Tag: Financial Planning

6 Steps of doing Retirement Planning by yourself

Posted on by Jagoinvestor

In this post I will teach on how to plan for retirement. We will use simple tools like Mutual Funds and PPF for building Retirement Corpus.

We will also see what factors you should take into account when you plan for retirement. There can be other ways of doing this and it can be very complex with very advanced calculation. But in this post we will look at it in a very simple way which a common man can understand.

Retirement Planning

So you are finally deciding to plan for your Retirement. You need to understand following steps:

  • How much is your Current Yearly Expenses
  • How much will be average Inflation figure for the coming years
  • How much would you need at your Retirement
  • Finally coming up with the corpus you would need at the retirement
  • Calculating how much you should save per month
  • Understanding where to invest the money

We will see all the above points in detail and go through some examples side by side to understand the process in well. Let say we are taking an example of Ajay who is married and has 2 kids below the age of 6 yrs. He has a monthly salary of Rs 40,000 per month. His age is 32 yrs and he wants to retire at age 60.

Step 1: Calculating you Current Yearly Expenses

Take a piece of paper (do it now as you read this) and make a note of your expenses, things like Rent, House hold expenses, Children fees etc etc. You should have a rough idea of what is the minimum amount you require per month for living a good life. You should also try to save a part of your salary every month, Ask your self Can you live with 90% of your Salary ?

Ajay calculates his expenses:

Rent – Rs.10,000
House hold expenses – Rs.11,000
Medical Expenses : Rs.1,000
Entertainment and outing : Rs.3,000

Total Monthly Expenses : Rs.25,000
Yearly living Expenses : Rs.3,00,000 (12 * 25,000)

Other Expenses like Vacations and Surprise Expenses : Rs.50,000

Total Yearly Expenses : Rs.3,50,000

Step 2 : Understanding how much Inflation would be there in coming years

This is the inflation you expect in coming years till your retirement. I calculated the average inflation from last 28 yrs (1990-2008). The CAGR inflation was 7.3% Source.

Considering a better economy in future I expect the inflation over next 20-30 years to be 6-6.5%. Lets take 6.5% for our calculations here. However you can assume your own rate as it depends on your understanding.

Step 3 : How much amount would you require in your Retirement

By this we mean how much money will provide you same standard of living as of today. This will depend on the Current Yearly Expenses, inflation expected over the years and years left for retirement. Just like we require Rs 105 to buy something of cost Rs.100 in 1 yr at 5% inflation. The same way we can cost how much is is needed after X yrs.

So formula would be

Retirement yearly Expenses = Current Yearly Expenses * (1 + inflation)^(number of years left)

Ajay has already calculated his yearly expenses as Rs 3,50,000. He has 28 more years at hand. He calculates his retirement yearly expenses.

Retirement Expenses = 3,50,000 * (1+ .065)^28
= 20,40,000 (20.4 lacs approx)

Now one can tweak this figure depending on whether you want to have higher standard of lifestyle than now (earning years) or more simpler life. You can decrease it or increase it to the quantum of your compromise. You won’t have to compromise on your Retirement if you are a Early Investor.

Step 4 : Finally coming up with the corpus you would need at the retirement

Here you may want to receive the monthly income for whole of your life and preserve the capital for your Children or any nominee. So you need a corpus which if you put in Bank or invest in some “guaranteed return fund”, you should get an amount per year which is equal to your Expected Expenses per year.

So suppose you expect to get a return of 7% per year. Then you need X amount at the end where 7% of X is = your yearly expenses.

Corpus needed = (Monthly Expenses)/(interest expected )

So in the case of Ajay the yearly expenses expected was Rs.20,40,000 and return expected is 7%. So we calculated the amount required for Retirement that is 20,40,000 / .07 = 2,91,00,000 (2.91 crores).

Note:

You can also buy an Annuity for a fixed number of years till when you want to receive the income (which also means you should have an idea of when will you die, which is not easy). So for example if you want to receive the the monthly Income till you are Age 80 (for 20 yrs).

The following formula will be used. See this Video or this article on Net Present Value to understand the calculations and Concept.

PVA = A * [ {(1+r)^n -1} / { r * (1+r)^n } ]

Where

PVA = Present value of Annuity (Amount you need to have at your retirement)
r= Rate of interest you expect to get
n = Number of years you want the Yearly Income .

So at the end of this, you will have the Amount you need for your Retirement.
Do you calculations online just now Here OR download the excel sheet Here.

Watch this video to learn how to do your own retirement planning :

Step 5: Calculating how much you should save per month

Here comes the interesting part, here there are two things

  • How much Return you expect to earn in long term
  • How much you can afford to invest per month

Both are related to each other. If you expect more return, then you need to invest less every month and if you can afford to invest more every month, you need to generate less returns for your investments.

So which is the better way? What should you decide first? The returns expected or monthly contribution you can make? I would recommend the other way, better we first decide how much we can invest per month, because that is what we can control better way. We cant control returns !!

I have this monthly contribution calculator to calculate how much you need to put every month to generate Rs X after Y years if you expect R returns, please feed these inputs there and get your numbers. To understand how its calculated you can see this video which explains some important formula’s in Financial Planning.

So here is the process

  • You figure out how much you can save
  • Then you find out how much return you need to generate
  • Then you decide where to invest to generate that return

You can also go the other way deciding how much return you can generate and based on that how much you need to save. But I prefer the first way because then you control things in your hand but you can go the other way too.

So our friend Ajay has a saving of Rs 15,000 at the moment (40,000 – 25,000) And he thinks that he can easily invest 10,000 per month at least over a long term. So the return he needs to generate per year CAGR for 28 yrs to generate his retirement corpus of 2,91,000,00 comes out to be 12.25%, see the calculator mentioned above.

So now you got to know how much you need to get per year in returns.

Step 6 : Understanding Where to invest it

This is the last step as per our article. So you got the CAGR return number which you need to generate over a long term. This number will decide how much risk can you take and where can you invest depending on your time frame. See below to understand which are the suitable products you can invest to get your returns.

Understand the ground Rules

  • Higher the return expected, higher the risk you need to take
  • More the Tenure, Lower the risk

Above 15% : Direct Stocks, Sectoral Mutual Funds, Equity Diversified Mutual Funds
10-15% : Equity Diversified Mutual funds, Balanced Funds
8-10% : Mix of Balanced Funds Debt Funds
Less than 8% : FDs, PPF, Debt Funds, Balanced Funds [ find out which FD is best ]

However, if the tenure is more than 10 yrs you should always go for Equity Funds. Never go for FDs or Debt funds if your tenure is long enough. Understand the Chemistry of Equity and Debt please.

So in our Example of Ajay, he requires a return of 12.3% CAGR in 28 yrs, so for this, he can invest in Equity Mutual funds through SIP he has different ways to achieve this like Doing a SIP in 3 Equity mutual funds OR combination of PPF (25%) and SIP in mutual funds (75%) OR Direct Equity (5-10%) + PPF + Some Balanced Funds. You got to be creative in this :), there are endless ways of doing it.

Conclusion :

Here you go!!, you just did your Retirement Planning 🙂 . You can do your retirement planning yourself easily. A financial planner will look into more details and will do perfect planning for you which would be best but this is pretty much great way you can adopt your self.

Involve yourself in this journey of Financial planning and you will be amazed to find how much Fun it is.

The Chemistry of Equity and Debt

Posted on by Jagoinvestor

Following is a small Table which discusses the Equity and Debt allocation for your Investments . (Click on the chart to enlarge it). It will tell you how Equity and Debt should be used for long and short term financial goals .

 

It has two parameters .

1. Importance of your investment goal (Left Downside)
– Low : Buying an a/c for you car , Going for a vacation .
– Medium : Buying a Car , Saving for a second home
– High : Retirement , Child Education , Family health Related things , Down payment for Home Loan .

2. Time Duration of your Goal . (Upper Right)

– Short term : 1- 2 years
– Medium Term : 3-7 years
– Long Term : 8+ years

Basic Idea : It is based on the following facts .

– Equity is extremely risky in short term
– Equity is highly rewarding in long run with almost no risk
– Debt is safe always
– Debt eats away your money purchasing power.

So on based of these observation. Your Equity : Debt allocation should be based on both parameters of Importance and duration of goal , not just one one them


Some Examples

Example 1 : Ajay wants to invest 1,00,000 for his brother Education in next 1 year .

His Action : This is extremely important thing and cant be risked with , also its a short term goal. Equity should not be used . He should invest in anything giving him pure protection of his money (even though he does not get high return) . A plain FD for 1 yr will be good enough .

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Example 2 : Robert want to save some money for his house down payment in next 4-5 yrs .

His Action : As this is an important thing with time goal of medium term , His investment should be mixed in both Equity and Debt . He should invest 35-40% in Equity (SIP in mutual funds) and rest in Debt products like Tax FD’s and Debt funds% .

Alternative : He can also choose to invest his money Balanced mutual Funds (as they have mix of both Debt and Equity built in)

—————————————————————————————


 Example 3 : Ankit wants to retire in next 25 yrs .

His Action : Now this is a important thing , with a goal tenure of around 25 yrs . There is no reason why Debt must be involved here at all . The matter that Equity is risky does not apply here its true for short – medium term , not for Long term like 25 yrs . (probabilistically only , If you are extra unlucky , what can one do) .

He must invest 50% in some good 3-4 Equity Diversified Mutual funds though SIP route and and he can invest 50% of his money also in some very good fundamentally strong mid caps and large caps stocks directly .

Note : Understand that , your definition of “Importance of Goal” and “Duration” depends on your situation , For me buying a Car is “Not Important” ,whereas for some one with a family of 4 and requirement of often going places can be “Important” .

What can Repiblic Day teach us about Financial Planning

Posted on by Jagoinvestor

India gained its Independence in 1947 . At that time India was free , and ready to grow on its own , with its own decisions . But it was not possible without a set of guidelines to guide the decision making process .

Success comes when you are disciplined and have a decision making process. On Jan 26 , 1950 our Constitution came into effect and now we had laws for different things .

Financial Planning

We knew exactly what we have to do when thing happens . We had a road map to follow. From there on we progressed and have came a long way . We can now say that we are much better than we were at that time and we continue to grow and make better decisions.

We need amendments from time to time and that helps us to change the bad laws and adapt to new situations.

How do we relate it to Investing?

We can learn from anything … really anything . Let us try to map each event discussed above and relate it to our Investing world .

1. Gaining Independence

When we get a job and start earning on our own, we are full of confidence. we are independent, We don’t need to ask for money from our parents. Rather we have to support them. We have responsibilities. There are many goals for us like buying house, car, saving for our retirement, Marriage etc etc.

2. Republic day

This is the day when we understand that we need to do our financial planning and have a set of guidelines to guide our decision making regarding our investments .When we know how exactly we are going to invest to achieve our goals, we have a clear road map and time duration .

We just need to follow it with discipline.

Example : If a young 25 yrs old want to retire at 55 with 2 crores at the end . He can take two approaches .

a) He can try to save money here and there, some month he can invest 10k, and some month he can skip it and down the line, he has a vague idea where is he going and how is he making progress. This kind of approach often leads to failure, because there is no road map and sometime will come when you will have no idea whats happening.

b) Second approach can be very easy . You have to make sure that you understand some thing very well and be clear about somethings. Those are

– Equity outperforms every other asset class in long term .
– Equity in long term has given 15%+ returns and its possible in future too .
– You should have understanding about the power of compound interest.

Now when you are clear crisp about this idea , then you can use a simple compound interest formula to see , how much you need to invest every month for rest 30 years (55 – 25) , which can generate 2 crores at 15% annual return .

The formula is

Final_amount = monthly_contribution * (1+rate) * ((1+rate)^months – 1)/rate

where
rate = monthly rate = 15% / 12 = .15/12 = .0125
months = total number of months you will invest = 30 * 12 = 360

Now you can calculate what monthly_contribution fits the values .

The amount comes to little below 3,000 per month .

Which means if you invest 3,000 per month for next 30 years , you can achieve your retirement target easily without fail. (Invest in Equity Diversified Mutual funds to target 15% returns for long tenure).

When you do this, you go with a plan (constitution) and dont have to doubt your self and you will not get lost. Just follow it with discipline without fail.

3. Amendments

Just like amendments are made in Law , because of change in environment and situations . You also may have to change you plans with market change and new products coming in (this happens rarely , because fundamental things remain same) .

Summary and Learning

What I want to point out here is that just earning money and being independent in not enough and cant make you successful with money , Discipline and proper understanding with good planning will help .

So if you are Independent but have not put your constitution in place , do it soon to really succeed . Make this day as your teacher and learn from it . Don’t be afraid of mistakes .

“Success is a ladder where every step is made up of Failure . If you cant fail !! , Winning will not be easy ” .
Manish

5 Elements of a well-planned financial portfolio management

Posted on by Jagoinvestor

Everyone is concern when it comes to investment. But lot of investors does the mistake of focusing on investments only and not on their portfolio. Having a good financial portfolio is also as important as an investment.

This article will talk about 5 things every financial portfolio must have and we will see that it should be good for almost every type of investor . We will try to judge it over the important parameters discussed in my one of the earlier Article : Pillars of Success

financial portfolio

What is mean by a financial portfolio?

Financial portfolio is a road-map which you can use to achieve your future financial goals. It is build up by considering your risk appetite and investment objectives. You can handle your own financial portfolio or you can also take help of the professional financial managers which will make it easier for you to reach your financial destination.

Your investments alone can not help you to build a healthy portfolio, there are some other elements also which are important as much as your investments.

Let’s see the Five most important and must have things that each and every financial portfolio must have:

1. Life Insurance

Each and every person who has financial dependents must have a good Life cover through Term Insurance. This must be taken at an early stage of life for the longest term possible.

For India :

  • Aegon Religare Life Insurance
  • SBI Life Insurance
  • Max New York Life Insurance
  • LIC (Jeevan Amulya)

For Other countries :

Please search for your respective countries and find out which term insurance is the best one.

2. Health Insurance

This is extremely important to have a health insurance now a days, because of rising health-care expenses. A Family must be covered with a Family Floater plan for a good amount (Rs 5 lacs/$10,000) depending on your budget .

3. PPF

Each and every financial portfolio much have debt exposure and PPF (for India) is an excellent investment product for anyone, backed by government , its 100% safe and one of the most efficient and tax efficient products available , with post-tax returns of 8% , its a must have in each portfolio .

4. SIP in Mutual Funds (for long term)

For long term investments, its hard to beat this . For long term investments Equity must be the route and for systematic and disciplined investing , SIP is the best way to channelize your money . Considering the undebatable growth for Indian economy , no can afford to miss Equities for long term investments.

5. Contingent/Emergency Fund (Cash + Liquid Funds)

Each and every financial portfolio must have good amount of cash and liquidity to meet unforeseen and emergency expenses. Other wise you will have to liquidate and break you investment products which may attract penalties and may not give you enough cash at the time of requirement which can create problem .

Better to have money equivalent to 3-4 months of expenses in emergency fund . You can also put 1-2 months expenses as Cash and rest into Liquid funds which may also provide you some returns .

Analysis

Understand that these 5 things are a list of things one would have for sure , but its not an exhaustive list . Depending on your profile and requirements you should have other products as well. but i would say this will solve 90% of the problem . Let looks how a finanacial portfolio consisting of this 5 things passes on 4 parameters called Pillars of Success ?

1. Capital Appreciation : 

With SIP in mutual funds and PPF , the capital appreciation should happen to a great extent , PPF would provide stability and assurity or returns , where as Equity will gives exceptional returns .

2. Liquidity : 

We have already covered that Contingent fund should be able to provide good Liquidity.

3. Risk Management : 

Term Insurance and Health Insurance will take good care . SIP will take care of the market volatility. some other techniques like Hedging using Derivatives and being well informed will manage extra level of risk .

4. Goal Oriented : 

Each and every product is for a specific and important goal , as described above .

For Non-Indian Readers

Hi all , the article is specifically with Indian context , but article is helpful for each of you , please find the similar products in your country .

Conclusion

Each and every financial portfolio can be different and should match the requirement of the investor , But these 5 things are such that it can be for any kind of investor . Just like we have master key for any kind of lock , we have these products for any kind of investor.

If you have an query ask us in the comment section.