INDIVIDUALS & FAMILIES
So far, the industry focuses on “Which fund / investment is right for you?”.
At IME, our question is “What do you want from your life and when would you like to achieve it? What will free you from your worries?”
Desires and goals differ from person to person. The usual life goals people need to plan for are broadly retirement, home purchase, a contingency fund, a piggybank fund, and for those who have children – education, marriage and a corpus for your kids.
A financial plan is not just about where to invest your money. A financial plan is a way for you to be able to plan to achieve what you want and need from your life. While from a technical perspective, this means we will find the right investment category and asset class that fits your needs, what it actually means is that we make your money for you.
At IME Capital, we help families and individuals plan their future goals, after a careful understanding of your risk profile, investment beliefs and level of investment knowledge.
We stress on the importance of financial planning because it is important to:
- Have clear visibility of the amount of money you require through different stages of life
- Helps you get a better sense of your true investment horizon
- Identify the right investment options for each goal keeping in mind your liquidity requirements and risk tolerance.
A Typical Life Path
A majority of people have usually made some investments, but haven’t always taken a larger financial plan into consideration and this can lead to the following common life path / trajectory:
Financial complacency (Ages 30-45): this is the stage where income is higher than expenses, and larger life goals feel a long time away.
Financial pressure (Ages 45-60): It is at this time that most people start to put together funds for their children’s education or marriage, while also realising that retirement is not far away.
Financial stress (Ages 60+): Many families under-fund their retirement corpus, leading to them having to rely on inheritance, money from their children or downgrading their lifestyle.
Challenges And Solutions
There are a few things people don’t take into account that lead to financial stress but there are ways to work around them.
Problem: The Lumpiness of Core Life Goals
Income & expenses for families do not move at the same pace. There are certain expenses related to core life goals (retirement, child’s education, home purchase) that are very large and lumpy; they tend to all come to a head at the same time. This leads to families having to make major compromises at later years of their life.
Solution: Systematic Investing
We work around this by investing a small amount every month. This plan can be made after we work out your investment mandate.
Problem – Underestimating inflation
The same annual expenditure of Rs. 20 lakhs today, will cost you Rs. 40 lakhs in 10 years, Rs. 80 lakhs in 20 years and Rs. 1.6 cr in 30 years.
Solution: Making your money work for you.
The only way to mitigate the impact of inflation, is to use the power of compounding in your favour. With smart and careful planning, you can save yourself from a lot of pressure. For instance, an investment of Rs. 20 lakhs in equity today (earning 15% p.a.), will be worth Rs. 80 lakhs (10 years), 3.2 cr (20 years) and Rs.12.8 cr (30 years).
FAQs
The amount you require for your retirement corpus, is likely to overshadow any other expense that you have in life. It is important to understand, that your retirement corpus will need to meet an elevated level of expenses (due to inflation), for almost 20 to 30 years.
All you need to calculate your retirement corpus are 3 key numbers – (a) your current annual expenses (b) your planned retirement age (c) your expected lifespan.
There are a few things to keep in mind while planning your retirement corpus:
Getting the right estimate of your current annual expenses
Many people make the mistake of relying on simplified online calculators (that add up various components of monthly expenses to arrive at your annual expenses). When we have analysed existing financial plans of clients, we have typically found that many people significantly under-estimate their actual level of expenses.
This is because it is easy to forget to include the non-monthly lumpy expenses that take place through the year. This includes travel, special occasions, gadget purchases, periodic changes of cars etc.
The best method: is not to try to estimate how much you spend, but to calculate what you spend in reality. The easiest way to do this, is to take your annual post-tax income and reduce the amount you actually saved last year. If you do choose to estimate your requirements, it is best to do this with a trained consultant who can ensure that you are not leaving out any important expenses that may skip your mind.
Understanding your post-retirement lifestyle
Every person has different needs post-retirement. Some people choose to simplify their life, move to a smaller city and sharply reduce their expenditure.
For others (especially those that have the financial means), retirement throws open a number of lifestyle choices that are simply not possible while you are working. If you have the money, you have the luxury of taking extended international holidays, to spend more on leisure & entertainment and invest more on your hobbies & interests.
This is a lifestyle choice which differs from person to person. You need to think this through, to estimate whether your current level of annual expenses is adequate (or lower/higher) than what you would need to meet your desired post-retirement lifestyle.
You should remember the number
Once you have calculated your retirement corpus, this is a number that you should commit to memory. At any time, you should be able to answer (I need Rs___ cr as a retirement corpus).
This is important as it helps you stay motivated and committed through your investment plan.
The amount you require for your retirement corpus, is likely to overshadow any other expense that you have in life. It is important to understand, that your retirement corpus will need to meet an elevated level of expenses (due to inflation), for almost 20 to 30 years.
All you need to calculate your retirement corpus are 3 key numbers – (a) your current annual expenses (b) your planned retirement age (c) your expected lifespan.
There are a few things to keep in mind while planning your retirement corpus:
Getting the right estimate of your current annual expenses
Many people make the mistake of relying on simplified online calculators (that add up various components of monthly expenses to arrive at your annual expenses). When we have analysed existing financial plans of clients, we have typically found that many people significantly under-estimate their actual level of expenses.
This is because it is easy to forget to include the non-monthly lumpy expenses that take place through the year. This includes travel, special occasions, gadget purchases, periodic changes of cars etc.
The best method: is not to try to estimate how much you spend, but to calculate what you spend in reality. The easiest way to do this, is to take your annual post-tax income and reduce the amount you actually saved last year. If you do choose to estimate your requirements, it is best to do this with a trained consultant who can ensure that you are not leaving out any important expenses that may skip your mind.
Understanding your post-retirement lifestyle
Every person has different needs post-retirement. Some people choose to simplify their life, move to a smaller city and sharply reduce their expenditure.
For others (especially those that have the financial means), retirement throws open a number of lifestyle choices that are simply not possible while you are working. If you have the money, you have the luxury of taking extended international holidays, to spend more on leisure & entertainment and invest more on your hobbies & interests.
This is a lifestyle choice which differs from person to person. You need to think this through, to estimate whether your current level of annual expenses is adequate (or lower/higher) than what you would need to meet your desired post-retirement lifestyle.
You should remember the number
Once you have calculated your retirement corpus, this is a number that you should commit to memory. At any time, you should be able to answer (I need Rs___ cr as a retirement corpus).
This is important as it helps you stay motivated and committed through your investment plan.
How do you plan for something, when you don’t know what that something is? When your child is young, you have no clue whether he/she would want to be an engineer, a doctor, an artist, a sportsmen, a businessman or a fire-fighter.
The simple answer is, you don’t know and by the time you do, it will be too late to do anything about it if you have not planned in advance.
The only thing you can do as a parent, is to be prepared for any reasonable eventuality that fits within your budget. Perhaps you have planned to fund an Ivy League MBA, but your kid drops out of college to start a business instead – the money you saved could be used to buy a vacation home, boost your retirement corpus or help provide starting capital for your child’s venture. It is a lot better than planning for your kid to drop out and then having to pay for an Ivy League MBA with expensive credit card debt.
Given the very wide range of education options available, there is no one right number to aim for when it comes to funding your child’s education. However, our research has indicated that the annual cost of a top ranking school in the US can cost upto Rs. 100 lakhs a year (i.e. Rs. 2 cr for post graduate / Rs. 6 cr for undergraduate & post grad).
This is at the upper end of cost (top schools in the US with no scholarship), but can be used as a benchmark for you to estimate a number that you would like to target.
Many investor’s make the mistake of investing for their child’s education (or other requirements), by investing directly in the child’s name. We typically recommend against doing so!
It is important to understand that any investment held in your child’s name, is their money the moment they turn 18. As a guardian, you no longer have any control over how that money is spent.
You may have saved up for your child’s education, but if the investment is in his/her name there is nothing that you can do if you child desires to spend this money to buy a car, take an international vacation or anything else that he/she wants to use the money for.
Instead, we recommend having a clearly demarcated fund (in your individual name) that you know is kept aside for your child’s education, and is not to be used for anything else.
A piggybank fund is simply a low-risk liquid debt fund, that you can use as your piggybank. You can use this fund to keep making small investments/withdrawals to help you plan for any specific larger & lumpy consumption expenses in the near-term.
For example, piggybank funds can be used to help fund your vacations, save up for a new phone/bike/car, go on an extravagant shopping spreed, plan for a special occasion etc.
It’s a handy way to set some money aside, that is easy to draw upon whenever some larger expenses come around.
A contingency fund is some money that you set aside in low-risk debt funds, that can be used to meet any unplanned sudden large expenses. Contingency funds can be used to fund medical emergencies, help meet expenses in case of a loss of your job or any other such unexpected contingencies.
The benefit of a contingency fund, is that you have an ability to meet any unexpected expenses without having to draw upon your longer-term savings (this can help prevent you from being forced to redeem equity, when markets may be weak).
There are a few things to keep in mind while planning a contingency fund:
- 3-6 months of expenses: A good benchmark for how much to set aside as a contingency fund.
- A separate fund: This is a fund that you never touch for any other expense, apart from meeting unplanned contingencies
From a financial planning perspective, you need to keep the following in mind while planning for a home purchase:
- Plan for your own contribution: in case you are taking a loan, your own contribution would include the downpayment, registration/brokerage/stamp duty charges and the cost of home interiors
- Important to consider the impact of EMI’s on your financial plan: buying a house too early in life (when your income is still at a lower level), may lead to very little amount left to invest after paying off your EMI’s. This reduces your ability to take advantage of the power of compounding, leading to your having to invest substantially more to meet your other goals.
- Keep in mind your LT financial plan while deciding on the budget for your home: many people make the mistake of stretching their budgets to buy a home (since for most this is a once-in-a-lifetime purchase), and not considering the impact going above budget would have on their ability to invest for their other core life goals.
Your financial plan is customised to your unique requirements. Any specific larger expense that you need to plan for can be included as part of your financial plan. This could include
- the purchase of a vacation home/farm
- the purchase of a car (or a yatch!)
- saving for milestone events
- planning an inheritance you wish to leave for your children
- anything else that you wish to save up for
Systematic Investment Plans (SIPs) are very valuable to help reduce the impact of market volatility while investing in equities. However a well-planned financial plan can fail to achieve it’s objectives, if the markets happen to have a sharp correction at the time when you need the money.
This is why Systematic Withdrawal Plans (SWPs) or Systematic Transfer Plans (STPs), are as important as SIPs for your financial plan. Instead of redeeming the money at one-go, it is recommended that you start to systematically transfer your money away from equity and into lower-risk debt funds, a few years prior to your goal date.
This helps ensure that you are not exposed to a sudden sharp correction in the markets, when you require your funds.