Source/Contribution by : NJ Publications
Inflation in simple terms means general price rise of goods & services in a country. Inflation monster reduces purchasing power of money, rupee loses value with inflation as the same amount of money buys lesser goods/services with time or to buy same quantity of goods/services you need more money due to inflation. In India inflation trend is broadly measured by Wholesale Price Index popularly known as WPI, tracking wholesale prices of basket of goods. This tracks prices at wholesale level and not the prices at which consumers buy goods. RBI mainly tracks WPI to take decisions regarding interest rates & money supply. In recent times too much fuzz is created around inflation numbers as it remains at elevated level of around 9 – 10% range which is not desirable for a growing economy like India. But why so much attention is given to WPI numbers and what is their significance in context of Indian economy?
WPI in India has very wide implications as many nodal agencies use WPI number to arrive at many important policy decisions. RBI uses this number to decide on interest rate & money supply measures, movement in WPI indicates price trend of essential commodities.
What causes inflation in a country ?
As said earlier, inflation is nothing but general trend of price rise in a country. There can be multiple factors responsible for this trend of price rise:
Excess Money Supply: If money supply is increased due to loose monetary policy & low interest rates, prices go up as too much money chase too few goods. That is the reason why central banks increase interest rates in inflationary environment to reduce money supply.
High Level of Economic Growth With Low Investment: If economy is growing at healthy rate then income level of working population goes up and people start buying more goods and services which result in higher demand. To match this higher demand country needs to invest heavily in manufacturing sector to increase supply to match increased demand. If country fails to increase supply of goods & services against rising demand then it results in inflationary trend. Classic example is India where economy grew at a healthy pace of 9% in 2006-08 but manufacturing growth failed to keep pace with economy growth, and this resulted in higher inflation during the period between 2008 to 2012.
Deficit Financing : Emerging economies like India always remain in need of capital to finance various growth projects. As their imports remain higher than exports many a times governments of these countries lean towards deficit financing as a tool to fill the gap and narrow down the deficits. Deficit Financing means printing more currency to fill the deficit. This results in increase in money supply.
Impact of Inflationary Trend on You & Me (As Consumer - As Investor)
With rising prices from food to vegetables to petrol, common man like you and me always remain at the receiving end during high inflation environment. As discussed earlier in high inflationary environment on one end RBI keeps raising interest rates in an attempt to control inflation & on other end rising prices pinch common man's household budget. CPI (Consumer Price Inflation), the inflation number that impacts common man more than WPI as it is the measure of price rise at end user level has remained at around 9 to 10% level in last few months.
Higher inflation, rising interest rates, higher input cost & lowering demand affects corporate profitability and results in lower production, eventually affecting the economic growth of the country. If inflation remains at the elevated levels for longer period of time it affects investors as investment in fixed income instruments end up generating negative real return. With CPI hovering around 9 to 10% and your investment in Bank F.D., PPF or any other Postal instruments generate 8 to 9% return, as an investor you end up generating negative return.
The logical alternative for investor is to explore investment avenue with possible inflation beating returns like equity & gold. Investing systematically & in a staggered manner help investors in yielding inflation beating returns.
Financial Planning & Inflation:
Inflation is the single most important factor to be considered while planning for all your future goals. Considering an appropriate inflation number while estimating future cost of your financial goal determine your asset allocation & return expectation.
e.g. If higher education costs Rs.5 lacs today with inflation expectation of 7% this can grow to Rs.9.8 lacs in 10 years time if your kid is of 7 years of age and higher education age assuming at 17 years.
With ever rising cost of living due to inflation it is very important for investors to look at investment class which can consistently generate inflation beating returns. Time & again it is proved that equity can consistently beat inflation over a long period of time and so it is imperative to have equity allocation in your portfolio to keep your investment portfolio floating above inflation level.
Because of the negative cascading effect that high inflation can have on overall economy, high rate of inflation is not favorable specially for a growing economy like India. High growth rate with reasonable inflation of between 4 to 6% could be an ideal scenario for the economy and that is the reason why RBI is desperately trying to bring inflation level down to around 5 – 6% range.
Due to widespread implications of high inflation, it is mandatory for any emerging market economy to keep inflation under tight control. Controlling inflation is of course beyond control of you & me, but we can definitely add equity flavor in our portfolio and follow asset allocation to keep our investment floating above inflation.
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There is now a lot of communication seen on the importance of saving for retirement and what you need to do. This is fully justified and much needed as there is a large population of adults who are yet to plan for their retirement. However, there is not much being written about the decisions that you need to take the after and during your retirement. The time is finally approaching, you are 59.5 years old, and have a big corpus expected to arrive soon. All your goals must have been achieved by now, and the only major goal left would be to maintain your lifestyle after retirement. You have been dreaming throughout your life about how this golden period would be, and how you'll travel all the places which are left unchecked on your list with your spouse. Along with these questions, there are more pressing ones like ... what will I do with the money? How should I start deploying my funds? that keeps ringing in your mind. In this article, we shall talk about a few of these important decisions that you need to make post retirement but before that let us do a reality check on the retirement scenario present in India...
Reality Check
As per the WHO’s World Statistics Report 2016, the life expectancy at birth was 68.3 years in India which breaks down to 66.9 years for men and 69.9 for women in year 2015. The life expectancy at various ages
has been continuously increasing owing to better medical facilities. Life expectancy at 60 was 17.9 years between 2009 and 2013 compared to 16.2 years between 1991 and 1995. Life expectancy at 60 was always more for female and male with the difference being of nearly 2.5 years.
However this is a global figure for all Indians, urban and educated population in India have significantly higher life expectancies. some advanced states like Kerala have life expectancy over 75 years. Another eye opening stats shared by HSBC recently is that data nearly 47% of 'working' people in India have either not
started saving for their retirement or have stopped or faced difficulties while saving. Clearly, we are expected to live longer than the figures presented here which means that we would likely have over 20 years of post retirement life.
Asset Allocation
An important decision before investing is the amount of kitty you have and the asset allocation needed which will sustain your kitty till you need it during your retirement. Most people prefer not to risk their money
at all and divert their entire retirement corpus to traditional debt products, such as fixed deposits or bonds or insurance policies. These schemes do offer protection of principal but yield low returns. Since the returns will not be able to catch up with inflation, you might fall short of funds in future. Instead, debt mutual fund schemes do offer better post tax returns at acceptable levels of risks for you.
In a falling interest rate scenario like India, debt funds are considered as good investment option even for long term. Further, if your retirement kitty itself is small which may not last long, then there must be some planning on growing that kitty. This can be possible with a small portion of your kitty, say up to 20% being invested in equities for long term (over 5 years at least) where 80% of the kitty is for risk-free consumption during that time. You may further reduce this risk by investing slowly through Systematic Transfer Plan (STP)
from a debt to equity scheme.
Regular flow of Income
Since there would be no new money coming in, you should go for lump sum investments with regular return options like Systematic Withdrawal Plan (SWP) or dividend option schemes of mutual funds for meeting for your monthly expenses. You may also be receiving rental incomes or you you may deposit a lump sum in
fixed deposits or bonds to yield interest income. Those who do not have adequate kitty or regular flow of money may be forced to pursue some commercial activities post retirement, which is not a bad choice even if you have a adequate kitty with you. Working, for money or otherwise, after retirement can help you be more active and alert and this will help you socially, economically and physically too...
Health Coverage
Medical expenses will shoot up like never before in your retirement period and you may never anticipate what will hit you and when. The best idea is to get adequate health insurance coverage as soon as possible. Ask your children to cover you and your spouse in their personal family floater health policies. Most big organisations also provide parents health coverage at nominal costs - ask your children to enrol for the same at earliest. It can be a big relief for you and your children when any need arises. An important point to note is never to discontinue any running health policy you have, unless required. Buying a new policy at this age can be costly and you will have limited choices to choose from.Other important decisions...
Contingency funds
Apart from your regular expenses, emergencies can pop up from anywhere and anytime. You must be able to meet those contingencies and be prepared for them with the help of an emergency fund. This fund should be liquid enough to be able to serve the purpose and in such arrangement, if possible, that it can be accessible by your family too.
Estate Planning
If you have not done it yet, you must do it at the earliest. It is better to hire a professional or a reputed service provider to make your will. However, will is only one instrument of estate planning and you may like to set up private trusts, have business succession planning done, make gift arrangements, etc. Appointing of appropriate nominees and joint holders for your assets is also important at this stage. As far as a will document is concerned, it is the basic need to ensure that your assets are transferred in the manner you like instead of the law taking its course. Ensure that you have done all necessary pre-planning and discussions
for same to avoid any family disputes that may arise later.
Managing investments
Keep it simple:
Don't try to complicate your portfolio by including products which you do not understand. Invest in something only after you have acquired adequate knowledge about its functioning, return generating capabilities, risks involved, etc. If it is difficult to comprehend, you might as well omit it than keeping the possibility of facing difficult circumstances later. Don't lock in: Retirees often put a huge lump sum in annuity schemes offered by insurance companies or some other pension / small savings schemes in lieu of regular cash flow throughout your life or for certain number of years. It offers certain benefits like regular income, it covers longevity risk, and reinvestment risk. On the flip side, these investments are illiquid, offer lower returns and the returns are taxable. So you should consider these pros and cons before investing in such pension plans, and allocate a appropriate portion of your portfolio to the same.
Tax Awareness:
The returns of most investments are taxable and tax may be deducted at source. If you are not falling
under a tax bracket, you should take care that you are not paying taxes. For e.g. interest on bank deposits is taxable if it exceeds R10,000 in a particular year. So you should make sure that you submit form 15H in time, so that your interest is tax free. You should also consider the tax impact of various investment products before investing.
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This article, as the name suggests is for those who start their retirement planning in the pre-retirement phase, in their 50's. Since forever, financial planners, bloggers, investment forums, distributors, including us, have been propagating the importance of early retirement planning, yet the ideal has not been implemented by a vast majority of Indians. Now when the deadline is just around the corner, the idea of planning for retirement makes a sudden entry into the 50's investor mind. The investor is late and Retirement Planning at this stage is a challenging task indeed, because firstly there is time crunch and secondly this is the time when you are converging towards the fulfillment of some of your life goals, you have grown up kids who might not be settled yet, kids' weddings expenses, etc., are yet to be funded and at the same time you have to plan and provide for your retirement. So, no doubt it is back-breaking but every cloud has a silver lining.
The following paragraphs will acquaint you with how an investor in his 50's should go about his retirement planning. You must note that planning the last 10 years will not land you in a similar position as you would have landed, if started one or two decades earlier, but yes with your efforts and commitment you can still be in a better plight in securing a comfortable retirement.
Assess your requirement, The first step in planning for your retirement is determining the amount you are going to need. This amount should be able help you maintain your present lifestyle post your retirement. It should be as specific as possible, and should be arrived at, after considering a number of factors such as, impact of Inflation, if your monthly expenses are Rs 40,000 presently and you are 55 years old, assuming an inflation rate of 6%, your monthly expenses will be around Rs 53,000 when you turn 60, they'll go up to Rs 96,000 when you turn 70. So your retirement fund should be able to provide for your ever increasing expenses. Secondly, you must also consider Longevity, the average life expectancy of people has increased over the years, you might live another 30 or even 40 years. So your retirement fund should be adequate to last a very long period of time.
No flukes, no trial and errors, The time is such that you don't have much time on your hand, to try your luck. The plan should be fool proof as there is no scope for mistakes. A small error can cost you big because you do not have much time to recover from a loss. Hence, as a first step you must approach a good financial advisor, who can rightly assess your needs, the time constraint and helps you devise a safe and goof-proof financial plan.
Save more, You are doing a 30 year job in 10 years, so you need to run really fast in order to cover up. The only way to achieve your goal is through saving extra. 50's is the peak earning period for most people since they must have reached senior management positions or have established businesses, with some major life goals already achieved like a house, kids educations, kids marriages also in some cases. So you must be having or moving towards a stage with increased disposable income, this income should be saved and invested for your retirement goal. Track what you are spending on, try to cut unnecessary expenses because either you splurge now or survive later.
Create a second source of Income, To save more you have two options, one you can create a second source of income from your existing assets or you have to settle for a lower standard of living. You can explore a number of extra income options from within your existing asset base. For example, you have a two storey house, you can let out a floor on rent or can start a PG, and direct the extra income towards your retirement. Or you have a colossal bungalow, where you and your spouse are living, your kids have moved out, your parents are no more, so you can sell it or rent it out and move into a smaller space, thus saving a lot of maintenance expense every month, and it'll be a huge contribution towards your retirement goal. A peaceful Retirement should be the priority, any asset which isn't aligned to a goal, use it to strengthen your retirement kitty.
Low Risk not No Risk, The general principle is you should invest in risky long term investments and move towards safer investment options as you age. Follow the ideology but not stringently. If you invest your entire saving in low risk, low return investments, then your pace towards your target is like a drop in the bucket, you might never be able to reach your destination. Your retirement plan should be a combination of a 50 year old and a 30 year old. You need some exposure to equity since it will generate higher returns. The idea behind including equity is, although you are retiring within this decade but that is just the beginning of your retirement period, you won't be spending your entire retirement corpus on Day 1 of your retirement. You can invest some amount in equity to sponsor your middle retirement years, like your 70's.
Be debt free as soon as possible: If you have any Home Loan EMI's or any other EMI's running, try to get rid off them as soon as you can. Unassociate yourself from the high interest bearing credit cards. Offload the burden from your shoulders so that you can have more money at your disposal to save for your retirement goal.
Start working on your health, healthy people save more more because of lesser trips to doctors and lesser expense on medicines. You are entering a stage when you'll be increasingly vulnerable to health problems, having your health by your side simply translates into having more money in your bank account. Also, Review your health cover, if you are a part of the family cover, take a separate and higher cover for yourself and your spouse. Any unexpected medical emergency can wreck your dream of living a comfortable life after retirement.
To conclude, Plan Now and Plan carefully if you want to avoid working till your last breath!
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One of the most integral part of personal finance management and financial planning is estate planning. It is something very important to know and hence we would like you to read it to the end.
What is Estate Planning?
Estate is everything that one owns viz. assets & owes viz. liabilities and responsibilities. Please do not confuse it with Real Estate and in this context, it is a completely different thing. Estate Planning is a process of arranging and planning a person’s succession and financial affairs. An Estate Plan incorporates a person’s wishes about his estate - this could be regarding his estate management, preservation, distribution and his estate legacy post life. The main thing though remains as to how your estate will devolve upon your loved ones post your demise.
Estate Planning is for whom?
There is never a right age or any particular level of financial wealth required to engage in estate planning. It is for all ages and for every person to wishes to ensure a smothe transfer of assets due to his/her incapacitation or demise. Thus, it is irrespective of age and portfolio size, for everyone including you and me.
Think of it as the other side of buying a life /term insurance. Why did we buy the life policy? An estate planning also has similar justification, similar logical reasoning.
Do you really need it?
Most of us as individuals place a lot of importance is wealth creation. However, we often neglet the need to ensure preservation and succession of wealth. That is often left to destiny and that should never be the case. In the last few decades, our societal fabric and landscape has gone huge change. We now see more nuclear families, less of huge joint families, more financial awareness and need for personal financial security. In such scenario, it is not difficult to visualise disputes and legal issues which can be a challenge for entire families. Proper estate planning will be an answer to this issue.
On the other hand, most of us also believe that nomination and joint ownership is a way of estate planning. You will be surprised to know that both, nomination and joint ownership of assets is ineffective and legally disputable. The succession laws of the land supercedes everything and at the end of the day, assets will have to be distributed as per laws and not as per nomination or joint ownership. They will be merely treated as recipients and custodians of assets on behalf of the legal heirs till transfer.
Methods of Estate Planning:
One can plan his estate in two ways (a) by writing a Will or (b) by creating a Trust.
A Trust involves transferring of one’s estate to a Trustee for the benefit of certain beneficiaries which may include the person creating the Trust who is called as the Settlor. A Trust provides for management of the estate during one’s lifetime and also provides for distribution and management of one’s wealth post demise in a planned manner over a period of time.
A Will is the simplest and the most traditional way of distribution of assets by a person. A Will is legal declaration of the intention by the one making it – the testator – with respect to property that he/she desires to be carried into effect after his death. A Will is likely to be more relevant and of interest for most of us.
Advantages of Estate Planning
1. Get property and assets to loved ones quickly: After the death of an individual, the legal formalities and transfers take time and the family generally has to wait a long time to get everything in order. With proper estate planning and a latest will in place, you can avoid this delay for your family and they can get everything in order quickly. This becomes even more important if you are the bread earner of the family. Your dependents in most cases are not even aware of your entire estate and also the various investments that you must have made. A detailed will helps them getting all the affairs in order.
2. Minimize expenses: A lot of money needs to be spent in lawyers' fees and legal expenses in case of absence of an estate plan. An even higher amount of money is spent in case there are family disputes. One can avoid this hassle by simply creating a will and ensuring that a proper estate plan is in place.
3. Reduce Tax burden: When a property is transferred without a will or through a court case, one has to pay capital gain tax. This tax is avoided when one inherits or receives the property via a will. Similarly, estate planning can help you avoid a lot of taxes. One example can be making a trust. If a trust is set in place in a proper manner, you and your family can avoid paying taxes.
4. Plan for incapacity: While most people are convinced that estate planning is for old age, that is not true. Life is unpredictable and anything can happen at anytime. It is possible that one becomes incapacitated because of some unfortunate accident or sudden medical condition which leaves them unable to manage their financial affairs. In estate planning, one can ensure for both financial and healthcare decisions in case of incapacity. This can help you and your family in difficult times.
5. Support your favourite cause: An individual can leave a fixed amount as donation or as charity to a cause he or she wishes. In often cases, where a proper will has not been made, these causes go unnoticed as the family is unaware of the deceased wishes.
6. Assign a legal guardian for your children: In unfortunate cases where both the parent pass away and the children are still minors, the court decides who the legal guardian to the kids will be. However, with estate planning, you can assign a legal guardian in case of any unfortunate incidents and make sure that your kids go into safe and kind hands.
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We have all struggled to stay in budget. Each time we get our salaries or income from the business, we vow to save more money and reduce expenses on unnecessary items but end up pushing the agenda for the next month.
It is important to have some sort of control over your spending and being able to save some money for not just emergencies but also for the future. Any individual should save some, to make their future better, to be able to build assets and afford things which currently seem unaffordable. It is important that you understand the opportunity cost of spending money. Like, could the money you spent on the luxury watch be better used for your sons' education fund? Or could the expensive phone that you juts upgraded be avoided in order to save up for a better house?
While certain expenses like rent, loan EMIs, education and basic amenities are necessary and unavoidable, one can definitely control their discretionary expenses. Here are a tips which can help you to control your discretionary spending:
1. Monitor your expenses
You cannot change or control something if you don't know where you are going wrong. In order to spend less, you need to understand and realise where you have been spending more than what is needed or where you have been spending is unnecessary and avoidable.
So, note down as many expenses you can remember for the past few months and look at the areas where you have spent your money. You can divide them into groups, like basic utilities, travel, shopping, luxury items etc. Expenses on items like house rent, electricity bill, phone bill, groceries form a part of basic utilities and of course cannot be avoided but they should be kept in check. You should know how much you are spending. This will help you in realising how much of your spending is necessary and basic and how much is discretionary. Further, once you realise what your discretionary expenses are and where are these expenses mostly meant towards, you can control it.
For example, if you have been spending a lot on eating out and you realise this after monitoring and judging your expenses, you can be careful about it. Of course, you cannot and should not completely cut eating out, both change and socialising is necessary, however, you can control when you have been too lazy or too bored eat to at home.
Also, if you observe that you have been spending a lot on shopping for things you don't need, it maybe wise to go on a shopping hiatus for a while. Thus, monitoring your expenses will help you control them as well.
2. Make a budget
Making a budget is the very basic step to control your expenses. It is simple and effective. Once you make a proper budget, you will know how much you spend on a particular arena and thus it will be easier for you to control your expenses.
While, you may say that making a budget will not actually make you stay in one, whether you stay in it or not, you will still save more than general. This is because once you make a budget, you make a mental note on how much to spend on what. Now, while you are crossing that mental limit, you will realise that you are going over limit and thus will not be as reckless as you would have been without that reminder. Thus, even if you don't stay within the budget, you will at least benefit by spending lesser than general, which is the whole point of making the budget.
One point to remember while making the budget is to be realistic about it. You cannot expect to cut down your expenses by 40-50% in the very beginning. In fact, spending 40-50% less is very difficult even if you learn to spend less. Make sure that the budget you are making not just covers your basic needs but also gives you a little margin to spend on unforeseen expenses and also that it doesn't cut you out from everything but just helps you save some extra amount.
3. Cut yourself at the source
If you are someone for whom saving is extremely difficult, you can set automatic transfers which will leave you with lesser money. For example, you can get a different account and set up an automatic transfer at the beginning of the month. So every month a specific amount is automatically deducted from your account and saved in another account. If you want to be very stern with yourself, make withdrawal from the account difficult. Don't get a debit card for it or ask your family member to change the pin and not tell you.
Similarly, you can also start an SIP to a liquid fund or other instruments, which will help you save and invest more.
While there are many more ways you can save, these three simple step should cover you in a basic and extensive manner.
