There is a consistent complaint about this column. Why does it not provide specific action points? Can’t we have actual products as recommendations? Why explain the principlesbut stop short of converting them into actual thumb rules?
Personal finance cannot be generalised. Broad principles are universal, but actual application requires decisions the individual should make, based on their specific situation. Personal finance is not a scientific subject that is taught in universities; nor does it boast of a volume of research from which it can draw. It is a set of principles and ideas, heavily borrowing from various disciplines and developed by practicing professionals from experiences.
Therefore, a specific set of steps will not work for all. It would be downright unethical to use this space to promote products, which is why none is mentioned. But writing for an audience needs structure. We cannot let philosophical rhetoric fill the page. So the effort is to point the reader to some principles, offer some ideas that enable them to think through their decisions, and provide frames to evaluate what they see in the financial world.
When it comes to personal finance, there is really nothing new to say. What we discuss here are mere snippets of interpretative intelligence. The writing does not expound on original thoughts and unique discoveries. It is a teacher’s effort to simplify finance and motivate readers to take charge of their money.
Let’s rework last week’s column on retirement worries of the soon-to-retire generation. Using a few sketches, we tried to point out how those of us who don’t have a government pension, those who aren’t rooted to their bases and have family support, those who may have indulgent consumption habits, and those who don’t enjoy great health, might end up with a mixed bag of retirement experiences.
To convert that problem into an actionable set of rules would go like this: (I am not recommending these rules, only putting them here to illustrate a point). First, ensure that you earn a fixed income like a pension. Choose government-sponsored schemes and invest your retirement proceeds in schemes that offer annuity, pension, fixed interest and such. Second, make sure you have your own home to live in. Live where you have relatives close by. Spend frugally and within your means. Do not touch the retirement corpus. Third, buy a good medical insurance before any disease condition makes it expensive. Fourth, do not stay idle, find something to do. Fifth, stay healthy.
The rest of the column can expound each of these and put in specific numbers. How much should the corpus be? How much return should it earn? How much to draw and how much to keep? Which medical insurance is best? How much premium to pay? How much to spend on travel and hobbies? Will the money get over if I pursue something new?
The answers to all these questions is just math. In an excel sheet you can put numbers and assumptions, and you will soon have a number of scenarios and you can choose one that appeals to you most. To some, higher retirement income will make sense; to somehigher spending will; some won’t touch the corpus; and some will happily use it for themselves. We can make sense of the math, and make choices from what is on offer, if we instead focus on some principles. We can work with a frame and evaluate our choices.
First, what should someone without pension do? Hopefully there is some money set aside—in PF, as investments and as assets. Bring all of it together. Include the houses, plot and gold—all assets you inherited or invested in. This is available to use in your lifetime, bequeath to the children, and give
away as charity. Evaluate each one and put them in those three boxes. You will get a fair sense of what you have for your use.
Second, when you no longer earn an income, your assets must generate it for you. You know how much you need. If not, make an estimate. Include interests, travel, gifts and giveaways, and your regular expenses. Now to the classic strategic asset allocation decision. If you deploy all your assets to generate income, they may not grow in value. If you deploy your assets to grow in value, your withdrawals and corpus will be risky. You have to hold your assets, ask that question, and classify them, honestly. That multi-crore holiday home and jewellery in the locker won’t mean a thing if they aren’t useful to you.
What is a comfortable position? You have enough assets. A portion can be used to generate adequate income, and a portion can grow in value and remain untouched. For example, if your assets are worth a crore, and half of it is the house you live in and will leave behind for your child, do you have a lifestyle that is supported by the income earned by the other half? What if you fell short? Would you seek work? How would you use the house?
Comfort in retirement is achieved when you have income that is enough and assets that are growing and can be tapped as inflation increases the amount of income you need. To assume that investing one crore in a safe deposit will cut it, is oversimplifying it. Money you need should be in income generating assets; money you don’t immediately need should be in growth generating assets. You need both. Over time you will shuffle between the two as needs change.
You already have many questions. What about reverse mortgage? Can retirement corpus be risked in equity? Isn’t property the best investment? There are no simple answers. You created the assets and you will bring them together and make them work the best for you. If that means you sell your large house to move into a small one, and take your spouse on a world cruise, you have to make that choice. No columnist can do it for you.