financial planning

Annuity – When is it a good investment choice?

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Annuity

What is an annuity?

An annuity is a solution for post-retirement income. How it works is simple. You invest a fixed initial amount and in return you get a lifetime of assured income.

When you buy an annuity, you get

  • an assured income
  • lifelong income (pension)
  • no risk income
  • no hassle income
  • no bother about investment options, advisors, rebalancing, etc.

Take an example.

You are 60 and you need an assured Rs. 50,000 per month to meet your post retirement expenses. If you want an assured income of Rs. 6 lakhs a year, then you simply buy an annuity for approx. Rs. 75 lakhs, as a one-time payment. (Estimates based on an immediate annuity plan of a private insurer)

You don’t have to bother at all. No money management hassles, no investment selection, no dealing with bankers or advisors and collecting cheques from various investments.

The annuity provider will transfer the amount to you every month/year as per the frequency you choose.

An annuity ensures that you earn an income for the rest of your life.

But is it all that good? Not really. 

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Saving for Child’s Education – Is it enough?

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Saving for Child's Education - Calculator

In my recent workshop in Gurgaon, one of the topics that came up for discussion was “child’s education”.

One of the participants, let’s call him Ashok, mentioned that he pays Rs. 25,000 a month as fee of the school where her daughter studies.

It ensued a debate on how education expenses have risen dramatically over the past 10 to 15 years.

Ashok himself incurred only about Rs. 1 lac to complete his engineering – 20 years ago though.

Yet another participant mentioned that he spent just about Rs. 2 lacs as fee for his engineering and MBA.

I couldn’t resist mentioning that my own MBA – all tuition, lodging, travel and fun expenses included was completed in less than Rs. 1.5 lacs.

In fact, my entire year school expenses including fee in Class 10 was Rs. 10,000 only. This is a far cry from the fee of Rs.25,000 a month that Ashok pays for his daughter.

Of course in all these cases, the people went to Government funded and subsidised institutions, which charged only a nominal fee.

Times have changed though. The government institution doesn’t cut it any more.

As a parent, the one thing that you want to prepare your child for is to be ready for life in the best way possible. You want to equip her with the necessary skills and knowledge. You want the child to have an exposure that enables her do her best in life. You want her to stand on her own feet.

There’s a new breed of educational institutions (Schools, Colleges, Universities) that promise the fulfilment of these conditions.

You want the best for your child. Period.

However, what does it mean to you in terms of money? How much would you need to invest for your child’s education?

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How much will you need to Retire? Updated Calculator with 9 scenarios

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Retirement Planning Calculator

For all the financial savviness that one might have, numbers still find a way to stump us.

This is what exactly happened with Vaibhav.

“You will need Rs. 25 crores as your retirement fund.” I announced to him after inputting the numbers in the retirement planning calculator. I was working with him on his financial plan.

“What! Really?” was his instant reaction.

“Yes. Why do you seem so surprised? Did you have something else in mind?”

“Well, I had done some back of the envelope numbers for my retirement. But this one is way off what I had got.”

“Hmm. What did you factor in as post retirement inflation and rate of return?”

“Well, I took more aggressive numbers – higher rate of return and lower inflation. Though I understand that it may not be the right thing to do. I also see that my life expectancy assumption at 80 is lower.”

“Yes, that’s a big mistake one can make. My question always is “what if you lived longer?”

“You are right. It’s better to plan for a longer life. Anyways, I guess I now know what I have to prepare for.”

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Retirement Planning Calculator – revised

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Retirement Planning Calculator

Good planning depends on two things:

  1. To have a goal
  2. To establish a path to reach that goal.

Financial Planning is no different.

Once you zero down on your goals, you need to know what would it take to reach that goal and build an action plan.

One of such goals that everyone plans for is Retirement, or a more modern phrase, Financial Freedom.

Call it by any name (not quoting Shakespeare here), the purpose is the same – to know, how can you retire / achieve financial freedom as soon as possible.

Let’s use our retirement planning calculator to figure this out.

The Retirement Planning Calculator

Few months ago, I had shared with you an Excel-based retirement planning calculator. To say the least, it was a little simplistic. It only told you a constant amount that you need to invest every month.

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What if you lived longer?

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What if you lived longer? retirement planning

“I want to retire at 50” Dinesh announced, “and then just enjoy life – reading, cooking, writing, everything that I always wanted to do.”

“That sounds like a plan Dinesh. But are you ready to do it?”

“Means?”

“I mean, are you financially ready to retire at 50?”

“I guess so. I am saving up enough that I can live carefree till 70.”

“How do you know you will live only till 70?” I paused. “What if you lived longer?”

“Well, no one in my family has lived beyond that age”, he winked at me. “Plus, isn’t that the normal life expectancy of a urban male in India”, he turned the screen of his smartphone towards me. The Census of India site confirmed the life expectancy number. I took his phone and read further.

“Do you notice here that the life expectancy has been continuously increasing over the years? There is a fair chance that you could go on to live till 80, 90 or even 100.”

“I don’t want to live that long.”

“I am not saying you have to. I am saying you may. In that case, will you have enough money to take care of you and your wife?”

This got Dinesh thinking. After a couple of minutes, he replied, “I don’t know.”

He looked at me and said, “You tell me. What would it take?”

What if you lived longer?

I had just been working on retirement planning for various life expectancy numbers. I opened my laptop and turned the screen towards him.

“Here, see this.”

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Financial Goals – What gets measured, gets done

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Financial Goals

“What gets measured, gets managed“, is a quote often attributed to the renowned management guru, Peter Drucker.

A slightly different version of it says “What gets measured gets done”.

I will let you pause here for a few moments and reflect on these words.

…

…

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Done?

Great!

I am sure as executives, professionals and business persons who have to manage teams, projects, businesses and P&Ls, you have come to hold these words as a mantra.

In any of the roles, you work towards a certain goal – a definite reaching point that involves use of time, effort and resources. A goal sets everything in motion in a particular direction

Now the simple point is unless you measure, you will not know how far have you reached, what has been the result of the efforts and what corrective actions need to be taken so that you make the right progress towards the goal.

Makes sense?

Personal Financial Goals – what gets measured, gets done

But is that an approach you apply to your personal life as well, say your health, your financial goals and investments? 

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