Can Ghosh achieve the financial freedom he yearns for? Besides retirement, he also has to save for his children’s higher education and marriage. “Financial freedom is when you can sleep easy with the assurance that all your financial goals will be reached,” says Atul Shinghal, Founder and CEO of Scripbox (see interview on page 5).
But it seems that an early start and prudent allocation to growth assets have helped Ghosh amass a sizeable sum that will take care of all his goals. If his equity funds give him annualised returns of 12% and his fixed income investments grow at 8%, he will have close to Rs 5.85 crore at 50. “Part of this would fund my retirement expenses, while the balance will be used for my children’s goals,” says Ghosh.
Not everyone has his financial requirements so well sorted out. “A person may think he can retire at the age of 45-50, but when you look at the financial goals and obligations, the retirement age is closer to 55 year if not 60,” says Shinghal.
Start early to be free
If you also want to be financially free like Ghosh, start saving and investing early. An early start gives your money more time to grow. If you start putting Rs 10,000 a month at the age of 30 in an option that gives 8% compounded annual returns, you will have a corpus of Rs 1.5 crore at 60. If you delay this by 10 years but enhance the monthly investment to Rs 15,000, you would have invested the same Rs 36 lakh but your corpus would be much smaller at Rs 88.64 lakh (see graphic).
Unfortunately, this simple arithmetic is lost on young people, who are busy spending their salaries without bothering to save enough for the future. Hyderabad-based financial planning firm Arthayantra examined the portfolios of more than 2,000 professionals and found that more than 90% don’t start planning for retirement in the first five years of their careers. Even by the 10th year, less than 20% would have a retirement plan in place. Investors start thinking about retirement planning when they are 30-35 years old but the actual process gets implemented only when they are in their 40s.
Retirement planning is not the only thing on the backburner. It’s rare to see a young person who budgets her expenses or keeps a tab on where every rupee is going. Admittedly, today’s 30-40 year olds don’t save because they don’t want to. “This generation hasn’t seen scarcity, uncertainty or unemployment. They have grown up amid economic prosperity and positive growth and therefore, prefers consumption over savings,” writes financial trainer Uma Shashikant.
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Save aggressively
Apart from starting early, you need to put away a substantial amount every month to build a corpus big enough to set you free. A 2012 study by the US based Putnam Research Institute found that fund selection, asset allocation and portfolio rebalancing did not impact the final portfolio as much as the quantum of savings. An investor who simply enhanced the quantum of his savings every year would have a bigger corpus than investors who got into the best performing funds or changed their asset allocation annually. “Investors obsess a little too much about which funds to choose and how to finetune their portfolio. It would be better to put that same effort into enhancing the quantum of those savings,” says Dhirendra Kumar, CEO of mutual fund tracker Value Research.
Ghosh puts away Rs 1.2 lakh in mutual funds and Rs 42,000 in fixed income every month, which is more than 50% of his total income. He also increases the SIP amounts every year in line with the increase in his income. The aggressive savings leave him with very little for discretionary spending, but Ghosh doesn’t mind. “Sometimes I feel bad that I am not able to spend on the things I want. But then the thought of early retirement eases the pain,” he says.
Don’t disregard inflation
One of the biggest impediments in financial freedom is the miscalculation of requirements. DIY investors tend to make this mistake when calculating future needs. Even a moderate 6% inflation can push up monthly expenses to unimaginable levels in the long term. A household that runs on Rs 50,000 per month will need Rs 2.87 lakh in 2051 (see graphic). The milk priced at Rs 50 a litre today will cost nearly Rs 300 and a loaf of bread that costs Rs 35 will have a price tag of Rs 200.
Other expenses might shoot up even more. Healthcare costs are growing at a fast clip of 12-14% and will progressively take more space in your expense basket. Experts say that in the last decade of a person’s life, most of the savings go into healthcare. Unless an individual is financially prepared, he won’t be able to afford quality health care when he needs it most.
Invest in the right option
Starting early and calculating your requirements correctly won’t take you to the magic figure that ensures financial emancipation if you remain a prisoner of poor investing habits. “You need to be investing in the right instruments if you want to build a corpus that can ensure your financial freedom,” says Harshad Chetanwala, Co-Founder of MyWealthGrowth.com, a wealth management firm.
Equities have the potential to give the highest returns in the long term, yet the latest household savings data of the RBI shows that fixed income options (bank deposits, Provident Fund, small savings schemes) account for 53% of total financial savings while equities and mutual funds get a little more than 10%. Even insurance policies get a bigger slice, with almost 18% share in financial household savings. Chetanwala says one should consider how useful an endowment policy will be for meeting one’s goals before buying one.
While investing in the right instruments, don’t forget to take sufficient life cover for yourself and health cover for the entire family. An unforeseen event can send all the financial planning into disarray. Experts say a pure term plan is the best way to insure your life. The cover should be at least 5-6 times your annual income. If there are some outstanding big-ticket debts like a home loan or education loan, take additional cover for them. A comprehensive indemnity floater health plan is a good way to cover your family. Even if you have a group cover from your employer, it is recommended that you buy health insurance separately.
