Post Retirement Planning

May 11, 2014

The Idea of this post came from here. Dear Viren Phansalkar requested for a post on Post Retirement Planning. A lot of articles have been written on pre retirement planning. How one should invest, where to invest, when to start, when to stop, when to switch for a wonderful retirement. All this stuff is concentrated on how to prepare your cake to eat in your post retirement life. But not much info is there on how to deploy the corpus post retirement to earn return as well as income so that corpus can sustain the expenses till death which is going to be some 25-40 years away in post retirement life.

Few good posts are available with important calculators on dear Pattabiraman’s frrefincal.com Here are 2 such posts.

http://freefincal.com/the-retirement-bucket-strategy-simulator/

&

http://freefincal.com/income-ladder-calculator/

Few days back we also have a detailed group discussion in our FB group for a case study on post retirement planning. There can be multiple ways to deploy ones money for consumption in post retirement life. But the important thing is, the corpus should outlived the investor and spouse. In case the corpus deplete well before the actual death of investor (including spouse’s death), the deployment of money was not proper we can say.

Now problem in post retirement planning is complex due to 2 things.

1. Inflation

2. Risk Tolerance

1. Inflation – it’s the single biggest enemy to any retirement portfolio in post retired life. Can any one of us imagine the impact of inflation in just 10Y time frame on a person from age 60 to 70? Most of you ‘ll quickly put a basic figure like 5-6-7-8-9 or 10% for retail level inflation. Is it the only inflation? Certainly not. The biggest impact of inflation ‘lll come in the form of healthcare cost. Interestingly this may anywhere from 15 to 25% and even more if health condition is not good. People may say that health insurance may take care off such inflation. Really? Try to read the queries on various forums where people want to purchase health insurance either for their own or for parents. Most of the time, the covers are either not available for the required sum assured or come with a hefty prem.

2. Risk Tolerance – When we are in job, we can bear few bad years of loss on our portfolio as we have both (time as well as resources – fresh money) to counter these loss. Once we set our feet in sunset years, neither we have enough time on our hand nor the resources – fresh money to overcome such loss on portfolio. This situation severely restricts the portfolio creation and deployment. So in a sense our risk tolerance level comes down to a very low point. This low risk tolerance may not allow to deploy more money in growth assets as safety of capital is prime importance here.

A very  generic and crude solution is to split the whole corpus in following manner (what dear Pattu called bucketing).

1. 1 year equal expenses in SB account

2. Next 2 years equal expenses in FDs and liquid funds

3. Year 4 to 10 years’ expenses in FDs, short term funds and Arbitrage funds.

4. Year 10-20 years’ expenses in instruments at 3 above as well  as add some Eq. to provide growth here.

5. Year 20+ years’ expenses in instruments + higher allocation in Eq.

I repeat the above solution is very generic in nature and the things should be done as per each individual’s own situation.

 

Please feel free to share your views in comments below.


One Sentence Investing Rules

March 28, 2014

Dear Reader of my blog. this post is dedicated to dear Deepak R. Khemani who posted all these rules in our FB group. The below rules are not my work. I have simply copy pasted.
Please read each one, its a long list but worth reading,
Its a US finance post replace dollar with rupee.
1. Dollar-cost average for your entire life and you’ll beat almost everyone who doesn’t.

2. Only invest in products and companies you can explain to a six-year old.

3. Every five to seven years, people forget that recessions occur every five to seven years.

4. You’re twice as biased as you think you are (four times if you disagree with that statement).

5. Read more books and fewer articles.

6. Read more history and fewer forecasts.

7. It’s strange that you go to the doctor once a year, but check your investments once a day.

8. Be careful when reading about how stupid investors can be and not realize you’re reading about yourself.

9. Your circle of competence is probably 90% smaller than you think it is.

10. You’re only diversified when some of your investments perform worse than others.

11. Big risks will always be disregarded; small risks always blown out of proportion.

12. Check your brokerage account as infrequently as it takes to prevent rash decisions.

13. When in doubt, choose the investment with the lowest fee.

14. Emotional intelligence is more important than book intelligence.

15. The more you learn about the economy, the more you realize you have no idea what’s going on.

16. Start saving for college before your kid is born, and start saving for your retirement before you graduate college. You’ll feel silly when you start and like a genius when you finish.

17. The most powerful way to grow your money is learning to live with less, since you have complete control over it.

18. Singer Rihanna nearly went broke and fired her financial advisor, who described her situation well: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”

19. You have no obligation to have an opinion about anything.

20. You have a strict obligation to not have an opinion about things you don’t understand.

21. No one attending private school should be on student loans. Most should utilize community and state schools, which provide just as good an education for a fraction of the price.

22. You shouldn’t feel strongly about any investment you haven’t spent at least a week thinking about.

23. Holding 60% of your assets in stocks and 40% in bonds isn’t perfect for everyone; but I can think of a thousand worse strategies.

24. Respect the role luck has played on some of your role models.

25. Don’t take out $100,000 in student loans for anything other than medical school (if that).

26. Change your mind as often as the facts change.

27. Ignore people who refuse to change theirs when the facts change.

28. Read last year’s market predictions and you’ll never again take this year’s predictions seriously.

29. Warren Buffett’s folksy talk misleads people into thinking that what he’s accomplished is easy. It’s not.

30. Sleep on every investment decision for a week, then run it by a trusted friend before acting.

31. Two things you can do to make yourself a better investor are increase the amount of time you’re investing for and the humility you put into your ideas.

32. Just as you should dress appropriately for your age, you should spend appropriately for your income, and not a penny more.

33. Warren Buffett has the best explanation of dumb risk-taking: “To make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish. It is just plain foolish.”

34. You can probably afford not to be a great investor — you probably can’t afford to be a bad one.

35. You’re twice as gullible as you think you are.

36. Learn more from your bad investments than your good ones.

37. Judge investors by the quality of their arguments, not the performance of their last trade.

38. You can realistically afford probably half the home the mortgage broker approves you for.

39. Teach your kids about money before they’re old enough to earn their own.

40. Admit when you are wrong.

41. Imagine how much stuff you’d have to make up if you were forced to talk 24/7. Remember this when watching financial news on TV.

42. There is, and always will be, more money to be made providing investment advice than receiving it.

43. Assume the worst, hope for the best, accept reality.

44. Save for your own retirement; assume Social Security and private pensions won’t be around (even though they probably will).

45. Annuities: A product mixing the complexity of high finance with the sales tactics of used-car salesman has an entirely predictable outcome.

46. The correlation between confidence and future regret is incredibly high.

47. During the last 100 years, there have been more 10% market pullbacks than Christmases. Everyone knows Christmas will come; think of volatility the same way.

48. Don’t attempt to keep up with the Joneses without realizing the Joneses aren’t any happier than you are.

49. Predictions, opinions, and forecasts should be discounted by the number of times the person making them is on TV each week.

50. Not taking advantage of an employer match on your 401(k) is no different than declining a raise.

51. Don’t let Washington sway your investment decisions. Congress has been a dysfunctional swamp of disappointment since 1789, and stocks have done well ever since.

52. To quote Larry Summers: “A good rule of thumb for many things in life holds that things take longer to happen than you think they will, and then happen faster than you thought they could.”

53. Another Larry Summers gem: “THERE ARE IDIOTS. Look around.”

54. “Invest in what you know” is dangerously simplified.

55. Quit day trading, and donate your money to charity instead. Same financial result for you, and a better outcome for society.

56. Most people’s biggest expense is interest, which comes from living beyond your means, and buying things they think will impress others, which comes from insecurity. Avoid these two and you’ll grow richer than most of your peers.

57. Reaching for yield to increase your income is often like sticking your hands in a fire to warm them up — good in theory, disastrous in practice.

58. Your devotion to a political party or economic philosophy is directly proportional to your tendency to think irrationally about how politics affects your investments.

59. Most people need a financial advisor, but everyone needs a financial counselor, or someone to talk them off the ledge before making a dumb decision.

60. There’s a strong negative correlation between flaunting money and being rich.

61. Investors were probably better informed 20 years ago when there was 90% less financial news.


Difference between Saving and Investing – A video

March 3, 2014

I got this video link in my mailbox from Franklin Temepleton India. Found it useful so sharing with you people.

https://www.franklintempletonacademy.com/ftacademy/academy/video.page?courseID=CRSINV001&categoryID=CATINV001&nicamp=fta&nichn=ft_emailer&nismseg=difference-between-saving-and-investing_en_em001

Please feel free to share your views and comments and queries as usual.


Importance of correct BLD

September 15, 2013

First of all let me share, what does BLD mean in the title of this post.

B stands for Breakfast

L stands for Lunch

D stands for Dinner

Now my readers may ask, where does BLD stands in the discussion related to personal finance? Before I make any comment, Just look at the picture below.

1176347_146104045598554_714809520_n

What do you people interpret from the above image?

There is an old say, Breakfast like a KING, Lunch like a PRINCE & Dinner like a BEGGAR. Can you people recall all the knowledged shared by Doctors and many others for our food habits? How & what should be our Breakfast or Lunch or Dinner? All that gyan is displayed in this one picture. As the old saying goes, ” A Picture is more than the 1000 words.”

Yes I do agree, a picture is more than the 1000 words. So it’s important to have a good, proper Breakfast followed by a little lighter Lunch & finally the very small and easy to digest Dinner. Now compare it with your financial life, the morning time i.e. Breakfast time is the time, when you are young, just into you first job, without any responsibilities, no dependents. This is the time to start working heavily for your future. Invest maximum part of your income to create a corpus which ‘ll help you in future consumption. The good start made by you during this time ‘ll ease out the pressure from your life in later part.

The Lunch time is actually your middle age, when family size is increasing & from 30s to end 40s you are too busy with family, kids, home loan, car loan, education of kids, career of kids. At this point, you need to assessed your situation & still keep on investing a good part of your income. Your Risk taking ability ‘ll be a bit lower So Debt part in your portfolio should increase.

The Dinner time is actually your pre & post retirement years, where your primary aim is to live a healthy (financial) life. The Debt part ‘ll be higher at this time but still you need a support of light Eq. This is also the time when you ‘ll start redeeming the rewards of your initial hard work. Your risk taking ability is very low or near zero at this point of time and preservation of your created capital is of prime importance for you now.

So What’s your view on CORRECT BLD? Please do share in comment section.


Financial Planning for WHOM? The Myths and Realities – 5

July 20, 2013

Regarding the Financial Planning, there are many myths in the minds of the common investor public. I’m trying to discuss some of these here. This is the Fifth & Final Article in this series.

Myth no. 5:-

Compounding is useless. It’s for poor or old fashioned not for us the younger generations. We can turn the things our way as & when we want to.

Reality:-

There is no substitute of compounding. Yes compounding is very dull & boring. Let’s try to understand it with this example. Just imagine if I ask you to put 1 Rs. in an square of a chess board & there after asking you to put, simply double the money in next square. Do you know what ‘ll be the result, at the end of all the 64 squares? Please look at this table to know the answer.

Square no.

Amount in Rs.

Square no.

Amount in Rs.

1

1

2

2

3

4

4

8

5

16

6

32

7

64

8

128

9

256

10

512

11

1024

12

2048

13

4096

14

8192

15

16384

16

32768

17

65563

18

131072

19

262144

20

524288

21

1048576

22

2097152

23

4194304

24

8388608

25

16777216

26

33554432

27

67108864

28

134217728

29

268435456

30

536870912

31

1073741824

32

2147483648

33

4294967296

34

8589934592

35

17179869184

36

34359738368

37

68719476736

38

137438953472

39

274877906944

40

549755813888

41

1099511627776

42

2199022255552

43

4398044511104

44

8796089022208

45

17592178044416

46

35184356088832

Now, I stopped here intentionally at the 46th Square. Do you know why? The reason is – the amount in 46th Square is 3518436 Crore. Why it’s important? My dear friend, do you know the size of Budget of Govt. of India in FY 2013-2014? It’s 2220619 Crore only. (source)

Now what this boring table indicates? This is the power of compounding that by the time, you reach the 46th Square, you have already surpassed the Budget amount for whole of India to be spent by Govt. of India.

You are still 18 more squares to calculate. Should I or you calculate any more? No it’s not required, I think. I hope, the very basic concept of Compounding is clear to you. If you give time, the money ‘ll grow on the basis of compounding.

OK, It’s about me. Agreed. Then what?:-

Please do not jump the gun. Take small steps, baby steps. Life is all about starting small. I know you are agree & now want to start your financial planning now. A word of caution here. “Over enthusiasm can actually do more harm than your inertia to take any action.” Let me explain a bit. Before planning anything, should you not check that there is water with you or not? Now as you have checked with yourself, that you are having the water & want to conserve it for your own betterment as well as for your family, your near & dear ones. The intention is not to make you a professional but an informed person who can make informed choices regarding his/her financial life.

This is the last article in this series. So what’s your take on this article? Can you face your own Myth for ‘Compounding is Nothing’ now? Can you now face some or all your Myths related to Financial Planning or Personal Finance?


Financial Planning for WHOM? The Myths and Realities – 4

July 14, 2013

Regarding the Financial Planning, there are many myths in the minds of the common investor public. I’m trying to discuss some of these here. This is the Fourth Article in this series.

Myth no. 4:-

My friend/uncle/neighbour/broker…… know some tricks/tips/shortcuts & on acting these I can mint a lot of money.

Reality:-

NO. There are no shortcuts for a good financial life. Slow & steady wins the race. The initial burst may create an illusion that you are doing good but at the end of the journey you ‘ll realize that you were not doing good at all. One more old known story here.

The Rabbit & the Tortoise:-

tortoise_hare

At the start of the story, the Rabbit was clearly in lead but the Tortoise, kept working hard & what was the end result? We all know it. Same is with your financial life. The person working on such tips/shortcuts may get ahead but in the long run, only the TORTOISE ‘ll win. So what’s the lesson here for you. Start small & simple but keep doing it without fail. the fruit of your hard work ‘ll come to you.

So what’s your take on this article? Can you face your own Myth for ‘Need of  Tips & Tricks’ now?

Financial Planning for WHOM? The Myths and Realities – 3

July 10, 2013

Regarding the Financial Planning, there are many myths in the minds of the common investor public. I’m trying to discuss some of these here. This is the Third Article in this series.

Myth no. 3:-

I need a perfect product/insurance policy/portfolio/MF for my financial planning.

Reality:-

There is nothing called perfect. All of us pay too much attention to be perfect but forget the core thing. Nothing is Ideal or perfect in this world. No matter how hard you try to get perfectness, critics ‘ll still find something here or something there missing in you. Do not believe me. Just check the lives of so many stars. Amitabh Bachchan, Sachin Tendulkar, Mahatma Gandhi & many more. Can you say with 100% surety that all these stars are perfect? Let me share you a story here. Some of you may be already aware of it.

 Father & Son:-

Once upon a time, a father & a son were riding a horse & going somewhere.

son father

On the way, few people met & commented –

“Look at this Father Son Duo, both are so strong & healthy & still riding a poor horse. The horse is facing so much pain.”

The Father & Son duo, heard the comment, discussed & it was decided that father ‘ll walk & son ‘ll ride the horse. After few miles, some more people commented –

“Oh! look at this selfish son. Father is old & weak, yet he is walking & son is riding. Actually Son should walk & father should ride the horse.”

The duo decided accordingly & Son started walking & father sat on the horse.

Few miles down the path, some more people met & commented –

“Oh! look at the selfish father, the son is so young & still walking whereas the father who is quite strong should walk.”

The duo listened & decided that both should walk. After few miles down the path, final comments made to the duo.

“Look at the fools. They are having a horse & both are still walking instead of riding the horse.”

Story ends here. I do not know what the father son duo did after that final comment but can you draw a parallel from this story to your own financial planning? There can not be a common perfect situation or perfect thing for all of us. The requirements of each of us are different. So instead of focussing on a perfect thing, we should act on what is good for us. This Good can be merely good, can be better or can be the best for us. The important thing is, take a decision. Not taking a decision & waiting endlessly for a perfect thing is not going to help you. If you wait endlessly for that perfect thing, actually you are missing the chances to convert simple things into perfect for you.

So what’s your take on this article? Can you face your own Myth for ‘Need of Perfect Thing’ now?