ifw3
TRANSCRIPT
Financial Wellness Program
Managing Financial Challenges Post Retirement
2014
Income
• Pension : Rs 6000 per month
• Retirement Corpus : Rs 40 Lakhs deposit in SBI Fixed deposit– 9% Interest Rs 3,60,000 per
annum– Or Rs 30,000 per month
• Total Income : Rs 36,000 p.m
Expenses
• Rs 30,000 per month
WHERE IS THE PROBLEM?
Income is more than the expenses
WHAT FINANCIAL CHALLENGES ARE YOU ANTICIPATING POST RETIREMENT ?
Sheet 1
Challenge No 1
Inflation
Inflation + lifestyle ?
What is the impact?
Inflation + lifestyle Impact
Year Average Household Monthly Expenses
1920 Re.1
1940 Rs.10
1960 Rs.100
1980 Rs.1000
2000 Rs.10000
2020 Rs. 100000
2040 Rs. 1000000
2060 ????????
Approximate Information, based on Estimates Expenses are going at 12% per annumCII – CAGR of 7.1% + lifestyle expenses like Mobile 3G, car replacement, etc...
Monthly Expenses will double every 6 years
Telephone Calls
Before 2000
5 Calls in Year
After 2000
5 Calls in an Hour
Clothes
Before 2000
Bought only for
After 2000
Bought whenever
Water
Before 2000 After 2000
Challenge No 2
Tax
Tax benefit comparison
Working life
80 C BenefitsEPF DeductionsPPF DeductionsGratuityHRATransport AllowanceLTALoss of Income from House
Property (Interest Paid on housing loan)
Standard Deduction Rs 2.5 Lakh
Retired life
Only Standard Deduction of Rs 3 lakh
Challange No 3
Increase in Discretionary Spending
Discretionary Spending 39% 59%
So many Discounts and offers But, Nothing comes free
All schemes are designed to make you poor
Combined effect
Inflation + Tax + Discretionary Spending
Normal Food, Clothing, Shelter
LuxuryFood, Clothing, Shelter, Car , Vacations
Super Luxury
Food, Clothing, Shelter, Car+ Driver, International Vacations
Year Normal Luxury Super Luxury2014 रु 360,000 रु 720,000 रु 1,440,0002015 रु 385,200 रु 770,400 रु 1,540,8002016 रु 412,164 रु 824,328 रु 1,648,6562017 रु 441,015 रु 882,031 रु 1,764,0622018 रु 471,887 रु 943,773 रु 1,887,5462019 रु 504,919 रु 1,009,837 रु 2,019,6742020 रु 540,263 रु 1,080,526 रु 2,161,0522021 रु 578,081 रु 1,156,163 रु 2,312,3252022 रु 618,547 रु 1,237,094 रु 2,474,1882023 रु 661,845 रु 1,323,691 रु 2,647,3812024 रु 708,174 रु 1,416,349 रु 2,832,6982025 रु 757,747 रु 1,515,493 रु 3,030,9872026 रु 810,789 रु 1,621,578 रु 3,243,1562027 रु 867,544 रु 1,735,088 रु 3,470,1772028 रु 928,272 रु 1,856,545 रु 3,713,0892029 रु 993,251 रु 1,986,503 रु 3,973,0052030 रु 1,062,779 रु 2,125,558 रु 4,251,1162031 रु 1,137,173 रु 2,274,347 रु 4,548,6942032 रु 1,216,776 रु 2,433,551 रु 4,867,1022033 रु 1,301,950 रु 2,603,900 रु 5,207,800
Average Annual Expenses for Retired Couple
Factors to be applied
Non Metro 0.75
Rented Home 1.3
Less than Rs. 5 Lakh Health Insurance
1.1
Example:
Retiring Year : 2015 , Retiring age 60Expected life : 80 years
Annual Expenses : 3,85,200
Corpus required : 20 * 3,85,200= Rs 77,04,000
Assumptions – After retirement : ROI = Inflation, current inflation = 7%
How to Manage
Inflation + Tax + Discretionary Spending
Strategy 1 : Fix your expenses
1. Expenses will increase every year – We can’t do any thing about it
2. Fix the expenses as per the table provided
3. Keep only minimum balance in Savings A/c
4. Set up Auto transfers and deposit only as per your monthly expenses projected
Even if we want to spend less, children/spouse/neighbour/relatives will not allow
Lack of Self ControlMarshmallow Test
Research conducted over 40 years
Kids 6-10 years of age are asked to go to a room
where chocolate is kept and asked to wait for 15
minutes
If they resist 15 min without eating chocolate, they will
get 2
Every Kid wanted to have 2 chocolates
Guess how many walked with 2?
Just 1%
10 years later – same kids who walked away with 2
chocolates – got better grades in the exam
Another 10 years later – they had better jobs
Another 10 years later – they had better investments
What prevents us from being in that 1%
Herd Mentality
Who should I follow ?
My Boss
My Brother-in-Law
My Friend
My Neighbor
My Colleague
My Cousin
What ever is good for them is good for
me too ?
Year Available Expenses Invested Interest2015 7704000 385200 7318800 5123162016 7831116 412164 7418952 5193272017 7938279 441015 7497263 5248082018 8022072 471887 7550185 5285132019 8078698 504919 7573779 5301652020 8103944 540263 7563681 5294582021 8093139 578081 7515057 5260542022 8041111 618547 7422564 5195802023 7942144 661845 7280298 5096212024 7789919 708174 7081745 4957222025 7577467 757747 6819720 4773802026 7297101 810789 6486312 4540422027 6940354 867544 6072809 4250972028 6497906 928272 5569634 3898742029 5959508 993251 4966257 3476382030 5313895 1062779 4251116 2975782031 4548694 1137173 3411520 2388062032 3650327 1216776 2433551 1703492033 2603900 1301950 1301950 911362034 1393086 1393086 0 0
Max Balance to be maintained in Savings A/c for 2015
3,85,200/12 = 32,100
Strategy No 2
Plan for next 20 years and not next 12 months
Case
Monthly Expenses : Rs 20,000
Corpus Available : Rs 35 Lakh
Let’s compare Annual Planning through FD’s and monthly planning through MIS (Bank & Post office)
Interest Rates
FD’s – 9.25% (2 year)
MIS – 8.3%
Cash Flow Statement with Annual Planning using FD’s
Years Monthly expensesCorpus at the beginning of the year
Amount kept for Monthly expenses Amount invested Total Income Taxable income
0 20000 3500000 240000 3260000 309700 59700
1 21400 3569700 256800 3312900 314726 64726
2 22898 3627626 274776 3352850 318521 68521
3 24501 3671370 294010 3377360 320849 70849
4 26216 3698209 314591 3383618 321444 71444
5 28051 3705062 336612 3368449 320003 70003
6 30015 3688452 360175 3328277 316186 66186
7 32116 3644463 385388 3259075 309612 59612
8 34364 3568688 412365 3156323 299851 49851
9 36769 3456174 441230 3014943 286420 36420
10 39343 3301363 472116 2829247 268778 18778
Cash Flow Statement with Annual Planning using MIS
Years Monthly expensesCorpus at the beginning of the year
MIS Investment required to meet expenses
Balance investments in FD Total Income Taxable income
0 20000 3500000 3000000 500000 287500 37500
1 21400 3547500 3210000 337500 288863 38863
2 22898 3579563 3434700 144863 288538 38538
3 24501 3593324 3586000 0 286880 36880
4 26216 3586000 3556000 0 284480 34480
5 28051 3556000 3500000 0 280000 30000
6 30015 3500000 3412000 0 272960 22960
7 32116 3412000
8 34364
9 36769
10 39343
Comparison – By annual planning we will have Rs 2,20,00 more by end of 7th year – almost
equal to 1 year expenses
Hence by annual planning it is possible to stretch the corpus by 2
more years in the next 20 years
Strategy No 3
Consider Post Tax Return on Investment and select Financial Products which are safe and offer higher post tax return with
lesser lock in
Comparison of Financial ProductsProduct Approx Interest Real Interest after Tax
(10% tax bracket)Real Interest after Tax (20 % Tax Bracket)
Real Interest after Tax (30% tax bracket)
Remarks
Bank FD 9.25% 8.35% 7.4% 6.5% Maximum 20 Lakhs to be kept in Bank FD
Company FD 10% 9% 8% 7% If total amount available is Rs 50 lakhs, then keep Rs 20 Lakhs
Post office MIS 8.4% 7.6% 6.72% 5.88% Suitable only for those in 0% Tax bracket
Sr Citizen scheme
9.3% 8.35% 7.4% 6.5% Lock in 5 years, normal FD better
Inflation indexed bonds
Inflation +1.75%
10% Tax to be paid
20% tax to be paid
30% tax to be paid 10 year lock in makes it unattractive
Tax Free Bonds 8.5% 8.5% 8.5% 8.5% 10 year lock in makes it unattractive
Fixed Maturity Plans
8.5%-10% ~8% ~8% ~8% Very attractive for those with more than 50 lakhs corpus because of tax benefits
Understand Return and calculate returns yourselves
If money is doubling – Apply Rule of 72
72
---------------------- = r where n= No. of years taken to double money
n
Why Returns are important?
2014 100000
2022 200000
2030 400000
2038 800000
2014 100000
2020 200000
2026 400000
2032 800000
2038 1600000
Return on Investment – 9%
Years taken to double – 8 years
What happens to Rs 1 lakh investment In 24 years
Return on Investment – 12%
Years taken to double – 6 years
What happens to Rs 1 lakh investment In 24 years
OR
EVERY 3% DECREASE IN RETURN MAKES ONE POORER BY HALF
Every 3% improvement in Return doubles wealth
Interesting Schemes - Ignore
1. Pay Rs 50,000 for 10 years – Get Rs 50,000 for 100 years
2. Pay Rs 5250 per month for 10 years get Rs 10 Lakhs
3. Get Assured return of 12.5%
Tax Slabs
Income (inclusive of Rs 1.5 Lakh in 80C Investments)
Tax Rate Min Tax Max Tax
Upto Rs 4.5 Lakh 0% 0 0
Rs 4.5-6.5 Lakh 10% 10% above Rs 4.5 Lakh
Rs 20000
Rs 6.5 – 11.5 Lakh 20% Rs 20000+ 20% of above Rs 6.5 Lakh
Rs 120000
Above Rs 11.5 Lakh 30% Rs 120000 + 30% of above Rs 11.5 Lakh
Income exceeds Rs 6.5 LakhsInvesting in name of Spouse
and minor children- Interest income will be
clubbed and tax needs to be paid
- Only interest on interest will become tax free
- Cannot give Gift or interest free loan to wife
But investing in the name of Major children will not be clubbed
What income will be taxed?
• Pension Income
• Interest income from FD
• Rental Income
• Income from part time job
• Interest earned from FD invested in Spouse name
Tax Optimizing Investment Pattern
Maximum Savings A/c Balance One Month Expenses (Rs 32,100)
Maximum Balance in Sweep in A/c One Year Expenses (Rs 3,85,200)
Maximum in Fixed Deposits Rs 45 Lakh (0 Tax)
Corpus above Rs 45 Lakhs In Lock in Debt Funds for 3 years (less than 5% tax)
What if I don’t have sufficient corpus ?
Step 1 : Try to reduce expenses
Step 2 : Check if Tax can be reduced further
Step 3 : Take up a part time job
Step : 4 : Use Reverse Mortgage after 75 years of age
Remember, all investments carry a Risk
Even FD’s
Invest only with Nationalised Banks
Financial Products – You may ignoreProduct Pros Cons
ULIP None Unnecessary Deductions towards commissions and Insurance Expenses. After Retirement No Insurance is required
Post Office Savings
No TDS Deductions upfront.
Interest rate lower than bank FD’s
Debt Mutual funds Gives slightly better return over FD’s
Complex Product. In case withdrawal during emergency, there may be a loss
Inflation Index Bonds
Better Tax adjusted return
Will be blocked for long periods and cannot be withdrawn in emergency
Tax Savings Bonds
Better Tax Adjusted return
Will be blocked for long periods and difficult to redeem in emergency
PPF Better tax adjusted return
Will be blocked for long periods and withdrawal not possible
What to do with the Loans ?
Interest on FD – 9%1. If Interest on loan is lesser than 9% - Keep the loan2. If the interest on loan is more than 9% - Pay of the
loan immediately
Also Stay away from
• Real Estate Investments
• Stock Market Investments
• Any New form of Investments– Unless you have started working again after retirement
Is this True ?
Rising Education Cost Best to way fund higher education is
through education loan3 ReasonsInterest Repayment eligible for tax
benefit – Net Interest on Edu Loan : 9%
If bank is not willing to give loan then college is not good
Loan brings more seriousness towards studies
Finally, Govt of India may waive of the interest as they did this year
Rising Health Care Cost
Other important Matters1. Have adequate Health Insurance so that your corpus does not
reduces due Medical expenses
2. Fund your children’s education only through education loan
3. Simplify your life and do all financial transactions online only
4. Consolidate all your financial assets for ease of management
–Max 2 Bank accounts
–Max 5 FD’s
–Analyze Returns on past investments and convert to cash on reaching optimum returns
5. Have a will and update every year.
Keep all your financial information in one Place
Keep it safe at home, known only to spouse, in case of emergency
Update atleast once in a year
Summary
1. Track your expenses growth every year
2. Do Annual Planning for next 20 years
If retirement corpus starts decreasing before 10th Year, consult a Financial Advisor.
Expectation from the Program – What we heard from 3000+ Participants
Where to Invest so that I can get regular monthly income?
How do I know whether I have enough money?
What can I do if fall short of money later in my life?
What are the tax implications on my leave salary compensation ?
How can I save more tax after retirement ?
How to mange my children’s education expenses?
What do I do with my Home loan / Car Loan ?
How to manage health care cost ?
How to control my future expenses ?
Any other Expectations ?
For those who have more than Rs 60 Lakh Corpus
If annual income is more than Rs 6.5 Lakhs – consider Fixed
Maturity Plans
WHAT BANKS DO TO FD’S COLLECTED FROM INVESTORS ?
What Banks do with your money?
Pay 9% interest to you
Lend to others
Home loan – 10.5%
Car loan – 11.5%
Educational Loan : 13%
Personal Loan : 15%
Loan to companies : 16%
Finally, Loan to Govt of India
How much does Govt of India borrow ?
There are other Govt. entities like State Governments, Municipal corporation, Different Govt departments – Health, Education etc ?
From where does Govt of India get Rs 15,000 cr every day?
•Banks
•Insurance
•Mutual Funds
•RBI
Lending Money to Government
•Through Banks (by FD) and Insurance (policies)
–Net return : -1%
•Through Mutual Funds–Fixed Maturity Plans
•Tax is 10% (before indexation) and not 30% as compared to Bank FD
Which is better?
Personal LoanEducation LoanLending to companies
(like Kingfisher)
Lending to Govt
Consider Fixed Maturity Plans if Corpus is more than Rs 60 Lakhs
Case 1 – Invest only in FD
Corpus : Rs 65 Lakhs
Invest all Rs 65 Lakhs in FDInterest earned : Rs 6,17,500
Taxable Income : Rs 2,67,500
Tax on Income : Rs 27,000
Case 2 - Invest in FD and FMP
Invest Rs 37 Lakh in FD and Rs 28 Lakhs in FMP
Interest on Rs 37 Lakh : Rs 3,50,000
Capital Gain on Rs 28 Lakh FMP Investment : Rs 2,52,000 (@9%)
Tax on Interest Income : 0Maximum Tax on capital gain : Rs 11,200
Tax Savings of Rs 16,000/=