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Posts Tagged ‘#planningforretirement’

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The Indian story is pretty simple and straight forward, as you grow you are told to study hard to find a good job. When you finally find that good job you work harder day in and day out trying to keep up with work pressure and your expenses. Then comes in Jack Ma announcing that he plans to retire early and says “I would rather die on a beach than in my office”. This one line is enough to reignite the dreams and fantasies to retire early and move to a quaint town away from the hustle and bustle of the big city. If this is your dream then read on to find out how you can retire early.

Rome was not built in a day and Jack Ma didn’t become a billionaire overnight. While you don’t have to wait to become a billionaire to retire early, you will need to save and create a substantial corpus to be able to take the plunge. This would require dedicated regular savings and beware, sacrifices will have to be made. You will have to try and save as much as possible which would mean spending less on your life style expenses, and trying to live a modest life.

  • List down all your goals-Just because you are going to retire early doesn’t mean you wouldn’t want to live a full life and realize you goals which could include travelling, sending kids overseas for higher education, buying your dream home etc. Yes you can achieve these goals and retire early too, but you will need a good plan which will take the cost of funding of these goals into account and adjust it against inflation.
  • Know your expenses-Most people especially the ones who live in a metro don’t know how much they spend on a monthly basis. Knowing your expenses is important for two reasons one it will help you know how big your retirement corpus needs to be and two you might need to cut down some unnecessary expenses to be able to save more. Take your life expectancy into consideration and your expenses till that time to calculate your corpus size.
  • Set the SIP for the 1stweek of the month- For most people the only investments that happen are either a minimum SIP started some time back or whatever is saved at the end of the month. This way you will never be able to retire, forget retiring early. Your savings and investments have to be planned and in line with the future goals that you have. So invest before you pay your bills. This is also what Robert Kiyosaki the author of “Rich Dad Poor Dad” believes is the secret to getting rich.
  • Ensure it’s not a one sided love story– Giving up a good lifestyle and a free hand on spending can take its toll. It can be very frustrating at times, that’s why its very important that your spouse supports this choice a 100% else you might find your self quite often at the receiving end which trust me is neither pleasant nor encouraging. From time to time you might need to remind yourself of your end goal and it should bring you back on track when you start to stray away. I would highly recommend not giving up on things that you love and keep aside some money for some indulgence every now and then if not regularly. Remember Jack Ma will retire at 55, so you will have to give yourself a considerable amount of time to prepare for the big shift.
  • Secure your self and you family-We can not stress enough on the importance of a sufficiently large personal life and health insurance. Its better to take one now while you are still young, this way the premiums will also be lower.

Albeit retiring early and getting away from the rat race and the pressures of the world, spending your days relaxing in a quaint house on the hills or by the side of a brook sounds so inviting, it can get boring and mundane after a while. Having spent so many years crossing one hurdle after the other throughout your life, doing nothing after a while doesn’t feel so enticing; so plan for a small business or some activity that would keep you busy in your free time or else you might find yourself missing and craving what you have left behind.

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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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IPO 1

The year so far has not been going well for the equity market yet India has seen a flurry of IPOs getting launched. Between January to June 2018, India has recorded as many as 90 IPO launches, the highest globally so far. The latest to join the band wagon was HDFC AMC and coming up next is Lodha.

Does it make sense to invest in the IPOs? And if yes how do you pick one? Read to find out more.

What is an IPO?

For a company to grow and expand it requires huge amounts of capital; an IPO helps them raise much more money than what they can raise through borrowing or private equity investors. An IPO stands for Initial Public Offering; it is the very first time a company offers its stocks to the public. Prior to an IPO the company is considered private with a relatively small number of shareholders. With the IPO the company becomes public and thereafter, it’s shares can be traded through an Exchange.

Why is there a frenzy around IPOs?

Every investor is looking for a diamond in the rough. Through an IPO the investors tries to purchase the shares at an IPO price which may be significantly lower than it’s future market price when it eventually starts trading on an exchange. This is where huge capital gains can be made.

As per data, the HDFC AMC offer was over subscribed 83 times by the end of the 1st day. What this means is that there was a demand of over 83 times for the shares offered by the company. The investors saw huge growth potential in the company and every one wanted to get a piece of it. Unfortunately, getting an allotment of a hot IPO can be very difficult, if not impossible.

Understanding the IPO process

A company that wishes to launch an IPO has to first register itself with Securities and Exchange Board of INDIA (SEBI) and submit its prospectus for approval. Once the SEBI gives a go ahead, the company fixes the price and the number of shares it plans to issue through the IPO.

 There are two types of IPO issues: fixed price and book building. In the former, the price of the share is decided in advance. In the latter the company offers a prices range and the investor needs to bid for the share within that range. The upper limit is known as the cap price while the lower is called floor price.

While applying for shares the investor needs to bid as per the lot size mentioned in the prospectus. Lot size is the minimum number of shares you have to apply for during an IPO.

For eg: If the you wished to buy 50 shares of XYZ company and the lot size is 10 shares/lot then you would have to bid for 5 lots. As per the SEBI rules, one can’t bid in decimals.

It is important to note that even if you have successfully subscribed to an IPO there is no guarantee that you will receive your lot. If the issue is popular and gets oversubscribed then it becomes difficult to issue even 1 lot to each successful applicant. In such cases the lots are allotted based on a computerized lucky draw.


Things you should consider before applying for an IPO

  • Read the Red Herring prospectus. It can be difficult to analyze the performance of a private company since there is no historical data to draw on. So the red herring becomes an important document to gauge the business prospect and operations of the company.
  • Look closely at the management team; they should be capable of steering the company towards growth after it goes public. Look for how they plan to utilize the funds received from the IPO.
  • Compare it’s bid price to that of the competitors in the market. That will give you a fair idea as to if the IPO is over priced or a value purchase.
  • You will need to have a Demat account since the shares can not be received in the physical mode.
  • Some investors like to subscribe to an IPO because some lucky people had bought shares in the IPOs of companies that went on to pay huge dividends or soar in value. But just because investing in IPOs has worked for some in the past doesn’t mean you’ll get the same returns.
  • The target investor for an IPO are the institutional investors and a big part of the shares are reserved for them. This leaves a small percentage of shares available to the retail investor. Your best chance to get an allotment would be to check the “cut-off price” option in your application form. This way if the IPO is oversubscribed, then you have a better chance of getting a subscription.
  • Since you will need to block the money required while bidding, you can use an ASBA (Application Sorted by Blocked Amount)account while applying for shares. The blocked amount stays in the ASBA account and earns interest till the allotment can happen. And only an amount equivalent to the allotment is deducted.

Going back to the main question, should you invest in an IPO? The answer depends on your investment outlook. IPOs are definitely a good investment option if you are looking for value investing or under the radar deals but then so is everyone else.

If the company has been in the business for long, has good performance history and management team then it definitely is worth the shot but then again there is no guarantee that you would be able to get your hands on a lot or two.

If you’re not sure whether investing in an IPO will be a good move for your portfolio, consider talking to a financial advisor. A financial advisor can evaluate your investment decisions in the context of your overall financial situation and goals.

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uncertain inflowsI have uncertain inflows – how should I invest?

Money may not be the end in itself, but for most, it is a means to achieve many necessities as well as aspirations. Therefore it becomes important how an individual plans to use his/her hard earned money. More so when the inflows are not necessarily streamlined and consistent like that of an employee. When your personal income is linked to the performance of your firm, a well thought out plan could be all the difference between financial stability or having to make huge compromises.

Being a HR firm owner can have its ups and downs. By following certain simple financial planning steps, you can have some peace of mind with regards to your personal financial situation even though you may not have a steady income:

  1. Contingency Fund: This is a basic yet most critical part of any financial planning for a self employed individual. You never know when your next pay check may come. So it pays to prepare for the worst. Thumb rule has always been 3-6 months worth of household expenses to be kept aside in highly liquid assets as an Emergency Fund. Yet we feel that when it comes to a owner/manager, it should be at least 6-9 months worth of basic expenses!  A handy tip, do not forget to count any committed payments such as EMIs and any insurance premiums when calculating the corpus. 
  1. Risk Planning: or in lay man terms, Insurance Planning. This could be a considered an extension of contingency planning, but for very specific events. Following are the types of insurance policies one must always have at all times: 
  • Term Life Insurance Plan: The plain vanilla term plan is exactly the only kind of life insurance anyone should purchase. Handy tip, to know the amount of cover you might need, start with at least 15 times your annual revenue/income. Don’t forget, insurance should never be mistaken for an investment!
  • Individual Health Insurance: If nothing else, an individual health cover to at least cover your own standard hospitalization expenses is a must. Financial independence means you should be able to fend for yourself at the very least, even if it paying for your own recovery. 
  • Critical Illness Policy: Contracting a serious illness or undergoing a major surgery would mean a drag on your finances as well as a dent on income. Such financial risks can be mitigated by procuring a critical illness policy. Such policies usually provide for a lump sum payment to tide over the finances needed, in case of being diagnosed with a critical illness.
  • Personal Accident Policy: Another source of financial risk associated with most professionals is loss of income/job due to an accident. Similar to a Critical Illness Policy, this policy provides a supplement alternative income for certain weeks of disability depending on the terms of the policy. This can be used to either pay off medical expenses or help in taking care of household expenses during the recovery period.

While more types of insurances are available, it is essential that this set is acquired first. Having your Contingency funds and Risk Planning in place makes a strong base for you to venture into the world of investments.

  1. Planning for Retirement: Retirement, or as financial advisors put it, Financial Freedom, is something we all aspire for. The dream of not working for the sake of survival is a goal we all work towards. Yet having an uncertain income can make such a dream feel a little distant more often than not. And while retirement always seem likes a far off goal in comparison to what seem like more pressing concerns, it should ALWAYS be top priority! Underestimating your retirement financial needs can be the one of the biggest mistakes you could make and more often than not, people realize it far too late to make any significant course corrections. Even if you have to start with small amounts, it is the consistency and discipline that will ultimately help you reach your goal.
  1. Financial Goal Planning: Only after the first three steps are in place, is when you should really consider planning for the rest of the commitments/aspirations that you might have. As with any goal planning, the two critical aspects to consider are time horizon and future value of the goal, not current value. If you get these two right, the rest becomes clear.

For any individual with uncertain income flows, planning can become easier if you can channelize your savings, prioritizing in the above order! It is essentially in this area where the difference between financial planning for an owner of a firm/business versus that for an employed individual lies.

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