Retirement Planning for Senior Citizens| RetyrSmart



Importance of Well Being and Finance
RetyrSmart

In the evening or perhaps autumn of our years, finances and well-being, though not necessarily in that order, become very important.

This article will focus on finance whilst in the next, I will write about well-being, more particularly my thoughts on it.

First our Finances

With the explosion of information, not necessarily knowledge, let alone wisdom, there is too much of an overload on all of us, so much so decision becomes very difficult and things confusing.

It reminds one of Rajesh Khanna's immortal words in the late, great Hrishikesh Mukherjee's Film Bawarchi, "It is simple to be happy, but difficult to be simple"!

Simple Goals

Our goals are pretty much simple: we all want a steady stream of income, protection of our assets (invested in whichever form - about which I will come to a little later) and some appreciation/value increase in our assets to provide for inflation and for contingencies.

Lots of confusing alternatives thrown at us every day

To achieve our simple goals, the means seemingly become difficult (akin to Arjun having to look at the reflection below and hit the rotating fish right at the top) with various options:

@ Equity Shares: To confuse further, classified into large cap, mid cap, small cap etc.

@ Debentures or Bonds: Secured or unsecured, fixed interest rate or floating interest rate

@ Mutual Funds: Equity (again Large cap Fund, Mid Cap, Small Cap, Multicap etc), Balanced, Debt (further split into Gilts or Government Securities, Long Term, Medium Term, Short Term, Liquid etc and further based upon Credit Risk parameters).

@ Derivatives: Options and Futures and their own variants

@ Bank Fixed Deposits, NSC, PPF etc.

I have consciously restricted myself to financial assets and not to physical assets such as gold, real estate etc.

In my view, there are three key factors to be taken care of, more so as we go older:

1. Strategic Asset Allocation

2. Financial Housekeeping

3. Will writing

Strategic Asset Allocation:

In the medium to long term, the return on investments pretty much solely DEPENDS upon the asset class (broadly, equity or debt) and not on whether the investment is in specific shares (say, Infosys or HDFC Bank, Tata Steel, Reliance etc) or specific bonds or debentures.

In the long run (taking an investment horizon of around 15 years), equities in India have given a return in the region of 13-16% per annum while interest rates on Bank Deposits, Debentures etc have averaged around 7-9% per annum. While the difference may look like only 6-7%, it is per annum and on a compounded basis, works out to be quite substantial.

Therefore, a safety first person would have got a return of around 7-9% per annum, while an investor who believes in equities a much higher return of 13-16% per annum.

In the long run, it is Strategic Asset Allocation that decides the return, capital appreciation etc and NOT specific shares, timing of investment and so on and so forth.

And any period of 15 continuous years of investment in equities, have fetched returns of this magnitude (13-16% per annum) without any period of loss whatsoever! Therefore, there is volatility in short periods, but in the long run, they get smoothened out.

Rule of Thumb:

The typical rule of Thumb earlier used was 80 minus one's age in equity shares. Nowadays, some people take into consideration 100 less one's age in equity shares.

The sound logic in this is that assuming one expects to live till the age of 80 years, a younger person has a longer time for his equity shares to fetch handsome returns.

The older the person grows, it is but natural for a person to give safety the priority as there is volatility in equity shares in the short run, with prices moving up and down and wild swings at that.

One other golden rule:

Only invest in instruments which you understand. And I am not alone in saying this. The legendary investor Warren Buffet continues to believe in this and only invests in businesses he understands. Remember the KISS adage: keep it simple, stupid!

Note:

For equities, I have considered the BSE Sensex, the Index of the Shares of the 30 biggest companies, which has the longest period of existence. This in many ways is a good representative sample or proxy for the entire market. Whilst it got launched in 1985, the data has been considered from 1st April 1979. Over the years, the composition of the index has undergone changes based upon which are the 30 biggest companies with changes in the economy. Over the years, India has seen breathtaking changes – assassination of two Prime Ministers, the financial crisis of 1991, minority governments, 1998 East Asian crisis, 9/11 in the US and the consequent severe impact in the global financial markets, the 2008 financial crisis etc. In spite of all these, those who have stayed INVESTED have got a steady return of 13-16% per annum. This is primarily growth in nominal GDP of India plus the efficiency of the companies. For instance, GDP is slated to grow at 6-7%. Adding inflation of 3%, it means a growth in the index of 10% plus the efficiency of the companies.

Financial Housekeeping

One of the most ignored, albeit very important, indeed essential part of financial well-being is financial housekeeping.

Starting with one's bank account statements, it goes through the entire gamut of demat accounts, mutual fund statements, bank fixed deposit/NSC receipts. Any shares still in physical mode that need to be dematted.

As a general rule, all bank accounts, investments in shares, mutual funds etc should be in joint accounts with one's spouse, children etc. Nomination, if any, needs to be registered with the Bank, Companies, Registrars so that after one passes away, our spouse and children do not have any problems whatsoever.

Writing of Will

Whilst having investments in joint account (including apartments with nomination registered by the Cooperative Housing Society where one lives) is essential, writing of will is of paramount importance to ensure that one's hard earned assets are distributed in the way we would like them to be done.

Many of us ignore or fail to do this and leave unnecessary hassles for our spouse and children.

Conclusion

As I mentioned right in the beginning of the article, three simple, golden rules:

@ Strategic Asset Allocation: proportion of debt and equity in our investments

@ Financial Housekeeping

@ Writing of Will.

Scrupulously adhering to these three mantras are all that is required for one's financial well-being and getting good sleep!

 

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