Category Archives: Personal Finance

Retirement Planning

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Greetings from PenguWIN

Across the globe, including US, Germany, UK and India, surveys conducted among retired people, have revealed one common response – “We should have saved more for retirement”

Retirement is one of the most critical financial goals that needs a corpus (sum of money) to be built, for a period of time (like 25 years from age of 55), adjusted for inflation (money value going down). In rupee terms, a person who is 35 years old today, planning to retire by the age of 55 (2039), needing 50,000/- per month in today’s value, at an inflation rate of 6%, would need a sum of approx. Rs.1,60,000/- per month in 20 years or 3.21 times of what is required today. If he earns a return of 7% after taxes and the inflation rate continues to be 6%, his retirement fund needs to be Rs. 4.28 crores by 2039 (retirement year), assuming he lives till the age of 80 years (2064). i.e. 25 years post retirement age. This value would be higher if he lives for more than 80 years.

Hence, a contingency need to be built so that he does not outlive the corpus. On the contrary, if he lives lesser than 80 years, the wealth can be passed on his beneficiaries.

Retirement Planning has the potential to become an enormous problem for Indians, with increasing life expectancy. People are diagnosed with lifestyle ailments including Diabetes, Blood Pressure, Cardio problems at an early age. However, they would continue to live long due to advancements in the field of medicine which means increasing health care costs. Unlike western countries where hospitalization and prescription medicines are covered, health insurers in India cover only hospitalization and regular medication including insulin, tablets, regular tests need to be borne by us. On the other hand, the retirement age is declining in private sector with availability of young talent pool resulting in people getting relieved of their services by age of 50-55 and is expected to decrease further, in future. Essentially, this means that one needs to accumulate a substantial corpus in 20+ years of their active earning life which should help sustain for 25+ years.

Government servants who joined service before 1 Jan 2004 were fortunate enough to be eligible for pension, that is adjusted for inflation. For the rest, retirement planning has to be done meticulously (including the Govt. servants for whom the pension may not be sufficient) so that they can lead an independent life with esteem and not dependant on their children or relatives or friends.

While the retirement corpus number might look daunting, please remember that these are numbers for future and adjusted for inflation. To quote an example, I remember having a plate of Idly in Saravanan Bhavan for about 2 to 3 rupees in late 80’s and if I were told that the same would cost about 40 Rs. in 2019, I would have had an extra plate then thinking that I can afford 3 more rupees and may not be able to afford that high a price in 2019.  But today we continue to consume Idlis paying 40 rupees.

Given the variety of products that are available in the market including Bank and Postal FDs, Senior Citizen Savings Scheme, Post Office Monthly income Scheme, RBI bonds, Corporate FDs, Non-Convertible Debentures (NCDs), Public Provident Fund, Employee Provident Fund, National Pension System, Annuity, Mutual Funds, Direct Equity Investments, it is very much possible to plan and build a portfolio for retirement. It’s just that the planning and accumulation process has to start as early as possible where the money to invest on a periodic basis would be less than try to start late in the game when the monthly investment requirement would be significantly higher.

Most investors want to do today what they should have done yesterday.  - Larry Summers 

<Blog # PenguWIN 1071 – Retirement Planning>

Stay the course, Equities will deliver

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Greetings from PenguWIN:

PenguWIN wishes you a wonderful Vinayagar Chaturthi !!!

Greetings

There is a sense of negativity in the market with investors doubting whether Indian Equities as an asset class has lost its mojo. Returns from lumpsum investments done 3 years ago, SIPs that are 4 to 5 years old are close to zero or even negative.

Will Indian Equities Deliver? The answer is a resounding “Yes”, Stay the course and Equities will deliver. As long as businesses thrive and make profits (Automobile sector woes are a passing phenomenon), you can be rest assured that equity investments will be able to deliver higher returns than any other asset class as picturised below.

Instead of being verbose I have attached charts based on actual data that will help increase your confidence level and conviction in equity. I have picked funds that have a minimum of 10 years history and not the best performers (to make the charts look better)

Highlights

  • 10 Jan 2008 was the all-time high reached by Sensex – 21206. Investment done at this point as Lumpsum is depicted. On 27 Oct 2008 Sensex reached a low of 7697. i.e. 64% down from high on 10 Jan 2008
  • Lumpsum investment of 1 Lakh on 4 Jul 2014 and 10,000/- SIP per month starting Jul 2014
  • Advancing the SIP start date (10K per month) from Jan 2013 instead of Jul 2014.

“When there’s nothing clever to do, it’s a mistake to try to be clever.” Howard Mark

<Blog # PenguWIN 1070 – Stay the course, Equities will deliver>

Navigating Tough Times in Stock Market

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Greetings from PenguWIN:

Most people dislike uncertainty and change. But resilience to these characteristics is what makes a successful investor in Stock Markets.

Reminiscing couple of Buffets Quotes

The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.

Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant”

Yes, things are easier said than done. After seeing returns slowly move up and cross 10% and even close to 20% for investors in the past 5 years (depends on entry point), going down to less than 10% is difficult to digest.

So, what can we do?

  1. Don’t lose sleep by looking at returns on a continuous basis which is dependent on the market and fund manager. Even if we change the fund, there is every chance that the earlier fund manager will do a course correction as everyone makes mistakes, while the new fund might go into a bad phase.
  2. Markets are influenced by too many factors, some logical. Political changes, Foreign Portfolio Investor (FPI) flows, Finance and Commerce ministry policies, Budget and Taxation, GDP, Inflation, sectoral issues (Coal, NBFC) and the list goes on. Again, not in our control.
  3. Time in the market is what is in our control. It has been proven across all markets that consistency of returns increases by time “n”. Also, there is no other legally investable asset class that can match equity returns and it has been proven time and again. If equity returns move down to 12% then the other asset classes will be down further by 4-5%, i.e. 7 to 8% max.
  4. Look at pure equity investments only for financial goals that are 5 years plus in horizon. Once we do that checking whether it has gone down or up in year 3 or 4 does not make sense. Also, given the criticality of a goal, whether negotiable or non-negotiable, do proper planning so that a correction in the last year of the goal erodes your corpus making the goal unviable. If it’s negotiable, then you have the luxury of postponing the goal until you reach the desired corpus
  5. Conviction in equity investing. Every time when the market tanks if you start doubting whether you made a wrong choice of asset class there is no end your misery. Typically one review per year is good enough. If your proportionate allocation to equity is significant, then once in 6 months is fine.

<Blog # PenguWIN 1069 – Navigating Tough Times in Stock Market>