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Journalism of Courage
Obviously a lot of you would have guessed what I am implying by Phase II planning. If we see our life we would be able to see two distinct phases viz.,Phase I: The earning and creating phase and Phase II: The reaping and distribution phase.
So if you belong to Phase II or will belong to Phase II soon,this article and series that I am starting would seem more relevant to you.
Ordinarily you may hear; Heres an annuity product that will give you a steady income for as long as you live and when you are no more your family will get this big packet of money. So far so good. Now considering that you need,say Rs 25,000 per month,to live comfortably,how much will you need to put away?
The answer would be something like Rs 50 lakh. That is because your funds will earn about 6 per cent and thus you will get about Rs 3 lakh per annum which is Rs 25,000 per month. While this sounds alright considering one has Rs 50 lakh ready in cash what is the big deal and where is the problem then? Actually,there is not one problem but a multitude of problems.
The problems are such as:
Increasing annuity stream amp; Inflation: In about 10 years time the value of Rs 25,000 will get reduced to 60 per cent considering just 5 per cent inflation. How would you be able to afford life when you are even older? The point is you need to have an increasing income stream. How much should this increase be year after year? Broadly based on your lifestyle and health,but let us say equal to inflation at the minimum.
Contingency Risk: What happens when you need funds for some emergency or wish to help your children or friends or simply take advantage of some opportunity but all your money is locked into a product? If you could withdraw your funds then there will be another problem. Your cash inflows will stop.
Reinvestment Risk: If you redeploy after withdrawing then you may not get the same rate of return as you were enjoying earlier.
Shortage of Funds: Worst case; what if you needed Rs 25,000 to survive comfortably and did not have the Rs 50 lakh corpus needed for that?
Moral of the story: Do not jump into a pension policy blindly. There is a 99 per cent chance that it will be a waste.
The 5 factor formula
First explore if your advisor can help you with the following:
Create an increasing income stream for you; the increase being at least in line with inflation rate.
Ask,how many years will your funds survive? There is quite an obvious risk if you outlive your resources and then at an age of 70 or 80 you dont want to be in a situation where you have to figure out how to manage your money requirements.
Find out if the product/s is flexible enough to allow you to take advantage of opportunities,give you liquidity and flexibility at minimal transaction costs.
Find out,what are the effects of taxation on your strategy?
In case of any medical emergency who and how your funds be managed accessed?
In case of your death how can you ensure that your spouse/children do not suffer and that the funds are distributed in a manner that you would like them to be distributed and enjoyed?
Answers to these questions are so important but most of us tend to overlook this aspect. Financial matters are and can be rather complicated at this stage of life. But the above does not mean that one cannot have a good,healthy and prosperous Phase II of life. For those who are die hard fans of real estate please do not make the mistake that buying properties is going to solve all your problems. They might actually compound your problem.
I leave you with some numbers to dwell upon which will give you an idea of what cash inflows you might require year after year for the next 20 years assuming you are 60 now.
Considering just 7 per cent inflation: Survival support at Rs 25000 per month is equal to Rs 50,000 at age 70,is equal to Rs 69,000 at age 75 and Rs 96,000 at age 80.
I will get back in the subsequent parts of this series with strategies and methodologies to help you sail through Phase II as smoothly as possible.
The author is Director Transcend Consulting
kartiktranscend-india.com
