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Planning to fail in your golden years?

Yet again, a discussion with few friends on a Sunday afternoon has brought me here today. We were discussing about our future plans and each one of us wanted to retire early and retire rich. No surprises there. What surprised me is that my friends only have a vague idea, no concrete plans about how they are going to achieve this goal. This is true for most of us. With rising cost of living and increasing life expectancy, the need to plan for one’s golden years is absolutely necessary.

Lack of a concrete plan for retirement may lead to problems just when you are least prepared for it. As one of the founding father of the United States, Benjamin Franklin, so succinctly put “If you fail to plan, you are planning to fail”.

Most of us tend to underestimate the retirement corpus. If you need Rs. 50,000 for monthly expenses today, will you need the same after 30 years, when you retire? The answer is no. You will need Rs. 2.2 lakhs every month, assuming just 5% inflation. There it is, now I have your attention. Inflation leads to reduction in purchasing power, by slowly but steadily eating up your money. Learn more about it here.

Let me tell you one more thing. With increasing life expectancy, the non-earning period in an individual’s life is expanding. Someone retiring at age 60 after working for 30 years could live on for another 25 years or more. Assuming your current age of 30 years, current monthly expense of Rs. 50,000, inflation of 5% and retirement age of 60 years, the amount of retirement corpus one needs for 25 years after retirement is Rs 5.3 cr and for 30 years after retirement is Rs. 6.1 crore. These are not small sums by any measure. If you do not start to plan now, there is a high probability to fall short.

Are you now thinking when to start investing for retirement? The answer is as EARLY as possible. If you do that, your money gets more time to grow. Each rupee gained generates further returns. This is called “power of compounding”, and this helps you get rich… and richer over time.

Let us take the above example, say you start investing at age of 30 years and continue to do so for next 30 years. To achieve a corpus of Rs. 5.3 cr at retirement, assuming 12% return on your investment, you will have to invest Rs. 15,391 per month. If you delay the investment by even 5 years, the same monthly installment doubles itself to Rs. 28,630.

Don’t feel overwhelmed by all the numbers shown above, you can take help from your financial advisor for this. The key is to start early, invest regularly and choose the right products for your investments.

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Crazy about being fit? How about some financial fitness?

Ajay, my neighbor, was a regular “fitness freak” and never failed to capture my avid respect for his assiduous dedication to his fitness regimen. Three years ago, I was impressed enough to seek his friendship and invited him over for dinner. It was across the dinner table that I discovered his personal dilemma.

His passion for physical fitness was total and amply rewarded. However, he was nursing a deep regret in that he saw no way of realizing his abiding dream of starting a fitness center. In twenty years of working as a gym instructor, he had not managed to save any money.

As a financial planning aficionado, I immediately put on my “financial adviser” hat and apprised Ajay of “Financial Fitness” – how, by following a simple set of money management skills, a stress-free life of financial well-being can be ensured.

 1) Have predefined financial goals

The secret of financial stability begins with sorting and ordering priorities and with defining short term and long term goals. It is essential to achieve this clarity so that resources can be managed and plans laid out, to align with fine-tuned goals. If there is no sense of direction, the destination cannot be reached.

2) Calculate net worth

Once the goals and priorities are defined, assets and liabilities need to be assessed to determine the net worth of an individual. If a huge loan repayment is pending, an investor’s net worth may be negative, a situation that calls for urgent and concerted financial planning.

3) Manage Taxes

Taxes are often considered a necessary evil. While this may be true, there are numerous ways to harvest the benefit of government schemes and reduce taxable income, in the process. Filing tax returns before the stipulated deadlines and avoiding any direct or indirect course of tax evasion goes a long way towards inducing financial discipline.

4) Invest regularly

Simply depositing money in a bank cannot be the most productive way of capitalizing on savings. Investing is a wiser route to beating inflation and simultaneously building a corpus over a period of time. Align investments with pre-defined goals. It is possible that at all times sufficient funds for investments are not available; nonetheless, regular and disciplined investments should be maintained every month. Start small, but start early! Read more about this here

5) Earn as well as learn

Financial knowledge is not everyone’s forte. The lack of adequate information should not accrue as the stumbling block in financial decision making. There is no harm in consulting financial experts. Broadening the knowledge base in this domain can prove extremely rewarding. It is never too late to learn how to earn.

6) Maintain an emergency fund

If there is one thing that will remain constant, it is the ever changing scenarios that life will keep presenting as challenges. To deal with unexpected exigencies efficiently, an individual should have saved an emergency fund, which should ideally equal about 5 to 6 times of the monthly expenses. This will ensure the much needed cushion in times of emergency.