Retire @ 40 : Right Planning for An Early Retirement

A young and charming couple Ankit and Anchal, aged 27 years came to us for financial planning. Anchal works with a pharmaceutical company as an Analyst and Ankit work as Product Manager in an E-commerce company.  They asked us several questions, one of them was, ‘We want to retire at 40, Is it possible?’ Post 40, Anchal wants to teach French and Ankit wants to start an NGO.

Both, Ankit and Anchal is 27 years old and planning for a baby at around 33. They are planning to pursue their interest in respective fields till the age of 60 years and later want to enjoy retirement. Till 40, the couple is expecting to increase their salary by 7% p.a.

Ankit has a shop in his hometown, where he earns Rs 10,000 per month. They didn’t want to include it in their retirement plan. So, we linked this monthly amount with their financial goals related to their child’s education and marriage. 

 

We worked on a bucket strategy for ensuring happy retirement at the age of 40.

In this financial planning calculation, we have represented values on an annual basis. However, we suggested them to execute the plan on a monthly basis.

Bucket A:  Age 28 to 40 years

Surplus amount [Gross Income – Gross Expense] was suggested by us to be invested for 13 years. Hence, the surplus investment made at the age of 28 would be useful to take care of expenses at the age of 41. Thus, expenses would be taken care of, till 53. 

Bucket B: Age 41 to 53 years

Surplus saving at the age of 41 years [Rs. 28,50,449] would again be invested for a period of 13 years, which would take care of the expenses at 54 years. However, expenses are rising at 6% inflation rate.

The couple expects to receive a combined income of Rs 1,50,000 per month from the NGO, dance and French classes. This amount which they would receive till the age of 60 would be utilized in Bucket D.

Bucket C: Age 54 to 63 years

Surplus saving at the age of 41 [Rs. 28,50,449] would become Rs 1,56,55,838 at the age of 54. And hence, the corpus is more than enough to meet the expenses at the age of 54.

Corpus accumulated at the age of 61 was due to the investment made at the 48^th year from surplus saving. This amount is more than enough to meet expenses at the age of 63.

Bucket D: Age 64 to 80 years

After full-time retirement at the age of 60, the couple also expects to reduce unnecessary expenses. We create basket D at the age of 64 because the surplus saving at the age of 51 is not enough to meet expenses at the age of 64.

So, we decided to use the corpus which has been built since age 41 from the combined income of Rs 1,50,000 per month.

However, the interesting thing is that corpus accumulated since age 41 from the combined income of Rs 1,50,000 per month would be sufficient to take care of expenses tillage 80.

 

Apart from the retirement plan at 40, Ankit and Anchal also have surplus to save for their foreign trips after 40. Proper allocation of funds can accumulate enough amount of corpus for the couple to arrange four foreign tours any time after age 40.

For a child’s education, the couple would have sufficient time to build the corpus. However, we suggest the couple to set a target of Rs 1,70,00,000 [Education inflation cost at 7% p.a].

To reach the goal, we suggest the couple contribute Rs 5,000 every month to Equity Mutual Funds. Mutual Fund SIP amount would be arranged from their shop’s rent.

For their child’ marriage, which might be approximately 34 years later, the couple would have had an advantage of compounding. However, we suggest the couple to set a target of Rs 1,40,00,000 [Inflation cost increases at 5% p.a].

For achieving this goal, the couple needs to allocate only Rs. 2,500 in the form of monthly SIP for the next 34 years.

The couple would successfully be able to allocate funds towards their child’s future goals because of the right decision at an early stage. If the couple delays the financial planning for their child’s education till the time his/her schooling starts, then the couple would be left with only 20 years to invest. Now, in the same situation, the couple needs to start Mutual Fund SIP of Rs 15,000 instead of Rs 5,000 currently. This makes all the difference.

This plan works for most of the couples who are focussed regarding their plans. However, above all, they have proper guidance to allocate funds at the age of 28.

One should not wait for a certain age to start saving or channel funds, rather, start early to get the benefit of compounding.

NOTE: Current and Future Cost are not mentioned in the blog. 

You’ve just started your career: First 3 things you should be doing with your money!

With annual growth of around 7-8%, India is creating lots of employment opportunities for first time dynamic and skillful young generation. However, it is proposed that India should create more than 1 million jobs every month.

With more employment and young people coming to work with decent salaries increase money flow. However, around 90% of employed youth saves significantly less. This is mainly due to lack of awareness.

For engagement in this article, we have asked Mr. Singh to contribute,

Mr. Singh has started his career in IT company in Mumbai, with a salary of Rs. 70,000 per month. Mr. Singh is 26 years old and he is single!

With my conversation to Mr. Singh, he asked me to mention Top 3 things he should be doing with his money.

Number 1 Thing: Identify the Goals

Even before Mr. Singh starts saving, he should have clear financial goals. Now, goals can vary from person to person depends on a person’s priority towards life. Without a goal, a person might not align toward regular savings. So, above all, I would prefer Mr. Singh to set up financial goals. Generally, financial goals can be Retirement at age 60, foreign vacation every once in 2 years, etc. However, one should also be clear on goals like kids’ education, Home down payment, emergency funds, etc, even before Mr. Singh marriage and kids he should start recurring saving towards these goals. Because with the help of very minimum saving every month he can achieve goals efficiently. 

After identifying goals, Mr. Singh needs to prioritize the goals. This will make 50% job is done.

Of course, goals keep on changing on the way, this also needs revision in between. For example, we are planning for Kid’s education portfolio around 2 crores after 30 years, but It may be possible kid wants to pursue sports. So, like this, there are always changes in goals, and priorities also keep on changing.

Number 2 Thing: Allocate money to the Goals

After completing prioritizing the goals, it’s time to allocation funds towards particular goals. Basically, there are two ways to start investing in particular goals a) Recurring investment (monthly/quarterly) b) Lumpsum investment.

Mutual Funds are the best products to allocate money. Because, in mutual funds, there are open-ended funds which can be liquidated anytime, can be modified according to needs, can be track performance on daily bases, etc.

Mr. Singh has just started this career, so I would suggest him to start SIP [Systematic Investment Plan]. Mr. Singh can allocate different mutual funds SIPs to different goals. For example, Mr. Singh is planning to save Rs. 15,000 every month.  Now, out of Rs. 15,000, Rs. 2000 can be allocated to Long Term goals, Rs. 5,000 and Rs. 3,000 can be allocated to different goals according to priority. Now, left Rs. 5,000 can be allocated to emergency funds.  Once, emergency fund reaches a certain limit, an extra amount of money can be diverted to another less prioritized goal. [Allocations of funds depends on the client’s risk level and goals priorities]. Now, to execute the financial planning and to finalize funds allocation we request Mr. Sing to take a look at Number 3 Thing.

Number 3 Thing: Hire Professional Financial planner: 

Hiring a professional financial planner is very important. If you have the right knowledge and understand financial products and its flavors, and mainly if you think you have time to track financial plan and modify goals according to needs, then there is no need to hire professional help.

You have to ask this question to yourself. If the answer is ‘NO’, then you should prefer professional advice by paying minor fees. You’ll get free advice also, but quality comes with value, not price.

Money management is not luxury, it’s an essential tool for efficient.

Who Knows How to Cheat ‘Middle-Income trap’

“Great man come out of the middle class.” _Ralph Waldo Emerson

The Economic definition of the Middle Income Trap is, where a country reaches a certain income level and will get stuck at that level. Many scholars have written books and articles on this topic. I’ll try to reflect my understanding of the topic and some consciences.

The middle-income trap to our generation is like, having an iPhone X on EMIs. Everyone wants luxury – due respect to their income class. Robert Kiyosaki said, “The rich buy assets. The poor only have expenses. The middle class buys liabilities they think are assets. The poor and middle-class work for money. The rich have money work for them.”

Prime examples of middle income trapped countries are South Africa and Argentina.

Yet only a few – most notably South Korea, Taiwan, and Israel – have managed to continue right up to high-income status.

India has entered the middle-income position in 2008 and the per capita income is increasing slowly. The Per Capita Income of the country as per the World Bank’s 2016 estimate is $ 1670.

The middle class is becoming the working poor. If they have one tragic event – illness, loss of job – they have the need for the food bank.

In India, the IT/BPO sector helped many Indians to shift from poor class to middle class – between 2000’s to 2011. Very quickly, these employees’ salary touched to developed countries salaries [in $ terms]. India’s per capita income between 2000 and 2011 was increased with CAGR around 11.5 %, similarly between 2011 and 2016 increment was only CAGR around 3.03 %. Are we heading towards 'Luddite moments'? 

This IT/BPO industry alone can’t take India to the next level. If a country like an India fails to lift per capita income levels, we would be in The Middle-Income trap by somewhere between 2025 to 2035.

To escape the trap Indian needs radical changes in Education industry. Need checklists on Infrastructure projects and manufacturing activities, proper policies to implement Industry 4.0. Government’s initiatives like, Make In India, Startup India, Skill India etc. are to strengthen the ecosystem. India’s reforms also got 30 notches jump in ease of doing business.

We are in 2018, we still have around 8 to 12 years to prepare ourselves to cheat the middle-income trap. Every individual needs to upgrade learning and skills – especially middle-income level employees.

“Progress is impossible without change, and those who cannot change their minds, cannot change anything” _ George Bernard Shaw

The Bird of Gold

I live in a country where most of the people thinks that the Future is prosperous. Indeed Future seems prosperous from this stage where the new government is working with full ‘Josh’.

Human Dream Machines are spinning with full hopes.

India is known as – ‘Sona Ki Chidiya’. The country is going to feel the change it has never felt before. And I decided to postpone the idea to move to The USA – Just because of two gentlemen, Prime Minister and RBI Governor. In next few years (10-15 years) India is going to move beyond your imagination.

But very few Indians are known to it and going to participate in it.

Just wanna to explain simple example, Indian Finance Minister budgeted the amount of more than Rs. 37,000 crore on Infrastructure. But ultimately who is going to get benefits! Companies related in infrastructure industry. These companies are going to expand their balance sheets. But what the common man is getting from this FM’s step. Not Much. He is not participating in progress. Now, to participate in these companies there are two ways. First, be an employee. Second, invest in these companies.

You got the first way, right! The second says, either you become owner of these companies by investing in equity (direct or indirect) or you fund these companies for their projects. 

Now, the very important thing of this example is, if you will not participate either ways, you will not be a part of a new era – you will be drag down to the inequality gap and middle income trap theories.

As an investor and advisor too, I am fully aware about the risk in investment markets, but if we will not take this risk we will be exposed to the much bigger risk - ‘Inflation’.

FII (Foreign institutional Investors) are dumping their money in India and participating with huge margins, but Indians are still unknown. Invest in Equity.

Before Investing you need to get one question outstanding. Till when I need to be invested? Or What is my Future goal? Once this question is clear you need to pick investment products accordingly.

If your horizon is for 10-15 years, and you have decided to go with MidCap Equity funds, you better stick to your goal and investment vehicle. One thing is crystal clear, equity is going to go up and going to fall, but it does not matter - it is not going to stay there. For example a scheme of a Mutual Fund – ICICI Prudential Value Discovery Fund – Regular - Growth fund’s NAV was Rs. 12.88 in 2004, In 2007 NAV was Rs. 37.90. But in 2008 crisis NAV fell to Rs. 17.22 and bounced back to Rs. 40.53 in 2009. Currently, in 2014 Fund’s NAV is Rs. 96.99. [Source: Value Research] If we had withdrawn in 2008 then we definitely made a Loss. But my goal was for 10 -15 years. And currently we are getting a CAGR of 25.35%.

In current scenarios Indians are earning far better incomes. But please do not put them lying in worthless investment products [investment products giving return less than 8% or Inflation].

Be Savvy for your Own Hard earned money. Park it in a right manner with right investment vehicle.

Choice is Yours!

#Risk and its Future

I surprised many times when I came across special situations. It’s not about the events but about its unexpected time.

In this blog, I have psychologically calculated risks of future and more importantly actions and motions about that uncertain time. This could be easily understood.. if you rewind your memory and look into the rear view mirror.

When I was in a high school, I used to hate study and book the most. At that times my mommy used to say, if you’ll not grab decent grades you wouldn’t get admission in graduation and later on you might find hard time to find a decent job.  I understood why it was very important to score well, even if you don’t like. It is because the world has become very competitive.   It’s a simple logic, if everyone is working hard and creating competition, you must – at any cost – need to work hard to survive. Now the situation is not created by you, but by the people.

Same way if you are a computer engineer, and you don’t argue on buying a new computer, you do probably slowdown than your peer group. In this case no matter where the technology moved or knowledge about latest technology, but you need to understand the competition and should support with its balance. The logic is same; urgency of compute may not be created by you, but by the people and competition.

In near future same situation would be there in an investment.  If everyone around you is exposed to higher risks, you should not afford to take less risk. If people are taking more risk by investing in equities, no matter your risk attitude level, you would also be forced to take higher risks. I know it’s quite difficult to understand the situation..  But the situation is not created by you, but by the people.

Something is already in motion, it’s is difficult to understand. But, the future we are talking could be anytime. And it’s human mentality not to act till the very last moment – Change It.

This race is never going to finish, we are bound to flow – heard behavior.

At the present moment you have an option to change you future, at very next moment it would not be.

Put a reminder.  Read this after 10 years and you’ll surprise. 

Nothing Else Matters

No matter how much you are earning, you going to find it difficult. Because, Bcos! You are not putting that earned income at the right place.

Now, what this right place could be?

First, decide your need. What are your goals for future? And then, according to that decide the right place to park your money. There are lots of financial vehicles where you can invest your money, like Mutual Funds – Debt, Equity, Balanced, Bank Fixed Deposits, Direct equities, Bonds etc.

 One thing you need to care more than all these financial products is INFLATION. If you will fail to beat inflation then it doesn’t matter what you are earning, anyhow it is going to fail in long term. Let’s take a small and simple example; In India on average inflation rate is 8 to 10 per cent. Return from bank saving account is only 4 per cent, which simple mean your real rate of return is in negative 4 to 6 per cent.

You decide to put 1 Lac in bank FD at rate 9 per cent and in the same year Inflation index CPI was around 10 per cent. What progress you hard earned income made? Nothing. Negative. Really! After 1 year, original value of 1 Lac becomes around 99 K (inflation adjusted), Loss of 1000. Now after 30 years same 1 Lac would be around 74 L (inflation adjusted), Loss of 26,000.

My Friends, it is your hard earned income, not mine. This is a right time to start. You afraid of equity, Okay.  Chooses financial vehicles – at least which are able to beat inflation. If you will fail to do so, You would be intelligent Monkey. Don’t fool yourself, we are human. 

Nothing Else Matters – if you are able to beat inflation. Not even your small monthly incomes, which might counts in few thousands. Only things you need to do it is by choosing right investment vehicle.

So close no matter how far

Couldn't be much more from the Heart

Forever trusting who we are

And nothing else matters

                                                        _Metallica 

We All are Owners

I am a computer engineer. I was rejected by Infosys on the interview day. Yes, of course I thought there is no life ahead or maybe it’s going to be very tough. Life actually becomes tough when we have expectations.

Few days back I bought Infosys shares and I became its owner. Yes, my ownership is small but I can proudly say that I am a shareholder in Infosys.

Why I took this move?

Simple reason, I lives in India. Now why that makes sense? I live in Emerging countries. Okay. Are experiencing change in our living standards and spending – Every Sunday Cinema and McD, Yeah. Here in India Inflation would be high, let’s say around 6 to 8 per cent.  To beat this inflation Bank savings and your piggy bag is not at all good choice. To stay ahead you must look towards equity, like Mutual Funds and Shares.

Now I know it would not come easily, why should I put my money in share market where all losses it’s money. Let me tell you one secret, Nobody losses money in equity, intraday traders and greedy people loses money, Not Investors. But I also aware you that not to choose random funds or stocks, before choosing your investment, sit with your financial planner or advisor.

Let me share one more example to enter in Equity.

Almost all of us have bank account, Right? Now, in that we all are having our saving and Fixed Deposits etc. Why you put it in the bank? For safety of course! My Bank is not going to default on my savings.

My friends, if you know and you are confident on your bank, then why not to buy same bank’s equity which gives far better returns.

Even let’s assume that you have 6 Lacs in your bank account. And somehow bank collapse. Then you will receive only 1 Lacs on those 6 Lacs. NOT entire fixed amount of 6 Lacs.   

By this blog my motive is not to make you chase towards equity or share market.  My goal is that we must consider equity while investment. This is going to be a game changer. But I also aware you that not to choose random funds or stocks, before choosing your investment sit with your financial planner or advisor.