Financial Wellness Program

Managing Financial Challenges Post Retirement

2014

Income

• Pension : Rs 6000 per month

• Retirement Corpus : Rs 40 Lakhs deposit in SBI Fixed deposit– 9% Interest Rs 3,60,000 per

annum– Or Rs 30,000 per month

• Total Income : Rs 36,000 p.m

Expenses

• Rs 30,000 per month

WHERE IS THE PROBLEM?

Income is more than the expenses

WHAT FINANCIAL CHALLENGES ARE YOU ANTICIPATING POST RETIREMENT ?

Sheet 1

Challenge No 1

Inflation

Inflation + lifestyle ?

What is the impact?

Inflation + lifestyle Impact

Year Average Household Monthly Expenses

1920 Re.1

1940 Rs.10

1960 Rs.100

1980 Rs.1000

2000 Rs.10000

2020 Rs. 100000

2040 Rs. 1000000

2060 ????????

Approximate Information, based on Estimates Expenses are going at 12% per annumCII – CAGR of 7.1% + lifestyle expenses like Mobile 3G, car replacement, etc...

Monthly Expenses will double every 6 years

Telephone Calls

Before 2000

5 Calls in Year

After 2000

5 Calls in an Hour

Clothes

Before 2000

Bought only for

After 2000

Bought whenever

Water

Before 2000 After 2000

Challenge No 2

Tax

Tax benefit comparison

Working life

80 C BenefitsEPF DeductionsPPF DeductionsGratuityHRATransport AllowanceLTALoss of Income from House

Property (Interest Paid on housing loan)

Standard Deduction Rs 2.5 Lakh

Retired life

Only Standard Deduction of Rs 3 lakh

Challange No 3

Increase in Discretionary Spending

Discretionary Spending 39% 59%

So many Discounts and offers But, Nothing comes free

All schemes are designed to make you poor

Combined effect

Inflation + Tax + Discretionary Spending

Normal Food, Clothing, Shelter

LuxuryFood, Clothing, Shelter, Car , Vacations

Super Luxury

Food, Clothing, Shelter, Car+ Driver, International Vacations

Year Normal Luxury Super Luxury2014 रु 360,000 रु 720,000 रु 1,440,0002015 रु 385,200 रु 770,400 रु 1,540,8002016 रु 412,164 रु 824,328 रु 1,648,6562017 रु 441,015 रु 882,031 रु 1,764,0622018 रु 471,887 रु 943,773 रु 1,887,5462019 रु 504,919 रु 1,009,837 रु 2,019,6742020 रु 540,263 रु 1,080,526 रु 2,161,0522021 रु 578,081 रु 1,156,163 रु 2,312,3252022 रु 618,547 रु 1,237,094 रु 2,474,1882023 रु 661,845 रु 1,323,691 रु 2,647,3812024 रु 708,174 रु 1,416,349 रु 2,832,6982025 रु 757,747 रु 1,515,493 रु 3,030,9872026 रु 810,789 रु 1,621,578 रु 3,243,1562027 रु 867,544 रु 1,735,088 रु 3,470,1772028 रु 928,272 रु 1,856,545 रु 3,713,0892029 रु 993,251 रु 1,986,503 रु 3,973,0052030 रु 1,062,779 रु 2,125,558 रु 4,251,1162031 रु 1,137,173 रु 2,274,347 रु 4,548,6942032 रु 1,216,776 रु 2,433,551 रु 4,867,1022033 रु 1,301,950 रु 2,603,900 रु 5,207,800

Average Annual Expenses for Retired Couple

Factors to be applied

Non Metro 0.75

Rented Home 1.3

Less than Rs. 5 Lakh Health Insurance

1.1

Example:

Retiring Year : 2015 , Retiring age 60Expected life : 80 years

Annual Expenses : 3,85,200

Corpus required : 20 * 3,85,200= Rs 77,04,000

Assumptions – After retirement : ROI = Inflation, current inflation = 7%

How to Manage

Inflation + Tax + Discretionary Spending

Strategy 1 : Fix your expenses

1. Expenses will increase every year – We can’t do any thing about it

2. Fix the expenses as per the table provided

3. Keep only minimum balance in Savings A/c

4. Set up Auto transfers and deposit only as per your monthly expenses projected

Even if we want to spend less, children/spouse/neighbour/relatives will not allow

Lack of Self ControlMarshmallow Test

Research conducted over 40 years

Kids 6-10 years of age are asked to go to a room

where chocolate is kept and asked to wait for 15

minutes

If they resist 15 min without eating chocolate, they will

get 2

Every Kid wanted to have 2 chocolates

Guess how many walked with 2?

Just 1%

10 years later – same kids who walked away with 2

chocolates – got better grades in the exam

Another 10 years later – they had better jobs

Another 10 years later – they had better investments

What prevents us from being in that 1%

Herd Mentality

Who should I follow ?

My Boss

My Brother-in-Law

My Friend

My Neighbor

My Colleague

My Cousin

What ever is good for them is good for

me too ?

Year Available Expenses Invested Interest2015 7704000 385200 7318800 5123162016 7831116 412164 7418952 5193272017 7938279 441015 7497263 5248082018 8022072 471887 7550185 5285132019 8078698 504919 7573779 5301652020 8103944 540263 7563681 5294582021 8093139 578081 7515057 5260542022 8041111 618547 7422564 5195802023 7942144 661845 7280298 5096212024 7789919 708174 7081745 4957222025 7577467 757747 6819720 4773802026 7297101 810789 6486312 4540422027 6940354 867544 6072809 4250972028 6497906 928272 5569634 3898742029 5959508 993251 4966257 3476382030 5313895 1062779 4251116 2975782031 4548694 1137173 3411520 2388062032 3650327 1216776 2433551 1703492033 2603900 1301950 1301950 911362034 1393086 1393086 0 0

Max Balance to be maintained in Savings A/c for 2015

3,85,200/12 = 32,100

Strategy No 2

Plan for next 20 years and not next 12 months

Case

Monthly Expenses : Rs 20,000

Corpus Available : Rs 35 Lakh

Let’s compare Annual Planning through FD’s and monthly planning through MIS (Bank & Post office)

Interest Rates

FD’s – 9.25% (2 year)

MIS – 8.3%

Cash Flow Statement with Annual Planning using FD’s

Years Monthly expensesCorpus at the beginning of the year

Amount kept for Monthly expenses Amount invested Total Income Taxable income

0 20000 3500000 240000 3260000 309700 59700

1 21400 3569700 256800 3312900 314726 64726

2 22898 3627626 274776 3352850 318521 68521

3 24501 3671370 294010 3377360 320849 70849

4 26216 3698209 314591 3383618 321444 71444

5 28051 3705062 336612 3368449 320003 70003

6 30015 3688452 360175 3328277 316186 66186

7 32116 3644463 385388 3259075 309612 59612

8 34364 3568688 412365 3156323 299851 49851

9 36769 3456174 441230 3014943 286420 36420

10 39343 3301363 472116 2829247 268778 18778

Cash Flow Statement with Annual Planning using MIS

Years Monthly expensesCorpus at the beginning of the year

MIS Investment required to meet expenses

Balance investments in FD Total Income Taxable income

0 20000 3500000 3000000 500000 287500 37500

1 21400 3547500 3210000 337500 288863 38863

2 22898 3579563 3434700 144863 288538 38538

3 24501 3593324 3586000 0 286880 36880

4 26216 3586000 3556000 0 284480 34480

5 28051 3556000 3500000 0 280000 30000

6 30015 3500000 3412000 0 272960 22960

7 32116 3412000

8 34364

9 36769

10 39343

Comparison – By annual planning we will have Rs 2,20,00 more by end of 7th year – almost

equal to 1 year expenses

Hence by annual planning it is possible to stretch the corpus by 2

more years in the next 20 years

Strategy No 3

Consider Post Tax Return on Investment and select Financial Products which are safe and offer higher post tax return with

lesser lock in

Comparison of Financial ProductsProduct Approx Interest Real Interest after Tax

(10% tax bracket)Real Interest after Tax (20 % Tax Bracket)

Real Interest after Tax (30% tax bracket)

Remarks

Bank FD 9.25% 8.35% 7.4% 6.5% Maximum 20 Lakhs to be kept in Bank FD

Company FD 10% 9% 8% 7% If total amount available is Rs 50 lakhs, then keep Rs 20 Lakhs

Post office MIS 8.4% 7.6% 6.72% 5.88% Suitable only for those in 0% Tax bracket

Sr Citizen scheme

9.3% 8.35% 7.4% 6.5% Lock in 5 years, normal FD better

Inflation indexed bonds

Inflation +1.75%

10% Tax to be paid

20% tax to be paid

30% tax to be paid 10 year lock in makes it unattractive

Tax Free Bonds 8.5% 8.5% 8.5% 8.5% 10 year lock in makes it unattractive

Fixed Maturity Plans

8.5%-10% ~8% ~8% ~8% Very attractive for those with more than 50 lakhs corpus because of tax benefits

Understand Return and calculate returns yourselves

If money is doubling – Apply Rule of 72

72

---------------------- = r where n= No. of years taken to double money

n

Why Returns are important?

2014 100000

2022 200000

2030 400000

2038 800000

2014 100000

2020 200000

2026 400000

2032 800000

2038 1600000

Return on Investment – 9%

Years taken to double – 8 years

What happens to Rs 1 lakh investment In 24 years

Return on Investment – 12%

Years taken to double – 6 years

What happens to Rs 1 lakh investment In 24 years

OR

EVERY 3% DECREASE IN RETURN MAKES ONE POORER BY HALF

Every 3% improvement in Return doubles wealth

Interesting Schemes - Ignore

1. Pay Rs 50,000 for 10 years – Get Rs 50,000 for 100 years

2. Pay Rs 5250 per month for 10 years get Rs 10 Lakhs

3. Get Assured return of 12.5%

Tax Slabs

Income (inclusive of Rs 1.5 Lakh in 80C Investments)

Tax Rate Min Tax Max Tax

Upto Rs 4.5 Lakh 0% 0 0

Rs 4.5-6.5 Lakh 10% 10% above Rs 4.5 Lakh

Rs 20000

Rs 6.5 – 11.5 Lakh 20% Rs 20000+ 20% of above Rs 6.5 Lakh

Rs 120000

Above Rs 11.5 Lakh 30% Rs 120000 + 30% of above Rs 11.5 Lakh

Income exceeds Rs 6.5 LakhsInvesting in name of Spouse

and minor children- Interest income will be

clubbed and tax needs to be paid

- Only interest on interest will become tax free

- Cannot give Gift or interest free loan to wife

But investing in the name of Major children will not be clubbed

What income will be taxed?

• Pension Income

• Interest income from FD

• Rental Income

• Income from part time job

• Interest earned from FD invested in Spouse name

Tax Optimizing Investment Pattern

Maximum Savings A/c Balance One Month Expenses (Rs 32,100)

Maximum Balance in Sweep in A/c One Year Expenses (Rs 3,85,200)

Maximum in Fixed Deposits Rs 45 Lakh (0 Tax)

Corpus above Rs 45 Lakhs In Lock in Debt Funds for 3 years (less than 5% tax)

What if I don’t have sufficient corpus ?

Step 1 : Try to reduce expenses

Step 2 : Check if Tax can be reduced further

Step 3 : Take up a part time job

Step : 4 : Use Reverse Mortgage after 75 years of age

Remember, all investments carry a Risk

Even FD’s

Invest only with Nationalised Banks

Financial Products – You may ignoreProduct Pros Cons

ULIP None Unnecessary Deductions towards commissions and Insurance Expenses. After Retirement No Insurance is required

Post Office Savings

No TDS Deductions upfront.

Interest rate lower than bank FD’s

Debt Mutual funds Gives slightly better return over FD’s

Complex Product. In case withdrawal during emergency, there may be a loss

Inflation Index Bonds

Better Tax adjusted return

Will be blocked for long periods and cannot be withdrawn in emergency

Tax Savings Bonds

Better Tax Adjusted return

Will be blocked for long periods and difficult to redeem in emergency

PPF Better tax adjusted return

Will be blocked for long periods and withdrawal not possible

What to do with the Loans ?

Interest on FD – 9%1. If Interest on loan is lesser than 9% - Keep the loan2. If the interest on loan is more than 9% - Pay of the

loan immediately

Also Stay away from

• Real Estate Investments

• Stock Market Investments

• Any New form of Investments– Unless you have started working again after retirement

Is this True ?

Rising Education Cost Best to way fund higher education is

through education loan3 ReasonsInterest Repayment eligible for tax

benefit – Net Interest on Edu Loan : 9%

If bank is not willing to give loan then college is not good

Loan brings more seriousness towards studies

Finally, Govt of India may waive of the interest as they did this year

Rising Health Care Cost

Other important Matters1. Have adequate Health Insurance so that your corpus does not

reduces due Medical expenses

2. Fund your children’s education only through education loan

3. Simplify your life and do all financial transactions online only

4. Consolidate all your financial assets for ease of management

–Max 2 Bank accounts

–Max 5 FD’s

–Analyze Returns on past investments and convert to cash on reaching optimum returns

5. Have a will and update every year.

Keep all your financial information in one Place

Keep it safe at home, known only to spouse, in case of emergency

Update atleast once in a year

Summary

1. Track your expenses growth every year

2. Do Annual Planning for next 20 years

If retirement corpus starts decreasing before 10th Year, consult a Financial Advisor.

Expectation from the Program – What we heard from 3000+ Participants

Where to Invest so that I can get regular monthly income?

How do I know whether I have enough money?

What can I do if fall short of money later in my life?

What are the tax implications on my leave salary compensation ?

How can I save more tax after retirement ?

How to mange my children’s education expenses?

What do I do with my Home loan / Car Loan ?

How to manage health care cost ?

How to control my future expenses ?

Any other Expectations ?

For those who have more than Rs 60 Lakh Corpus

If annual income is more than Rs 6.5 Lakhs – consider Fixed

Maturity Plans

WHAT BANKS DO TO FD’S COLLECTED FROM INVESTORS ?

What Banks do with your money?

Pay 9% interest to you

Lend to others

Home loan – 10.5%

Car loan – 11.5%

Educational Loan : 13%

Personal Loan : 15%

Loan to companies : 16%

Finally, Loan to Govt of India

How much does Govt of India borrow ?

There are other Govt. entities like State Governments, Municipal corporation, Different Govt departments – Health, Education etc ?

From where does Govt of India get Rs 15,000 cr every day?

•Banks

•Insurance

•Mutual Funds

•RBI

Lending Money to Government

•Through Banks (by FD) and Insurance (policies)

–Net return : -1%

•Through Mutual Funds–Fixed Maturity Plans

•Tax is 10% (before indexation) and not 30% as compared to Bank FD

Which is better?

Personal LoanEducation LoanLending to companies

(like Kingfisher)

Lending to Govt

Consider Fixed Maturity Plans if Corpus is more than Rs 60 Lakhs

Case 1 – Invest only in FD

Corpus : Rs 65 Lakhs

Invest all Rs 65 Lakhs in FDInterest earned : Rs 6,17,500

Taxable Income : Rs 2,67,500

Tax on Income : Rs 27,000

Case 2 - Invest in FD and FMP

Invest Rs 37 Lakh in FD and Rs 28 Lakhs in FMP

Interest on Rs 37 Lakh : Rs 3,50,000

Capital Gain on Rs 28 Lakh FMP Investment : Rs 2,52,000 (@9%)

Tax on Interest Income : 0Maximum Tax on capital gain : Rs 11,200

Tax Savings of Rs 16,000/=