurance premium might be bumped up or that you realize that your life cover is inadequate and needs an increase. Using your bonus for such needs is a prudent way to utilize the same.
  1. Pay attention to your unfunded Financial Goals: There may be certain milestones that may not have been attended to by you earlier. Some may be upcoming in the next year, while others could be years away. Earning a bonus is always a great time to re look at those goals and use the bonus to bridge any gaps that may be there to fund such items. This could also be, but not limited to, ensuring adequate investments into tax saving instruments as appropriate.
  1. Invest in yourself: They say the biggest asset anyone can have is himself/herself. Therefore, using the bonus to upgrade your skills/knowledge can be a rewarding decision for the future either by increasing your prospects for that next big professional leap or even increasing your earning capabilities.

While the above are some of the “to-do” items with bonuses, there are also certain “do nots” that one should look out for, such as:

  1. Although quite common, never over spend beforehand, especially with credit cards, with the assumption that you will receive adequate bonuses in time to cover for the same.
  1. Money in savings accounts usually vanishes quicker than one expects. So, don’t wait too long on deciding what to do with that bonus. You may find out that by the time you decide what to do with it, it has already been spent somewhere unknowingly.

Bonuses are the result of your hard work throughout the year, so ensuring that your bonus works as hard as you have, can go a long way to a financially secure future. By considering the items listed above, you are more likely to arrive at the right choice of what to do with your bonus. And if you are still confused, it is always advisable to bring on board professional advice to ensure that you are on the correct path.

 

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Your money matters – Simple steps to take charge of your money matters

1In today’s world, women are equal to men in most ways. Women have achieved high accolades and are doing very well in modern Indian, sometimes even better than their male counterparts!

However, when it comes to financial planning for their family, most times they take the back seat, leaving the details for the husband to handle. Financial planners are unanimous in saying that when it comes to making investment decisions, women rarely take an initiative. A study commissioned by DSP BlackRock Investment Managers Pvt. Ltd and conducted by global research agency Nielsen across 14 cities in India in July 2013, found that only 23% of working women make their own investment decisions.The reason often is that the complexity of products and the mathematics involved in financial planning makes it seem puzzling.

However, women should take control of their finances. Here’s what the empowered women should do when it comes to financial planning for herself and her family.

Create Self Awareness and Get Involved:The first step would be to involve oneself and start discussing these aspects actively with family. Women face different changes in life which affects their finances – be it marriage, child birth, divorce or death of spouse. If you are a single mother, the financial responsibility of raising a child needs to be planned. If you are just married, understanding the outlook of the spouse and jointly planning the future finances should be a top priority. Therefore, it is important to increase the financial awareness when all is well and to be prepared for adversities. Things to do:

  • Read articles / blogs / personal finance books
  • Discussing and take active interest along with spouse
  • Take the help of a financial planner or advisor
  • Attending personal finance sessions

Take advantage of various incentives provided for women:Both the private and public sector institutions provide financial incentives for women, most of which go under the radar. (1) Banks offer customized savings accounts with cash backs and rewards for women who spend using bank’s debit card on shopping, food, etc. Some banks also offer discounts on medical tests required by women like thyroid tests, etc. To save for their kid’s education, mothers can open a ‘Junior/Kid Account’ with the waiver of monthly account balance requirement if it is linked to a Recurring Deposit (RD) Account or a Systematic Investment Plan (SIP). (2) While buying an insurance policy, women receive a benefit on the premium paid as compared to their male counterparts. Traditionally, women pay less premium than men for the same sum insured when it comes to buying a life insurance policy. (3) Many banks offer lower interest rates on home loans if a woman is applying for it or if she is the first applicant for a joint loan. The same goes for car loans too. (4) Some state governments provide certain exemptions with respect to stamp duty and transfer duty in case of sale deeds, conveyance deeds and gift deeds if the property is in the name of a woman.

  • Learn and know the available benefits available for women when buying products / availing loans

Cover Risk and Contingency:All the planning you do could be ruined in case of any emergency. Therefore, contingency planning comes before any investment planning. Such contingencies could be risk to life, health, hospitalisation or any unforseen emergency which may require her to step in financially. If you are a working couple or a single earning member family with a loan, having adequate life insurance ensures that dependants will not have to compromise on their finances in the income earner’s In regards to health, various medical research reports say that women live longer and may have more health issues compared to men. Therefore the need for health cover for women.

  • Have a contingency fund for your family
  • Understand and create enough life cover and health coverfor spouse and you

 Plan for Retirement/ Sabbaticals: For you, retirement can either mean retiring at the end of your working age, usually 60; or when you have children and decide to not work anymore. Various studies show that as women usually live much longer than men, therefore they may outlive their spouses. So, in order to have a secure retirement, it is essential to plan for it well in advance. Factors such as inflation, lifestyle, providing for dependants need to be synced together efficiently.

  • Understand the funds that you may need in retirement (with spouse and without spouse) and invest towards it
  • In case of sabbatical / pause in work, understand the income loss you may face from such a decision and work towards providing a buffer for it

 Investing: While women are known to be great savers, saving in itself becomes futile if savings are not deployed to grow. Women need to get involved in such aspects and contribute actively. Working women should also understand these nuances rather than letting the husband or father decide about her money and investments.

  • Involve yourself in investment decisions, slowly and steadily, to grow confidence and understanding of the subject

 Legacy Planning:– In case of wills, the voice for women to register their own wills is growing louder. Now, more than ever, women have assets in their names which if left without proper will/nominations, can inadvertently end up in the hands of a person for whom the asset was not envisaged. Women may also inherit their parents’ assets. Even in the case of the husband’s will, the wife needs to be informed of the existence and details of such a w Dealing with the loss of a loved one is challenging but can become easy if there is awareness and the lady of the family is prepared and informed.

  • Understand and be part of the will making process

 

From the above, you would have gathered how important it is for women to get started on money awareness. Getting women to manage money requires a mindset shift and the above steps, we hope, will give you some pointers on how to start managing your money matters. After all it is your money and it matters.

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1 (1) (1)In a world where access to internet is becoming more and more widespread, information on almost anything is subsequently becoming easier to find, simply by “Googling” it. Furthermore, free information quite often results in self proclaimed experts of the field, sometimes resulting in unfavorable outcomes for anyone who follows their views/advice without understanding how such individuals arrived at those outlooks.

As such it is important to separate a few facts from myths in terms of what data an individual should consider when faced with some common financial planning aspects rather than what is most commonly/easily available of the internet.

Sending children abroad for higher education is no more a matter of consideration for the upper class families. Nowadays, more and more middle class families aspire to send their children outside India for their education. As such, planning for such an major event requires careful attention. The common misconception is to take simple average rise of Indian education costs and apply the same data for education in a foreign country. However, two critical data points get missed out in such an exercise, (A) the rise in education costs in that particular country to which you plan to send your child. It is inappropriate to consider the inflation numbers would be identical or even similar to that of India. (B) the rise/fall in the currency exchange rate for the two countries in consideration. The following illustration should help clear this concept:

Particulars % Change
Rise in average education cost of  universities in the U.S. in last 10 years 5%
Rise in Currency Exchange rate in last 5 years 4%
Total Inflation to Consider 9%

Now In comparison the inflation rate for the Indian colleges is approximately 10%-11% p.a.

Talking about inflation, another topic of debate is if the Consumer Price Index (CPI) data is an adequate inflation benchmark, especially for higher middle class/ HNI families. To put things in perspective, following is a snapshot of items considered in the CPI basket and their respective weight-age:

Sr. No Particulars Weightage
1 Food and Beverages 45.86%
2 Pan, Tobacco and Intoxicants 2.38%
3 Clothing and Footwear 6.53%
4 Housing 10.07%
5 Fuel and Light 6.84%
6 Miscellaneous 28.32%

(Source: Ministry of Statistics Programme Implementation Circular Dated 14th March,2017)

As you can see, the weight age of expenses, while more suitable for the lower strata of income generating families, might not be appropriate for the higher end. Something like expenses on food/groceries would certainly not be half the expenses. As such, while current CPI numbers are around 3.5%, indicating that going forward inflation is to be expected around that range, it would be right to assume that a middle class family living in Mumbai would face the same inflation rates. A more appropriate method would be to calculate the individual inflation of major expense heads i.e. food, rent, education, lifestyle expenses and find the average of the same. You would more likely discover a very different inflation rate compared to the CPI.

Past returns is a favorite filter for most investors when choosing products of an asset class, especially stocks and mutual funds. However almost all online data provided by various service providers show Trailing Returns.. Trailing returns show how a fund has performed from date A to date B, by simply seeing the difference in NAV of those dates. But it does not show how consistently it performed in that period. A recent upswing in its performance can skew the average of say a 3 or 5 year performance. To adjust for this, Rolling Returns is considered. It does not take only one block of a 3year period but several blocks of such periods. Thus it allows you to see a range of performances across blocks of time. They therefore capture performance of funds over different market periods, giving a more reliable view of the fund’s performance

Similarly, another topic of debate is usage of Total Return Index v/s Simple Price Index as a benchmark when selecting a mutual fund. A Simple Price Index only captures the capital gains due to stock movements in the fund. But the Total Return Index considers the capital gains and dividend paid by the companies to the investors. Hence it shows a truer picture of the returns. Almost all mutual funds today benchmark their returns against the Simple Price Index. This can result in showing higher alpha generation by the fund which may not give the right picture to the investor. For example, Nifty 50 Price Index over past one year (as on 27th October 2017) was 18.63 percent and Nifty Total Return Index for the same period showed 19.75 percent. Hence a mutual fund will show different alpha based on the benchmark used.

Plan Ahead Wealth Advisors believes that Rolling Returns and the Total Price Index are the correct data points to consider.

Finally, the widespread use of the general rule of thumb when it comes purchasing a Term Insurance Plan i.e. the sum assured is to be 15-20 times the annual income. Procuring a term plan should be about covering financial risks that may befall on the dependants in case of an unfortunate event. Financial risk does not only include loss of income but also other factors such as pending liabilities, future financial goals, current assets that can be redeemed shortly to meet any obligations. Such factors also play a significant role in determining how much cover needs to be taken.

Using the right data is critical during the financial planning process. As you can see, wrong data can lead to significant errors/assumptions which can have detrimental impacts.

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Retirement is when you stop living at work and start working at living!

retirement 1

Retirement is not merely a goal but it’s a journey. There is more to it beyond merely planning for a desired sum as your retirement corpus.

Now that you are retired and you have an accumulated corpus with you, you have to plan wisely in order to sustain the sum till the end.

Expense management

The starting point of your exercise will be to have an expense pattern which you broadly have to stick to. There are many changes which will occur in your expense pattern now that you are retired.

Your retirement expenses will also have phases. Initially in your60s you may see a certain type of expenses going up. For example travel expenses. Now that you have all the time for yourself and your spouse, you may wish to go for multiple vacations –  either domestic or international. Another expense that may increase could be group memberships. You may join a hobby group or a club of your choice. Also it will take some time for your lifestyle to undergo a change so your lifestyle expenses may not change much in the first few years. Later on with age your choices and preferences may change. For instance you may no longer prefer restaurants as often, as you used to prefer at one point in time.

As you move towards your 70s your medical expenses may increase. Your medical costs will go up due to need for regular checkups and dependence on medicines. Health insurance and critical insurance do not cover your costs after a certain age. Even if they do, the cost is very high as the premiums increase with age. Therefore having a health care provision for your retirement is critical.

Plan for a regular and tax efficient stream of income

Another major change is that you will no longer receive any regular salary or business income.

Now that you have an accumulated sum, you have to plan your investments in a manner so that you can have a regular and a tax efficient stream of income. Do not be overly aggressive or overly conservative. Whilst the exact investment strategy may vary from person to person, the focus should be to maintain and grow at least a part of your existing wealth.

On the asset allocation front you have to move a portion of your investments into debt/fixed income instruments, and allocate a limited portion towards equity.

In order to have a regular stream of income you can start a Systematic Withdrawal Plan (SWP) from your existing set of mutual fund investments.  Opting for a dividend payout option could attract Dividend Distribution Tax, especially for non equity oriented funds. Therefore, SWPs can work well. Also dividendscould be irregular at times depending on dividend paying history of the fund but in an SWP you can choose a fix amount that you wish to withdraw.

You can also invest in the senior citizen savings scheme as it provides a better rate of interest amount compared to other small savings scheme options.Do remember that small savings rates have gone down and will be altered on quarterly basis going forward.

You can also look at Bank FDs. These provide an additional 0.25% to 0.50% extra rate to senior citizens which varies from bank to bank. Company FDs can be a slightly riskier option as compared to bank FDs.

If you have a self occupied property which you feel is no more needed since you kids have moved out and it’s only you and your spouse who need to stay, you might consider selling it and buying two smaller properties. One you can use as self occupied and other you can use to let out to avail regular rental income. Do consider the capital gains tax angle to it.

Make a will

It is a very important step. This makes transfer of wealth to your future generation smooth and hassle free.

Also have a nominee attached to all your investments and insurance so that there is succession challenges are reduced. Also make sure that someone knows where all you wealth and investments are lying so that your family does not have to struggle to get what you have left behind for them.

Have a Happy Retirement!

Image credit:www.cbtownandcountry.com

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