Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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How much you should save for retirement?

Posted by Muthu on September 5, 2016

I get many queries on how much to have as retirement corpus and what can be the withdrawal rate every year.

I come across instances where people are losing jobs in their mid forties and this is the question in top of their minds.

Let us say you are 50 years of age and need Rs.1 lakh every month for your expenses.

Having worked for 25 years, let us assume (hope!), you’ve repaid home loan and has made enough provision for your kids higher education and marriage. You also have sufficient medical cover and an emergency fund equivalent to 2 years of expenses.

The retirement corpus you aim for need to provide you an income of Rs.12 lakh per annum. What would be the corpus? I would suggest you need at least Rs.2 crores. Having a life expectancy of 80 years, for both you and your spouse, this corpus can be deployed in balanced funds (equity oriented hybrid funds, 65% in equity and 35% in debt). I assume balanced funds are capable of providing 12% returns over next one decade.

If we keep the withdrawal rate at 6%, you would get Rs.1 lakh per month. Why I’m keeping the withdrawal rate at 6%. The inflation is around 6%. So you get a real return of only 6%. If you withdraw more than the real rate, then your capital would start eroding. As capital erodes, your purchasing power would go down. This would affect your quality of living. So you should only withdraw the real rate of return. This would ensure that if both of you or one of you happen to live till 90 or more, still you’ve comfortable money.

If withdrawals include part of capital, at some point you may run out if it, especially if you live long. Not only that many want to leave some assets for the subsequent generations as well. Also it is difficult to even assume what return we would get beyond 10 years. There can be some major emergencies as well. Keeping all these in mind, it is never wise to withdraw part of capital. You should withdraw only real returns.

This also means that if you go for fixed deposits (other than for emergency fund and near term goals), your real returns would almost be zero. So to preserve your purchasing power, you cannot make any withdrawals! This is an impossible situation.So some amount of risk taking is essential unless you’ve tens of crores. Balanced funds are a better option as we are looking at the retirement life which can even be longer than our career span.

If we apply this strict yardstick, most of us are not ready to retire. So please try to develop your knowledge and skills and be employable till you achieve the goals. Early retirement is not easy. It may be possible if you drastically cut down your life style. Since most of us do not prefer this, the only way is to keep developing skills which can be monetised and thereby enhancing the means.

Early retirement is not easy. I’ll let you know when you’re ready.

Posted in Basics, Muthu's Musings, Wealth | 4 Comments »

40,000 times in hundred years= 11.3%

Posted by Muthu on August 7, 2016

I was reading this article written by Vivek Kaul.

A bungalow in Nepean Sea Road, South Mumbai was bought for around Rs.1 lakh in 1917. It is now going to be sold for Rs.400 crores. The value of the bungalow has multiplied by whopping forty thousand times in 100 years.

Real estate is always discussed in terms of how many times it has multiplied. Rarely anyone in that industry calculates XIRR or annualised returns. 40,000 times in 100 years when expressed in terms of XIRR is 11.3%. Not a bad return at all. But nowhere as glamorous as saying 40,000 times.

Many tell me something like that the property they bought 25 years ago has multiplied by 10 times. Sounds fantastic. But the annualised return works out to 9.6%.

When I say Birla Sun life Tax Relief’96 has provided around 26% returns in last 20 years, it doesn’t sound much sexy. When I rephrase that the fund has multiplied wealth by 100 times in 20 years, it suddenly looks very attractive.

Generally, we the advisors always talk in terms of annualised returns. If I say, you may expect around 15% annualised returns from equity over next 20 years, what it means is that the money getting multiplied by 16 times.

Do one thing. Use the simple function in excel or a financial calculator to calculate returns in terms of XIRR. An exotic 10 times in 25 years would be converted into a modest 9.6% XIRR. Comparison between asset classes would become meaningless if not measured in the same way.

Learn to measure everything in terms of annualised returns. This would not only impart better financial literacy, it would also reset your expectations to more realistic levels. If a prime property in Mumbai can ‘only’ deliver 11.3% over 100 years, you would learn to be contended with 9% annualised returns from your real estate investments.

The 2004-07 bull market in stocks, the 2004-09 boom in real estate are more of exceptions than the rule. As I’ve mentioned before, in the long run, you may set your expectations as follows:

Fixed Deposits: Inflation + 1%

Gold: Inflation + 1.5%

Real Estate: Inflation + 3%

Equity: Inflation + 7%

Next time when you meet me, let me know how much annual returns your real estate investments has delivered over last 2 decades.

The number may surprise you.

Posted in Real Estate, Wealth | 8 Comments »

Don’t look frequently

Posted by Muthu on July 18, 2016

I wrote the last piece immediately after Brexit. Like many, I was also expecting the market to correct in the near future. Markets, as always unpredictable, have been moving up after the event.

This shows the difficulty of forecasting and predictions. That’s why it’s always best to ignore them and stay the course. Though at times I do anticipate some market movements, I don’t change my investment plan accordingly. I simply stay the course with my portfolio. As you are all aware, I do the same for you as well. Brexit or no Brexit, the only sane option is to continue your SIPs.

Like I’ve mentioned many times before, we don’t try to sell our house or land based on constant news flows and macro events. In fact, we are not even aware of their exact market value. We intend to own those assets for decades. The same yard stick needs to be applied for equity funds as well. I would like to share what Buffett says in this regard.

“Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of ‘Don’t just sit there, do something.’ For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”

One way to increase the tenure of equity ownership is not to look at the value frequently. Many investors’ emotions get as volatile as markets when they keep looking at prices or NAVs regularly.

The less frequent you see, higher the probability of positive returns. The more positive returns are, higher the motivation to stay the course.

I want to share with you what personal finance expert Carl Richards has mentioned in this regard.

“Since many of us use the Standard & Poor’s 500-stock index as a proxy for the market, let’s take a look at the period from 1950 to 2012 to see how often we’re likely to feel positive, based on how often we check our investments:

  • If you checked daily, it would be positive 52.8 percent of the time.
  • If you checked monthly, it would be positive 63.1 percent of the time.
  • If you checked quarterly, it would be positive 68.7 percent of the time.
  • If you checked annually, it would be positive 77.8 percent of the time.

So here’s the thing to ask yourself. Other than upsetting yourself half of the time, what good is it doing you to look anyway? Maybe we should all invest as if we’re going on a 12-month trek in Nepal!

So along with your do-nothing streak, let’s see how long you can go without looking at your investments (assuming you’re in a low-cost, diversified portfolio, of course). I think you’ll discover that it makes you happier, keeps you from doing something stupid and helps you become a more successful investor.”

As we never get tired of repeating, please check your mutual fund portfolio only once a year. This increases the probability of seeing positive returns. Positive returns would lead to better emotions and self control.

Treat equity funds the same way you treat your house. Don’t look at the value frequently.

Posted in Basics, Mutual Funds, SIP, Stock Market | 2 Comments »

Slow growth world

Posted by Muthu on June 25, 2016

You would all have read about Brexit (Britain’s exit from European Union).

It would take years for us to understand its impact on the global economy. The majority view is that it would be negative.

The general feeling across the world, especially among poor and middle class is that of anti-globalisation and anti-immigration.

After 2008 crisis, global economy is plagued by deflation, slow growth, unemployment and rising inequality. So there is lot of fear and uncertainty in the minds of the people.

China, which was growing at higher rate for last 3 decades has fallen to around 4% growth rate now (nobody  believes the data Chinese government provide).

There have been questions around even our own GDP data but even the critics acknowledge that we would be growing around 6%. Our official rate of growth is around 8%.

In a slow or no growth world, even 6% is an excellent growth rate.

This government has been doing a lot to ensure that we continue to grow at a good rate. I was having a very high opinion of this government and it has come down few notches after seeing the way they handled Raghuram Rajan issue.

We are an extremely poor nation with only $2 trillion GDP and around $1500 per capita. We need to grow at 8% to 9% for next 2 decades to catch up with where even China is now.

I’m fairly confident that the government would continue to work to make this happen.

Hopefully, if all goes well, we may be a $10 trillion economy with $7500 per capita in 2030. We would then be a middle income country. A majority of our population would be out of poverty.

The biggest challenge would be generation of employment. We are able to create only 5 million jobs a year whereas the requirement is 12 million. On the other hand, many countries in the world face labour shortage.  The best option would be to focus on skill development (no country would want unskilled labour) and encourage emigration. If the employment gap continues to persist, it would become both a major social and economic problem.

As I’ve mentioned before, the journey from $2 trillion to $10 trillion provides us excellent opportunity to grow our wealth through equity investments. In a slow growth world, our growth at a higher rate (though from a very low base) is a boon for equity investors like us.

It is very difficult to guess how Brexit would play on our stock markets in the months to come. Though Brexit has less impact on our economy, it may have a significant impact on the markets, if foreign investors decide to pull the money out.

However, as always, please do remember that in the long run markets grow in line with earnings. As long as the economy and corporate earnings are growing, these short term blips can be completely ignored.

There is nothing new you need to do now. Stick to your SIPs and stay the course.

Posted in Economy, General | 2 Comments »

Automation, Robots and Planning

Posted by Muthu on June 12, 2016

We’ve started hearing stories of people losing jobs in IT & BPO due to automation. Also, the pace of recruitment in these sectors is slowing down. The number of new jobs created in next few years would be far lesser than what was created in the past.  Many roles are becoming redundant. The starting salary for a fresher has been constant around 25K per month for last very many years.

Also many IT & BPO companies have started going for contract workers. In the coming decade, automation, robots and temporary staffing can change the way we look at jobs and career.

Soon factory floors may have more robots than human workers. There may not be any need to outsource manufacturing jobs to low wage countries.

Every month, in India, we are adding one million people to the job market. In 2020, we would have 900 million people of working age. Though as an economy we would continue to grow, the job growth may not be on par with economic growth. Skill development and providing employment opportunities would be a major challenge for the government.

We need to get used to temp employment. Temp employment means constant upgradation of skill and knowledge. This only would ensure that there are further opportunities after an assignment gets over. Investing in oneself would be the primary investment requirement. Without human capital, it would be difficult to generate and grow financial capital. We need to adjust ourselves to increasing life span and decreasing career span.

Normally we suggest having an emergency fund equivalent to at least one year of expenses. Considering the breaks one’s career may have, emergency fund need to be 2 to 3 years of expenses. Many do not take individual medical cover, as it is provided by the employer. Given the changing dynamics, individual medical cover would be mandatory. Otherwise any medical emergency can make us bankrupt.

At the moment, it is still difficult to envisage how job markets would be after 10 years.But those who would keep updating their skills and knowledge would always be in demand. Mere certifications or degrees would not be of much use. What matters is what you can ultimately deliver.

Financial planning would become all the more important as expenses are always certain while income may be uncertain. Not that people like me can take our profession for granted. Robo advisory is becoming very popular!

We are in for interesting times.

As I always say, the best antidote to uncertain future is financial independence.

Go for it.

Posted in General, Muthu's Musings | 1 Comment »