Tuesday, June 23, 2009

Personal Finance Part 1: Retire Rich

23 June, 2009

Do you want to retire rich? Do you want to retire early? Would you like to be an expert at managing your money?
I know - I know - never ask dumb questions where you know the answers already! If only wishes were horses... Since I think I know your answers to these questions, let me continue.

I presume you know how to earn money - and I also presume you are earning close to what you think is your potential at this point in time in your career. You may or may not be sure of this one, but I am going to proceed on the assumption that you are; since how to earn more is outside the scope of our discussion. How to save more, and how to ensure that your savings grow, are however, very much within the scope. Questions that are seemingly simple - the answers, distinctly not so.

Welcome to the new column in the Fidelity-Newsletter-online-avatar. The column entitled "Perspectives on Personal Financial Planning" (as you might have noticed) will cover topics relating to savings, investments, investment options, types of financial risk, retirement planning, how to evaluate various financial products, how to avoid getting carried away by hype and mis-selling, concepts relating to insurance, and any other related topics that come to mind.

Talking of retirement:
Life spans are getting longer,
Filial bonds, not any stronger,
Medical costs, growing by the day,
Value of money, eroding away!

Job spans are getting shorter,
Ain't no pensions any longer,
Money "safely" stashed away,
Of late, is vanishing away!

A race where goalposts keep shifting,
And the track keeps meandering,
Where shall I keep my little hoard,
And grow it till the end of the road?

You have to plan for getting married, for a house, for children, for their education, for your own pension, and for touring the world - no harm building castles in the air - if and when you manage to retire. Quite apart from that, you need to live life as well. You don't want to reach your retirement and find out that you may have the money, but not the health and enthusiasm, to enjoy all that you had put off for another day! To live life, you need to spend - that's very debatable, but in this context, we'll let that stand - and to retire you need to save. Both, as you can see, are conflicting objectives.

How much money do you need in order to retire? What amount do you need in the bank in cash or investments that can be liquidated, to retire today? You can build complicated financial models that start with putting a span to your life; then think of events that may occur in that span, along with their likely dates. You assume a level of earning, and a level of spending; you assume an inflation rate, and a rate of return on your investments. All of which you project out for the next thirty years - or maybe fifty - discount it back to the present, and arrive at a number. And then take the next few days to recover.

How about a simpler approach? Think of what kind of lifestyle you would want to lead if you retire today. Then think of how much you would need in today's terms to sustain that lifestyle. Let's assume you decide you need Rupees 50,000 per month. That is Rupees six lakhs per annum. Let's assume an interest rate of 6%. You need Rupees one crore in the bank or in liquid assets to earn you six lakhs per annum. But wait a minute. You need to factor in inflation. Let's assume you will save half of your income every month; and this saving will go to add to your hoard constantly. That takes the number to Rupees two crores. What about taxes? Let's add, say, 20% to this number. We then get Rupees 2.4 crores. Remember, all such calculations are supposed to exclude your primary house, the one in which you stay; it obviously assumes that the housing loan is fully paid for.

Run your own numbers. And reflect on it. I'm sure they would be somber reflections. And think about how you would like to make the journey to that kind of financial security. This column will address some of these concerns in every issue.

Happy reflections!

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