An agent or a financial planner

Here is an opportunity to invest R 6 lakh in this fantastic product. Forget the risk and volatility of the markets. Your money is safe,return is secure and everything is tax free. Moreover my advice is free. The financial planning I will do for you is free of charge. Let me focus on your life insurance and retirement planning to start with. You need about 10-20 times of your annual income as life insurance hence let us go with what you are comfortable with.

I suggest R 1.5 crore. This is a beautiful plan. You just invest your R 6 lakh and at the end of 25 years you get R 3 crore tax free. After that,for the rest of your life you get R 2.5 lakh per month income and whenever you die,your capital is given to your dependents.

You cannot lose out on this opportunity. This product may be withdrawn in a few weeks. This is your final chance 8211; you must act now.

Analysis of Advisor Cool

Life insurance could have been R 1.2 crore as well but advisor wanted to capture the entire R 6 lakh as premium and hence recommends R 1.5 crore. No logic for this figure. Very smartly he has not clarified that R 6 lakh is the investment per year for next 25 years. By investing R 6 lakh p.a. for 25 years you can definitely get 3 crores 8211; that8217;s about 4 per cent yield. What is the big deal? If you put your money in a bank deposit or bond fund earning 8 per cent for 25 years,you would get R 5 crore. Mr cool slyly assumes a 10 per cent return on corpus of R 3 crore via fixed deposit. He is using today8217;s rate and telling us that this rate will be available after 25 years as well and will continue till you live.

Financially all this is so bizarre. What about tax to be paid?

Normally we do not check or analyse all this. We just feel fantastic about R 3 crore. It8217;s a dream and because we do not have it we seem enamoured and want to buy before it8217;s off the shelf.

Advisor Smart

Let8217;s see how the other advisor operates. You earn R 12 lakh which is net but that means you actually earn about R 18 lakh p.a. and hence let us start with income tax calculations and your IT return. Let8217;s see if you tax planning is alright. I understand that current cash surplus is about R 6 lakh right now and R 50,000 on a monthly ongoing basis. Before we get into real planning,lets put aside some money for emergencies,healthcare needs and other contingencies. Then let8217;s fix insurance on your home,assets and other valuable belongings. Once this is all done now let8217;s get to the core of real financial planning. Let us start with financial priorities,and then talk about immediate,short,medium term and long term goals. I recommend that you consider addressing critical or high priority financial goals irrespective of time retirement,children8217;s education,health care,liability management before you plan for buying a car,investing into holiday resort and other luxury/ lifestyle goals. For each goad I need to do many calculations and answer many questions. Let8217;s take retirement for example; to maintain same standard of living,assuming 7 per cent inflation and say 30 per cent tax,how much will you need when you are 60? Inflation and tax will continue after your retirement too. Hence,you need your annual cashflow to rise by about 7 per cent inflation each year. How much corpus do you need then? We need to asses this need each year. Likewise we need to assess each goal each year. No single product can fix your planning. We need to make a strategy and then have a portfolio for each goal. All this will take time and will cost you a good amount in fees but it8217;s worth it. This is an appropriate way to address personal finance. Does that make sense?

Now it is up to you to decide whether you want to be cool or smart?

Author is Director,Transcend Consulting
kartiktranscend-india.com