How much money do i need for my retirement

This is a recurring question one encounters many times in life.

The answer is not straight forward. To answer this many aspects need to be considered.

1. When one wants to retire and how many more years one needs to survive with the corpus. With increasing life expectancy and increasing living costs, one needs to consider this aspects very carefully. Hence it is better to take higher life expectancy and a reasonable factor of living expenses. If I want to retire at 50, one may be better off considering 35-40 years of remaining life and 6-7% annual inflation. However, this is subjectively.

2. What is the status of living one wants to maintain. The higher the status of living, the higher the expenses and higher the corpus should be.

3. What are the responsibilities one has to take care off. One needs to take care of children to some extent. However, this level may vary. For boys, one has to foot the bill for their studies and bring them up to some level(till 25 years). For girls it may be marriage. But it will be useful if one makes children independent and train them to be on their own from the beginning. This will reduce expectation that my parents will give me this much money etc.

4. External factors like inflation and rates etc. Though one is not directly in control of these aspects, one can understand and prepare for these. This will help them by giving necessary grounding to weather these changes.

After going through the above, it may feel that one can never retire. But with some discipline, one can get enough corpus and optimize one's expenses so that one can retire peacefully at 60 at least.

Is frugalism only way to wealth creation

I recently came up on a discussion group where the above point was being debated. Is frugalism only way to build wealth or if one builds wealth for the first 30 years or so of one’s working life, whether one will have enough time to enjoy life?

These are pertinent questions.

It is true that one has to enjoy one’s wealth. There are no two thoughts about it. But in this world of uncertainty, one needs to plan from the beginning to generate enough corpus to sustain one throughout life. Now, how much does one needs for this. Lets take a rough estimate.

In this calculation, there are few important items. Current expenses, time and estimated inflation. Inflation as all are aware, is the rate of increase of prices and is normally expressed on a yearly basis. That means purchasing power of money will reduce at that rate for an year.  Now if  monthly expenses of normal household is Rs 30000 per month and inflation is 7% on an average, the expenses after say 25 years will be about 19.5 lakhs. That means, one needs to have a corpus, which can generate a sum of about 20 lakhs per year after 25 years. That means one need a corpus of about 2 crores @10% interest rate to meet his expenses requirement.

Yes, it is a big corpus. Also, expenses may decrease after children grow old and start earning for themselves. Considering these aspects, the corpus may be brought down somewhat. However, the future is unknown. There can be unexpected expenses like medical costs or some amount required by a child.

Now accumulating this money is a daunting task. But the time will come to our rescue. If one plans religiously from an early age, it is not so big  corpus. But if one delays, the effort required will be much higher.

There is one more aspect here. It may be possible that one stops a regular paying job and pursue an activity of one’s choice. It may or may not pay at the level of current regular job. But to pursue, one needs to have a corpus to fall back on in case of any necessity.  

Another aspect which can be thought of can be family responsibility, in case something happens to the bread earner. Normally many do not people consider this as a requirement. There is a psychological phenomenon called ”Survival ship bias”. One tends to think that as I didn’t meet with an accident till date, I will never meet an accident. This is illogical and one should plan for eventualities.

Thus, frugality is required to take care of one’s future responsibilities and aspirations. Hence it is advisable to start early and create a corpus.

Once a person understands the need for it, it may be easier to embrace the concept and succeed.

Less known ways to manage Income tax India

I was searching for some ways to manage my taxes and I found some  ways to manage my taxes.

These are not routine ones that’s why I wanted to list them so that others can benefit. All these come with points to be kept in mind, before using.

HUF

(Hindu Undivided Family) This is specific to Hindus. A married person can create a HUF and can receive Rs 50000 max as gifts per year into it in the form of gifts.

The process to open a HUF is as follows

Get a PAN card. For this one can apply online with relevant proofs. Card will be sent directly by post by NSDL.

Karta should get a Stamp made stating that he is the Karta of the HUF. He has to use this any time he transacts in the name of HUF.

Then open an account in the name of HUF in any bank. Then route the gifts into that account. The money can be invested similar to any other person.

Karta Can also take loan for any purpose with valid proof and manage such funds.  Also any ancestral property can be kept under HUF and the income can be accounted under HUF.
Advantage with HUF is additional PAN card which helps in reducing tax out go.

Gifts from Relatives

Gifts from blood relatives are tax free in the hands of receiver. Thus, if one takes gifts from parent brothers etc, if one maintains proof, the gift money can be shown to be tax free.

Adult children

Adult children can be used as a good tax saving tool. In fact, with proper management, an adult son/daughter can act as an earning member even if she/he is not earning. Gift some money to them and get it invested in their name. Thus one can get tax advantage and also one can initiate adult son into the wonderful world of finance.

There is one more issue here. Adult in Indian context is one who completed 18 years. For income tax purpose, even if one is becoming adult, he will be treated as adult for that whole year. Thus if one is completing 18 by say Feb 28, he can get money and act as an adult from April 1^st onwards. This can be used by a parent for managing tax.

Parents

If parents are not in taxable limit, this also can be taken advantage by gifting them and investing on their behalf. Online banking facility will further ease the process.

Will update this list in a future post.

Art of wealth creation

In a wealth creation journey, different people will be at different places. A young person who joined a job newly is at the beginning. Middle aged person should be anywhere from beginning to the end. Only the person knows at what position one is in. One has to understand this first.

Then comes the requirements/goals. What are the objectives for which one is saving or creating wealth. The answer that easily comes to the mind is retirement. There can be/ will be some more goals one feels one is responsible. These are to be identified. Of these, retirement corpus is sacrosanct. One should plan to get reasonable corpus to see him through his retirement.

What is the corpus required for this? A reasonable estimate will be about 15 times annual current income. However, one has to estimate for himself and plan for the corpus. It will be better to err on the higher side. This is because the costs are continuously increasing and having a higher corpus will not hurt.  

Next step is to find the resources. First will be the salary surplus. Salary surplus is the amount left over after all expenses. However, it will be better if one controls expenses to the extent possible and maximizes the surplus so that the same can be channelized to wealth. As retirement corpus/goal amounts are generally big, one needs to channelize the maximum possible to meet the goal at the earliest.

For reduction in expenses, one needs to re-look at the expense sheet for a month and see if some of the expenses can be reduced or eliminated. It is a worthwhile exercise as one comes to know what all the expenses one is incurring in the first place. First step is identification and second step is follow through, to increase the monthly investible surplus.

Once this surplus is obtained, one has to plan for security first. Some contingency fund is required to see one through difficult times. This can be equal to 3-6 months of expenses and stored safely.

Then comes insurance. If the earning person is single, there is no need for insurance. But if one supports a family, insurance will help securing the income source of the family. Also, insurance amount is to be sufficiently large to see the family through a reasonable time.

After meeting these 2 requirements, one can start channeling balance surplus to investments.
There are various ways of investing, depending on the risk appetite.

Will post my thoughts on this, in another post.

Public Provident Fund or PPF

This is an interesting and useful wealth creation instrument. Any Indian citizen (an individual and not HUF) can open a HUF account in post office or some recognized banks. A PPF account can be opened as soon as a child is born. Currently (2014-15), per person limit is Rs 1.5 Lakhs. The limit ideally is per person (including all his dependent minor children). But in banks or post office, they are not checking this rigorously. Hence, if one has 2 dependent minor children, he will not be objected to invent (deposit) 4.5 lakhs (1.5 for self + 1.5 for either minor children).

However, for income tax rebate, only Rs 1.5 Lakhs is considered.

As per rule, if one deposits more than 1.5 lakhs, there will be no interest for the additional amount.

The attractiveness of PPF is its EEE concept, it is exempt from tax at the time of deposit(in the year or deposit), during the growth phase(when the corpus is earning interest) and when the account matures and the subscriber withdraws the amount.

However there are some conditions. The account is open for 15 years (There are rumors that the period may be increased to 20 years with higher rate). The amount cannot be fully withdrawn before 7^th year after which some partial withdrawals are allowed. In post office one has to go physically and deposit and in banks one can use account transfer. One has to keep depositing at least Rs 500 per year for the tenure of the account.

After completion of 15 years one can withdraw the money entirely or extend the account for a period of 5 years. This 5 years extension can be done any times subsequently.

The interest rate is yearly announced and is reasonable. Many other details can be had from the following wiki entry.

http://en.wikipedia.org/wiki/Public_Provident_Fund_(India)

If one is looking for a steady risk free income, this is a good instrument to be considered. Also this can be used even if one is having employee provident fund account. Also, 15 year lock in creates some discipline and help compounding to take place. Also this is the only instrument which gives such return over a long period.

Hindu Undivided Family or HUF

Hindu Undivided Family or HUF is a legal entity. It comes into existence when one marries and starts a family. A HUF consists of husband wife and their children. Husband is called Karta of the HUF. He looks after the affairs of the HUF. Other family members are called coparceners.

This can be used as a tool for wealth creation and wealth preservation. HUF can do this by reducing the taxes, if properly used.

For tax purpose, HUF is a separate entity.

As indicated, HUF comes into existence when one marries. HUF can acquire assets in various ways. Main one of them is through a will or inheritance. For example, a grad father can bequeath a house to the HUF of son or grand son. When this is done, such gift belongs to all coparceners and all the coparceners have a right on HUF assets or income arising out of them.

There is an interesting and detailed post on this in Jagoinvesotr blog. One can see that by clicking the following link.

http://www.jagoinvestor.com/2011/10/huf-creation-and-saving-tax.html

As indicated, HUF is a separate legal and tax entity.

Procedure to create HUF

One has to apply for a PAN card for his HUF. One can apply online on NSDL site for a HUF PAN card. But a copy of signed application along with document proofs as specified in their website are to be sent as advised on the website. Aftert his, PAN card will be home delivered in 1-2 weeks time.
Then with this pan card and necessary address proofs, one can open an account for his HUF in  a bank.

Managing HUF

A person opening HUF account will be Karta of the HUF. When Karta is signing on behalf of HUF, he has to necessarily stamp stating that he is Karta.
One needs to take precautions while getting assets and funds for HUF. One(any of the co parcenors) should not gift/donate funds to his HUF. HUF cannot take any gifts >50000(total value for year).
However, (karta on behalf of) HUF can borrow from others and invest these monies nd pay interest to the lenders.

HUF corpus can be invested by Karta for better returns. On HUF FDs Karta can give form 15H to avoid TDS, if HUF income is within taxable limits.
Some ideas to invest through HUF.

1.      Get 50000 every year and build up an investible corpus

2.      Borrow from relatives and invest in avenues as per risk appetite. Pay reasonable interest and retain the differential.

3.      HUF can invest in 80C instruments and get additional tax rebate for HUF corpus.

As one explores, one can get many more options based on one’s knowledge and corpus level.

Thus HUF provides a valuable tool for creating and maintaining family wealth.