# What is the “Magic Number”

Your Magic Number is the amount of money you need to have saved and invested in order to quit work and enjoy retirement.  In other words, a lump sum of money that can provide interest income to live off of.

Magic Number is how much one need to replace his/her active income and pay for the expenses… after one has quit the 9-5 job.

And why “the magic number” is so important.

Because it represents a free pass to a great life without financial stress.

Have you ever tried to calculate how much money you’ll need to retire? Good chances are that most of us haven’t. Most of these people fail to achieve their retirement dreams

Most people in their 40s and 50s will work with a psychology of avoidance and denial about their years ahead. They think it is too early for any serious retirement planning. They refuse to face the truth and procrastinate. Other people don’t know how to calculate their Magic Numbers, they just pick up some arbitrary numbers.

Just don’t commit these mistakes.  After all, you are doing it for your own future life.

Steps to work out your Magic Number

FIRST step is to calculate the amount of money needed each year to enjoy your lifestyle.

It’s easy to determine this number. Simply calculate how much you are currently spending to live life each year.

Mostly our expenses fall into six categories: (a) housing (including maintenance and taxes), (b) basic living expenses (food, clothing, etc.), (c) healthcare (d) education (if applicable), (e) entertainment (including travel), and (f) charity (if you believe in it). Don’t guess and use your actual costs in past one year. For our calculations, we are assuming them to be Rs,25000, Rs,50,000, Rs,5000, Rs,10000, Rs,5000 and Rs,5000, for the above six categories, respectively.

Even this simple step could be eye-opener for you as it will reveal how much you are spending, say on smoking or drinking, and will shake you up to rethink and revise it.

SECOND step is the one most people start with: deciding how much money you’ll be spending each year in your retirement to enjoy the lifestyle you want.

Take your current expenses you just figured out above. Then, add to it any “extras” you want to enjoy during retirement and remove any expenses you won’t have in retirement.

Let’s say, for example, that your current expenses are Rs.1,00,000 per month. To enjoy more fun, you want to travel more frequently, including foreign travel. This will cost you an extra Rs.10,000 p.m. Add Rs.10,000 to the Rs.1,00,000 to make it Rs.1,10,000.

Now subtract from this number (Rs.1,10,000) the expenses (like children’s education, loan repayments, etc.) which wont be there once you are retired.

For example, if those expenses are currently Rs 25,000, you will deduct that from the Rs.1,10,000. That would leave you with Rs.85,000 per month, or Rs.10,20,000 per annum. Similarly, if you already own a house, your rent expenses would also be lower and can be reduced.

In our above example, where you needed Rs.85,000 per month, deduct, say, Rs.15,000 per month you expect to get from some pension, another Rs.20,000 per month you expect to earn as a consultant.

This reduces your net expenses from Rs.85,000 p.m. to Rs.50,000 p.m. i.e. Rs.6.00 lac per year.

It is an important number, so work it out with reasonable assumptions.

FOURTH and an important step is to figure out the rate of return you expect to get on your retirement savings. For example, if the expected rate of return is 10% p.a., then the amount would be Rs.60,00,000 (it will generate annual income of Rs.600,000, at 10%). This rate is a critical assumption, would depend on prevailing financial market scenario, available investment options for various asset class. Don’t assume to put all your wealth in one asset class and accordingly, assume an average rate of return from combination of asset class.

Further, this expected return also need to be updated each year depending on market conditions. But for simplicity’s sake, let’s assume the expected post-tax rate of return at 10%.  With current rates of personal taxation in India, your total income of Rs.6,00,000/- would attract income tax liability of Rs.45000/- i.e. 7.5%.  Assuming the post rate return on investment at 10% would mean a gross rate of return at 10.8%.  With various asset classes yielding different rates of return, 10% is assumed as an average post tax rate of return; of course, it can vary as per the components of investments in each asset class.

You now know how much money you need to earn annually to enjoy your retirement. And you know the rate of return expected from your lump sum of allocated investments. That means you have the basic tools to calculate your Magic Number.

FIFTH and the last step is to figure out your Magic Number. In our running example of total annual expenses at Rs.6,00,000, divide it by the expected rate of return we just calculated. One would need Rs.60,00,000 (i.e.Rs 6,00,000 earned at the expected rate of return of 10%).

That is your Magic Number! If you had this amount of money invested right now making 10% each year, you could peacefully retire right now and enjoy the life without financial worries.

Take its mental note or write it down on a post-it sticker. Put it on your office desk or file cabinet. Always keep this number in front of you. It is the magic number you need to hit.

However, this Magic Number would be affected by Inflation.

Like any other country, Indian economy would also have inflation; may be higher than other countries due to our peculiar conditions. So, we have to suitably account for the inflation also.

Inflation is the rate at which the general level of prices for goods and services rise each year. Thus, the total expenses of Rs.85,000 p.m. assumed by us above would gradually go up due to inflation, towards the same level of lifestyle expenses.

So how do you factor inflation impact in your Magic Number calculations?

As a most simple method, you can simply use a lower interest rate to calculate your Magic Number.

In our existing example, we’re dividing Rs.600,000 by a 10% interest rate. This gives us a Magic Number of Rs.60,00,000. But to be more conservative, you could lower your interest rate to 5%. This would increase your magic number to Rs.1,20,00,000.

If you have 20 or 30 years to go before retirement, you might want to use this more conservative interest rate.

## Having learnt to calculate the Magic number, next exercise would be how to achieve this Magic number.

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# Rule of 72

The “Rule of 72” is a very handy mathematical shortcut for quickly estimating how long it’ll take to double your money if you stay invested and reinvest your gains.

The “Rule of 72” is a very simple calculation. By dividing 72 by the annual rate of return, investors get a rough estimate of how many years it will take for the initial investment to double itself.

In your fixed rate investments, like Bank FDs, you already know the rate of return i.e. interest rate payable on such investments.  For other investment options, like Mutual Fund units, you make an assumption as to what average annual percentage return will be on your investment. Then you divide this rate of return into the number 72. The answer will be the number of years it will take to double your money.

For example, let’s assume an average 8% return i.e. current rate offered on fixed deposits of more than 2-3 years, by most of the Banks in India. At that rate, according to the “Rule of 72”, it would take 9 years to double your money (72 divided by 8).

A word of caution to be added here.  Above quick calculation is very handy. But what “Rule of 72” fails to do, is present accurately your future purchasing power.

While a 8% return will double your money in nominal rupee terms over 9 years, during this time period, it is very likely to fall well short of doubling your purchasing power. The reason: inflation.

Thus, The “magic of compounding” isn’t so magical once you take account of the impact of inflation. And if you are investing in an instrument like a fixed deposit, in which the returns are taxable, even more of the magic is lost.

So if 72 isn’t a good “rule” for estimating how long it takes to double your purchasing number, then what is?

Using 72 would make sense if zero inflation were assumed. Assuming a deflationary period, the appropriate number to divide by could even be below 72.  Under the most probable economic and market scenarios, which assume a rising cost of living, the inflation-adjusted number for calculation purposes is likely to be well above 72.

The lesson for investors is that they may find themselves financially unprepared if they base their wealth-creation assumptions on before-inflation numbers, and on the Rule of 72. Thus, advisers play an “expectation manager” role, educating their clients by illustrating the actual impact of inflation on long-term investing.

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It is a sad fact of life that thousands of people die prematurely and unexpectedly every day, many with insufficient or no life insurance to protect their loved ones.

• What would the financial future hold for your spouse and children without you?
• Would they be able to afford the basic costs of living, from food bills to clothing?
• What about essential expenses such as house repayments, school fees & medical expenses?

It is true that nothing can replace you but you can ensure to reduce the financial misery of your loved one and your family will not face the financial consequences of your death. Life insurance can take these worries away.

Life insurance is of no use if one does not have any dependent.

Term insurance is a life insurance product offered by an insurance company which provides financial coverage to the policy holder for a specific time period. In case of death of the insured individual during the policy term, the death benefit is paid by the company to the beneficiary.

Term Insurance is the purest form of insurance. It provides cover on the life of individuals and has the lowest premium in all types of life insurance policy. It provides the highest amount of insurance cover.

Personal life Cover

Life insurance cover can be taken by an individual to cover his own life as well life of his family members.  Any Individual between 18 – 65 years of age can take term insurance policy. Some insurers may provide the policy to individuals up to the age of 70 / 75 years.

Policy term is the number of years for which you buy a life insurance policy. Any benefit under this policy is payable only if the insured event (generally death or permanent disability due to illness or accident) takes place during this period.

Term Insurance policy is generally required during your working life or till retirement. For e.g. If your current age is 35 years and you want to retire at the age of 60 years, then you should buy the policy for 25 years (60 – 35).

How much insurance value to buy is an important question. It is directly related to the expected financial support the family would need in your absence. There is a simple method to calculate “Human Life Value” to work out the amount of insurance cover needed by an individual. We all are familiar to work out the value of car insurance.  It is the replacement value of the car we want to insure.  Similarly, in life insurance, it is the income which the family will be deprived in case of death of its bread-earner OR the amount need for various expenses towards family’s sustenance at the given standard of living.  Value of Life insurance cover can also be topped up regularly, in accordance with increased expenses and higher standard of living with career progression.

Term Insurance policy generally provides a lump sum amount in case of death of the insured person. The lump sum amount payable under the policy is equal to the sum assured (plus bonus, etc.). This amount is a constant number and not adjusted to inflation. These days some of the policies also provide annual pay out over and above lump sum amount.

There is no maturity benefit under this policy. This policy pays out only in case of death of the insured person. Sum Assured (insured amount) is payable to the nominee. The proceeds of a life insurance policy generally pass to your beneficiaries, which can be used to help preserve your family’s standard of living, cover outstanding debts and keep your families dreams alive.

There is no premium charged for providing you any investment return. Hence, no maturity benefit, if the insured person survives beyond the policy term.

Premium paid for term insurance is eligible for tax exemption under Section 80C of Income Tax Act.

### Other Life insurance Products:

#### Group Life Cover

Group Life insurance is insurance cover in which a single contract covers an entire group of people. Typically, the policy owner is an employer or an entity such as a network or affinity group and the policy covers the employees or members of the group.

Group Life insurance is often provided as part of a corporate’s employee benefit package and in most cases, the cost of group coverage is far less than what the employees or members would pay for a similar amount of individual protection so if you are offered group life insurance through your employer or another group, you should usually take it, especially if you have no other life insurance. As the policy owner, the employer or other entity keeps the actual insurance policy, known as the master contract and those who are covered typically receive a certificate of insurance that serves as proof of insurance but is not actually the insurance policy.

Group Life insurance is typically provided in the form of annually renewable term insurance and when provided through your employer, the employer usually pays for all of the premiums. The amount of coverage is typically equal to three or five times your annual salary and may also include disability coverage. It remains in force until your employment is terminated or until the specific term of coverage ends. Even though Group Life insurance may appear to be cost effective it is important for individuals to consider personal cover at the same time since it may be too late to obtain cost effective individual cover after they have left employment.

### a)     Key Man Cover

Key Man Insurance is life insurance purchased by the employer on the life of an employee (the key man) whose services and know-how are critical in contributing to the profits of the business. The company owns the policy and pays the premium and if the key person dies or is disabled the proceeds are paid to the company.

### b)     Partnership Cover

Disability and death are not things that we like to think about, but if one of the business owners were to die or can no longer work, would you and the other owners be able to afford to buy their business interests? A simple solution to this problem is a properly structured agreement that guarantees that on the disability or death of a business owner the necessary funds will be available to buy their share of business using the proceeds of a life insurance policy.

One can protect your loved ones by ensuring your business partners have the funds available to buy your equity in the business should anything happen to you. Conversely, you can also cover your business partners, ensuring you have the ability to purchase their shares rather than acquiring a new partner, should anything happen to them.

### Few Contrarian views:

1. Internationally, Life insurance cover is available even for very advance age i.e. even beyond 100 years. However, in India, Life insurance cover is available only up to the age of 75 years only. What about income loss to the surviving spouse? What happens if the deceased spouse has not bequeathed any income yielding assets? Perhaps it is assumed that the surviving spouse would be financially taken care of by the children. But if some couple does not have children or if the children themselves are financially stressed or does not bother about the surviving parent?  With the life expectancy going up and longevity improving with improved medical care as well higher health consciousness – should the Indian Insurance regulators not give this aspect a thought?
2.  Normally income generating age is assumed at 60 years. If Life Insurance is basically to take care of financial insecurity caused by loss of income to surviving family, then there is no such loss beyond 60 years of age.  SO why take Life Insurance cover up to the age of 75 years or more.  It would entail higher premium payment to insurance company.  This saving in premium, if invested separately from the beginning of the insurance policy, can yield an handsome amount to the surviving family, whenever one dies either prior or after 60 years of age.  Whatever wealth one would accumulate till the time of his/her retirement, would remain available to the family, irrespective of the insurance cover. Net worth won’t increase once the income source ceases to exist, on retirement, except by its own return on investments.

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# Basics of Emergency Fund

An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly.

We don’t have to re-invent the wheel by defining what is “emergency”. Everyone understands it.  In simple words, it is occurrence of an unexpected event with adverse impact on our otherwise smooth life.  Such event could be a severe accident, sudden death, unexpected serious illness, physical disability, loss of job with resultant financial uncertainty.  When life presents an emergency, it threatens our financial well-being and causes stress. Any of these can stretch the generosity and finances of families. Each of us will tackle such ‘emergency’ in his / her own way and will definitely tide over it with passage of time.  May be, sometime one just reconcile to a certain kind of ‘emergency’ which comes as ‘fait accompali’.

Nevertheless, it is always prudent to be in readiness, to the extent possible, even for those uncertain events, severity and timing of which we are not able to gauge or assess accurately.  In ‘emergency’ situation, our readiness and ability to address it at least in the initial phase, gives us a lot of confidence towards its ultimate resolution.

When life throws nasty financial surprises your way, have a Plan B ready. An adequate emergency fund can help you tide over the crisis. That is the contingency fund we may have to build for our own happiness

Now find out how big a contingency fund should you have. This question will have to be answered by each one of us in our own way, though there are broad criteria.  In today’s uncertain job market, a lay off can lead to months of unemployment. But anyone with a stable and secured job need not worry too much on this count. On the other hand, Stars, artists and sportspeople typically have very short career spans and irregular income levels and thus would need to factor these to work out the quantum of emergency fund as well as in their overall financial planning. Similarly, one would need to take into account the quantum of EMIs for existing debt servicing as well Insurance premium already contracted.  Besides, if there are certain known regular medical expenses (for an existing chronic illness of any family member).  Lastly, the number of earning members in one’s family as also the number of dependent family members and overall household expense, will all determine the extent of emergency fund which anyone would need to keep aside.

The thumb rule is to keep aside 3 to 6 months of basic life expense and payments.  It is generally experienced that during this period of an emergency situation, a viable alternative is worked out to bring the life back on rails.

In today’s time where health insurance plans are becoming quite popular, need of an emergency fund for medical emergency is diminishing. But at the same time, health insurance is actually available only when hospitalisation is needed. So one will need cash for doctor visits, tests and medicines, prior to hospitalisation.  And cost of these diagnostic tests, sometime, could also be substantial. Some health insurers have started insurance policies for OPD expenses also but one should be careful in weighing the pros and cons of these vis a vis return in liquid funds, as these health plans are currently priced at high premium.

Similarly, credit cards have also reduced the need for emergency funds, as expenses can be paid almost instantly through credit cards.  Credit cards will make us available interest free funds for period up to 50 days, during which alternatives sources of funds could be tapped and credit card bill paid.  However, credit cards should not be seen as a replacement for setting up an emergency fund as these funds would be exorbitantly costly, beyond the initial period of 50 days.

Once the size of this kitty has been worked out, the next question to be addressed is where to invest these funds, without compromising on the key element i..e ‘access and easy availability of these funds at short notice.  Remember, ‘return’ on these funds is of secondary importance.

No financial planner will suggest to keep emergency funds idle.  One should look for options for investing these funds also. One can park at least 25% of the emergency fund in saving bank account, which can be withdrawn 24*7.  Here, ensure you have a debit card with adequate cash withdrawal limit.  Many people remain unaware of their debit card’s daily cash withdrawal limit till the time they attempt to withdraw huge amounts of cash during an emergency.

But savings bank accounts give very low interest of 4% p.a. on the balance (with exception of few private sectors banks now, where it can go up to 6%).  A more remunerative option would be a sweep-in account where excess funds automatically gets converted into a fixed deposit with higher returns of 6-8%.  When you withdraw, the money is paid by breaking the fixed deposits.

The other comfortable option is to park these funds in liquid fund scheme.  The money will earn a decent return and can be withdrawn at any time.  Liquid funds and some ultra-short funds have returned more than 8% over the last one year.  Redemption under these schemes takes a day only.  Some fund house offer liquid funds that come with ATM cards so the investor can withdraw the money directly without the redemption first going to his bank account.

Revisit your emergency fund kitty regularly review it at least once a year.   A contingency kitty once formed is not the end of the process.  Everyone needs to revisit this fund and replenish it regularly to adjust for inflation, lifestyle changes, increase in family members and changes in debt commitments.

Creating Emergency Fund is the first step of a Financing Plan.

• It helps keep your stress level down
• It keeps you checked from spending on a whim.
• It keeps you away from making bad financial decisions.

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# Avoid these mistakes

Financial planning is well adopted and followed by vast majority among developed countries, especially USA and Europe.  In India also it is gaining popularity, gradually and particularly among young population.

Objectives of Financial planning would include building one’s wealth gradually and consistently to reduce financial uncertainties, provide adequately for contingencies & medical emergencies, equip oneself for realising one’s dreams of an own house, children’s education, foreign tours and stress free relaxed retirement life. The exercise would entail setting specific goals, saving regularly, wisely investing those savings, and protecting your assets. This needs to be done on an ongoing basis through various life cycle stages.

There are, however, many common financial planning mistakes that can cause sub optimal results to your money and wealth. Some major mistakes that you should avoid are:

Ignoring inflation

When planning finances, the time value of money, or how money loses its value over time is very commonly overlooked by most. Loss in money value over a period of time is inevitable and the hard reality of financial world. While incorporating increase in income with time, it is vital to consider the increase in expenses and the drop in the value of money thanks to the annual overall increase in prices of common goods and services.

Being over-dependent on “safe” investments such as saving accounts, Bank FDs, and government bonds will lead to your portfolio giving returns at a rate lower than the inflation rate.

Ignore inflation and you might just see your savings slowly erode away while your financial plan goes haywire.

Undervaluing long term expenses when considering retirement

When investing and saving for your retirement, the most important point to consider is the correct estimation of health care and other long term essential expenses, owing to the process of aging. Health care and other costs increase with age, and incorporating these expenses correctly is necessary for an effective retirement plan. Not doing so would compromise your savings and finances during your years of zero income.

Not saving enough or investing when you are young

The initial years of your investing life must be focused on savings. The rate of savings during that time should be more than the rate of returns.

An effective investment plan can be made, gradually, once you are saving consistently and as much as you can in those initial years. Remember, the earlier you start, the more will be the power of compounding.

Savings should be made not just by controlling daily expenditures, but also by considering the money paid towards taxes. Figure out a good plan to maximize your savings during the initial years of your investment life. If you are in a higher income category, tax savings (through correct choice of investments) should be important.

Investing too aggressively or too conservatively

It is very commonly opined that people in the age group of 20-40 years should invest aggressively. Investing more and more is okay but it is also necessary to invest using reasonable logic and not blindly as investments would also entail some risks. One may end up losing more if one exposes to a risk not compatible with one’s goals.  Failure will lead to frustration and moving from investing in future.

Similarly, too conservative investment approach also has its downside. Choosing conservative investment options can lead to loss in the value of your money. Stocking up cash in your savings account will bring down its value over a period of time; inflation would eat up most value of your money, with passage of time.

Hence, it is of paramount importance to choose appropriate investment options with varying degrees of risks so that your money grows consistently.

Thinking that Insurance is about saving tax

Far too many individuals make this common mistake in India. Insurance of any kind is an expense and not an “investment”. Buying insurance (life or health) just to save tax is one of the worst ways you can spend your money, unless you actually need the insurance.

Life Insurance is a must only if you have dependents. Life insurance is much beyond tax saving. Think about the need and utility of life insurance first before you think about the concomitant tax benefits. Life insurance cover at early age gives you benefit of lower premium as well as higher multiplier for maximum cover amount.  At the same time, lower income at young age would cause a lower premium paying capacity.  So plan well and draw a balance. Build up gradually.

Health Insurance in today’s expensive healthcare scenario is a must. With longer life expectancy, its criticality goes up in advance years of life.

Overall, DIY approach is good and economical. It works in financial planning. But there comes a point and stage where someone’s experience can give you better result.

Thinking financial planning is all about investing

A very common misconception is that financial planning is all about investing.  IT IS NOT. One must appreciate that investing is just one part of an ideal financial plan to meet your long term goals.

It is important to focus on day-to-day budgeting, appropriate insurance cover (for everything of real value to you, including your health) and smart tax decisions, to make an effective and appropriately long term financial plan.

## So go ahead & choose an experienced Financial Planner

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# Estate Planning

Estate planning is the process of anticipating and arranging during your lifetime for the disposal of your estate after your death. It typically attempts to eliminate uncertainties over the administration of your estate and maximize the value of your estate by reducing taxes and other expenses. It refers to those activities that are focussed on transfer of wealth to heirs, charity and other identified beneficiaries. It is done through instruments such as Trusts, Last Will & Testament, Living Wills, Nominees, Power of Attorneys, Beneficiaries, Executors, Guardians, Gifts, etc.

Though Estate Planning is vital, it is often neglected in one’s financial planning process. Many people believe that an Estate Plan simply means drafting a Will or at the most a Trust deed. However, there is much more to estate planning, in order to ensure that, upon your death, all your assets are transferred seamlessly to your heirs and other beneficiaries. Estate planning covers the structural, financial, legal and tax aspects of managing wealth in the interest of intended beneficiaries. It essentially involves structuring your personal financial affairs in such a way that, upon your death:

• estate duty is minimized
• inheritances are sufficiently protected for your heirs
• assets are transferred to heirs, smoothly with clarity

There is more to estate planning than deciding how to divide your assets when you die. It’s also about making certain that your family members and other beneficiaries are provided for, and have access to your assets upon your temporary or permanent incapacity.

To reap the full benefit of good estate planning and to avoid pitfalls, it is essential to obtain advice from a skilled and professional advisor. It is important to understand the full spectrum, as listed below, of Estate Planning and plan for all contingencies.

1 – Trust

Trust is an agreement between an owner of assets and trustees whereby the trustees undertake to administer, objectively manage and control the trust’s assets with necessary care for the benefit of beneficiaries. It is an efficient and flexible method to ensure that wealth earned by an elder stays within the family. There are  different types of Trusts that one can create – the most important being:

• a Trust created while you are still alive

Trust can also be created for utilisation of assets towards specified objectives (e.g. charitable or social causes), and/or for the benefit of specified persons (e.g. your handicapped or minor child)

2 – Will

Your Last Will & Testament is one of the most important documents to be drawn up during your lifetime as it contains your final wishes about the assets you have accumulated in your lifetime. Above all, it represents financial peace of mind to those you leave behind and are financially responsible for.

It ensures that one’s loved ones inherit what is rightfully theirs. It is a misconception that property is automatically passed on to the spouse and children. A Will or Trust should be one of the main aspects of every Estate Plan, even if you don’t have substantial assets. Wills help to ensure that property is passed according to an individual’s wishes. Simply having a Will and/or a Trust deed isn’t enough. Its drafting and execution process is critically important. The rules for writing a will are determined by applicable Indian Succession Acts.

When you draft your Will, make sure it is complete and specific. Write the Will clearly and do not use jargon. A Will usually starts with a declaration by the maker stating that it is being drafted of his/her own volition, with sound mind and without pressure. One must write his/her full name, age and residential address. Then, list out all your assets, with specific identification details of each of them – property, provident fund balances, bank accounts/deposits, postal investments, insurance policies, mutual funds, share certificates, cars & vehicles, jewellery, artefacts, etc.; also specifying where these assets/title documents are kept.

One must clearly mention how each of these assets would be divided, among which beneficiary and in what proportion. It is desirable to include a ‘residual’ clause also in the Will. Likewise, if you nominate a minor as a beneficiary, you must also appoint a custodian till the minor attains majority. Normally, a nominee or a second joint holder of an asset is only a trustee caretaker of such asset. A Will, however, will specify to whom the asset will be bequeathed.  In the absence of a Will, nominee will have to distribute the asset in accordance with one’s personal law. The recent exception made is in respect of Insurance Policies purchased under Married Woman’s Property Act, 2015, where a widow is the sole beneficiary of such insurance policy.

Will must be signed in the presence of at least two independent witnesses, whom you trust and those expected to outlive you – ideally, a family doctor or a lawyer. Ensure that witnesses aren’t beneficiaries. Witnesses too have to sign the Will, certifying that you have made the Will in their presence. The date and place of execution of the Will must be indicated clearly. Make sure you and witnesses sign all pages of the Will. After completing all formalities, the Will must be kept in a safe place. You may put it in an envelope and seal it with your signature and date.

You can change your Will any time you want to. However, when you make a new Will, you must mention that it is the latest Will and supersedes all earlier Wills. Even though registering a Will is not compulsory, if you apprehend succession disputes, it is recommended you register the Will at Sub Registrar’s office. There should be only one copy of the Will. After your demise, an executor will be responsible for dividing your wealth among the beneficiaries. It is advisable to make your spouse your children the executor. In case you expect disputes, then a neutral and trusted party can also be made the executor.

A Will would ensure certainty and definiteness in not merely determining entitlement of your heirs but also in location and identification of assets. If a person dies without having made a Will i.e. intestate, then his/her assets will be divided as per Succession Act or applicable personal law. It is very difficult to transfer assets, especially immovable property, upon the demise of its owner. A Court’s succession certificate would be required, after a proper process of identifying the legal heirs to the deceased. If there is a Will, it is much simpler to obtain probate from Court.

If you have made nominees in respect of such specific assets (bank deposits, insurance policies, etc.), pl. make sure to include these assets also in your Will to mention as to whom these assets would be bequeathed. If overlooked, Will might be contested. In that case, both individuals could be bitter toward each other (and you) for involving them in a legal battle.

2.1 – Living Will

One key contingency which is overlooked by many in their Estate Planning is to make plans for contingency of one becoming mentally or physically incapacitated. A living will is an advance document reflecting a person’s wishes regarding the type of medical care he or she would, or would not want, should they ever be without the mental and physical capacity to communicate his or her needs. One of the most important roles of a living will is that it may be the only written evidence of what a person’s wishes are in such a critical situation.

2.1.1 – Power Of Attorney

It’s important to draft a power of attorney (POA) so that a person you assign will act on your behalf in the event of your disability. In the absence of a power of attorney, a court may be left to decide what happens to your assets. The court’s decision may not be what you wanted.  This document can give your agent the power to transact real estate, enter into financial transactions and make other legal decisions literally as if he or she was you. POA is revocable by the principal any time when the principal is deemed to be physically and mentally competent or upon death.

2.1.2 – Healthcare Power of Attorney

By executing a healthcare POA, you can designate another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity. For such a document, you should pick someone who you trust, who shares your views and who would likely recommend a course of action that you would agree with. After all, this person could literally have your life in his/ her hands.

3 – Beneficiaries outside Will

As was discussed earlier, a number of your possessions can pass to your heirs without being dictated in the will. This is why it is important to maintain a beneficiary (joint holder or as nominee) in such an account. In fact, all bank deposits, retirement accounts and insurance policies should contain a beneficiary.

If you don’t name a beneficiary or if the beneficiary is deceased or unable to serve, a court could be left to decide the fate of your funds. And frankly, a judge that is unaware of your situation, beliefs and intent is unlikely to make the same decision that you would have made. Make certain that all such beneficiaries you name are over the age of 21 years and are mentally competent.

4 – Guardianship

If you have kids or are considering having children, naming a guardian is incredibly important and should not be overlooked. Make sure the individual or couple you choose shares your views, is financially sound and is genuinely willing to raise children. In the absence of such guardian, a court will step in and could rule that your children live with a family member that you wouldn’t have approved of.

Gifts can also be an effective channel of transferring one’s assets to his/her loved ones, during one’s lifetime itself.  It is an effective tool to minimise tax incidence, within the prevailing tax laws. It will ensure against any possible dispute later on as the donor is alive to clarify any dispute.

6 – Family Settlement

Whenever there is dispute among several claimants to a property, Family settlement is an effective instrument to settle the dispute voluntarily with minimum cost as it is considered neither transfer of property nor gift.

7 – Letter of Intent

A letter of intent is simply a document left by you to your executor or to a beneficiary. The purpose is to define what you want to be done with a particular asset after your death or incapacitation. In addition, some letters of intent also provide for the details of the funeral or other special requests. While such a document may not necessarily be valid in the eyes of the law, it helps inform a probate judge of your intentions and may help in the distribution of your assets if the will is deemed invalid for some reason.

Protect your legacy for now and for future generations

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# Biases in Investment decision making

## What is Bias

#### based upon certain thinking, thoughts or preconceived notions

Creating and managing an investment portfolio requires decisions to be made on – how to invest, in which asset classes, timing of entry/exit and reviewing/rebalancing the portfolio. Decisions ought to be based on the analysis of available information so as to optimise expected performance and risks associated with such investment. Very often the decisions are influenced by behavioural biases in the decision maker. Sometime even experienced Fund Manager may also fall prey to it, which leads to less than optimal choices being made.

An investor faces several hurdles, minor and major both. These include personal ones like lack of knowledge and ability to invest at the optimum levels. Some of the well documented biases that are observed in investment decision making are:

Disposition Bias: An important hurdle that often comes in the way of realizing an investor’s financial dream is the emotions of the person that mislead him to divert from what he should ideally do. It’s always better to be informed about such emotional hurdles in investing before it is too late. For example, people often keep on holding stocks bought years ago and are still in the red, but prefers to sell off those stocks in which they have made profit and has further potential to make more profit. In this case termed as disposition bias in financial economics literature, investors tend to hold on to their losing bets in the hope of recouping their losses sometime in the future but feel good to make some small profit by disposing off their winners.

Optimism or Confidence Bias: Investors cultivate a belief that they have the ability to

Out-perform the market based on some investing successes. Such winners are more often than not short-term in nature and may be the outcome of chance rather than skill. If investors do not recognize the bias, they will continue to make their decisions based on what they feel is right than on objective information.

Familiarity Bias: This bias leads investors to choose what they are comfortable with. This may be asset class they are familiar with or stocks/sectors about which they have greater information and so on. Investors holding an only real estate portfolio or a stock portfolio concentrated in shares of a particular company or sector are demonstrating this bias. It leads to concentrated portfolios that may be unsuitable for the investor’s requirements and feature higher risk of exposure to the preferred investment. Since other opportunities are avoided, the portfolio is likely to be underperforming.

Anchoring: Investors hold on to some information that may no longer be relevant, and make their decisions based on that. New information is labelled as incorrect or irrelevant and ignored in the decision making process. Investors who wait for the ‘right price’ to sell even when new information indicate that the expected price is no longer appropriate, exhibit this bias. For example, they may be holding on to losing stocks in expectation of the price regaining levels that are no longer viable given current information, and this impacts the overall portfolio returns.

Loss Aversion: The fear of losses leads to inaction. Studies show that the pain of loss is twice as strong as the pleasure they felt at a gain of a similar magnitude. Investors prefer to do nothing despite information and analysis favouring a particular action that in the mind of the investor may lead to a loss. Holding on to losing stocks, avoiding riskier asset classes like

Equity, when there is a lot of information available on market volatility are manifestations of this bias. In such situations investors tend to frequently evaluate their portfolio’s performance, and any short-term loss seen in the portfolio makes inaction the preferred strategy.

Herd Mentality: This bias is an outcome of uncertainty and belief that others may have

better information, which leads investors to follow the choices that others make. Such choices may seem right and even be justified by short-term performance, but often lead to bubbles and crashes. Small investors keep watching other participants for confirmation and then end up entering when the markets are over heated and poised for correction.

Demonstrative Effect: Investors, especially new to investing, often get carried away by what their friends or relatives say. There are people who boast how they have made multiple times in some stock, which has a demonstrative effect on the new comer, who without understanding even the basics of investing, just dive into putting his money into something which could be an extremely risky bet or may not even be suitable for him. In such situations, it is also seen that the person claiming his multiple winning stock to people known to him, may also have hidden stocks and investments in which he has lost money. So it’s very important for investors to keep away from such demonstrative effects which could, in the long run, prove to be a loss making proposition.

Recency Bias: One of very strong emotional bias is “recency bias“, the phenomenon of a person most easily remembering something that has happened recently, compared to something that may have occurred a while back. The impact of recent events on decision making can be very strong. This applies equally to positive and negative experiences. Investors tend to extrapolate the event into the future and a repeat. A bear market or financial crisis lead people to prefer safe assets. Similarly a bull market make people allocate more than what is advised to risky assets. The recent experience overrides analysis in decision making. So everybody expect the recent performance to continue over a future period which is not true.

Choice Paralysis: The availability of too many options for investment as also too much of information can lead to a situation of not wanting to evaluate and make the decision.

Greed: At times there are people who claim that they could give very high returns, compared to the accepted market linked returns of financial products, and that too within a short period of time. Investors should be careful about such tall claims before investing

Individual investors can also reduce the effect of such biases by adopting few techniques. As far as possible the focus should be on data and interpreting & understanding it. Setting in place automated and process-oriented investing and reviewing methods can help biases such as inertia and inaction. Facility such as systematic investing helps here. Over evaluation can be avoided by doing periodic reviews. A rational investor would probably look at the portfolio of all the stock as a whole and decide which ones to sell off and in which ones they should remain invested, irrespective of the losers and gainers status.

It is always good to have a financial adviser the investor can trust who will take a more objective view of the investor’s finances in making decisions and will also help prevent biases from creeping in.

Best way to invest, for new as well as experienced investors, is to have a disciplined approach, patience and diversify.

# What everybody wants?

Everybody wants a good financial protection for family,

but nobody wants to pay for Insurance.

Everybody wants to get prepared for emergency,

but nobody wants to have a emergency fund.

Everybody wants to have a nomination for few thousands in savings bank account,

but nobody is prepared to write a will for their real estate.

Everybody wants to save tax,

but nobody likes to plan for it.

Everybody wants to give a great future for their child,

but nobody wants to accept the future cost.

Everybody plans for a two week vacation,

but nobody bothers for longest vacation that is retirement.

# PFA aka Family Doctor

In anyone’s life, personal happiness would always demand keeping good health and smooth personal finance.  Both are equally important not only to enjoy one’s own life but also when we want to do something for our own children, near and dears ones and the society at large. Both need to be maintained and nurtured regularly with care and knowledge if one wants to enjoy the rich dividends.

In our childhood, our parents nourished our good health, providing a long lasting foundation. As we grow, we start maintaining our health ourselves – avoiding bad habits and picking up healthy, nutritious food habits and exercising regularly.  We also make efforts to gain knowledge about basic medicine, which is nowadays more easily accessible through internet and use it freely for common ailments.

Notwithstanding our own knowledge about symptoms, diseases & cures, when we fall sick, we consult a medical doctor for thorough diagnosis, advice and medication. With full trust in doctor’s prescription, we buy medicines or go for further pathological tests. If the doctor observes some serious symptoms, he advises us to approach a specialist doctor or a hospital in case of an emergency. In this whole process, we entirely trust the professional competence of the doctor we have chosen to go to. We do adopt a sub-conscious process of selecting the doctor – looking at his/her professional qualifications, years of experience, reputation in the community, availability of essential services with him, ease or convenience of availability and lastly the likely cost to us. Once approached, we never doubt or question the doctor’s advice, accepting his prescription and even to the extent of silently paying whatever fee he demanded.

Believe it or not, the same care and process need to be adopted when we deal with our financial health.  Till the end of our formative years, our parents provided us good financial standing – educating us to the best of their ability, readying us for a good paying and lifelong job or vocation and support through family heritage.

When one start earning, one also start financial planning, either at his own or through a personal financial adviser (PFA). Here also, while basic financial knowledge is gained on a day to day basis and everyday finance would be handled based on our own knowledge and skills. In case of any symptoms of financial stress, everyone need to approach and engage a professionally qualified and experienced PFA. This need when overlooked would entail its own pitfalls. Besides, the deficiency of not seeking professional advise cannot efficiently be bridged through free advice from our own sources (colleagues, friends, neighbours or relatives) or internet portals.

We should consult a financial doctor to get the right advice, who can analyse our cash flow, expenses budget and options for investments, insurance policies, loans, etc., recommending suitable plan and products to achieve our financial goals. The plan ought to be tailor-made to our specific needs. It is similar to the process of medical prescription and treatment depending our own health and body.

Financial world is growing as complex as any other subject, making it difficult for a common person to understand to avoid pitfalls and to take its full advantage. Most of us buy financial products, like insurance or mutual funds or mutual fund SIP, through an agent or a bank relationship manager. By the time we realise that products bought by us are not suitable for achieving our goals, it may be too late. Besides, financial products are also evolving and keep on changing with new features, etc. Thus, need of dependable and competent source on whom to rely for updated information and advice in financial planning, cannot be overemphasised and overlooked.

Difficulties and pitfalls of choosing an incapable doctor or PFA are same. One need to select and cultivate a capable PFA. Once chosen, same nature of trust and confidence need to be placed in the PFA, as we do in our family doctor.

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# Power of Compounding

Power of Compounding is often referred to as “Magic” because it is one of the most fundamental ways to build ‘wealth”.

Any financial transaction involving transfer of money from one entity to another for a specified temporary period would generally involve payment of “interest” by the “receiver” to the “giver”.  Rate at which such interest would be calculated is also defined upfront.  In addition to the rate of interest, another critical aspect of interest calculation is the method of such calculation.  Two methods i.e. Simple and Compound would make substantial difference in the amount of “interest” payable/receivable by the receiver/giver.

“Simple” interest would always be calculated with reference to the original amount of principle, while in calculating “Compound” interest, the original principle amount gets updated and increased at the end of each frequency period set out for such compounding.

### What is Compounding?

It is the ability of an asset to generate return on the original investment as well as on the returns from the previous period. As this process is repeated year after year, in later periods, the returns on the aggregate returns of all the previous years grow at a much faster pace than the return on original investments in that particular period. In the longer terms, the total effect is that the corpus increases manifold over the initial amount.

### How It Works

A sum of money – principal – is invested that accrues interest at the end of the first period (monthly, quarterly, yearly or any other fixed tenure) at a certain rate. During the second period, principal earns interest and the interest earned during the first period also earns interest. During the third period, the principal, the interest from the first and the second periods, all earn interest. The process goes on during each subsequent period to have a larger sum of money at the end of each period.

In simple terms, Rs.100 invested at 10% p.a. will become Rs.110 at the end of the first year.  In second year, the principle becomes Rs.110 (and not the originally invested Rs.100) and thus the maturity amount would become Rs.121 i.e. 10% on the updated principle of Rs.110.  With this process, the maturity at the end of third year would be Rs.132.10, and so on.

It is interest on interest OR earnings on previous period’s earnings. Thus, compounding is process of exponential increase in the original value of investment.

Effect of compounding depends upon the frequency at which interest is compounded. Compounding frequency could be monthly, quarterly or yearly OR even daily.  Shorter is the frequency, better it is for the investor because it would yield more to him/her. In case of debt, however, it would be reversed.  Shorter compounding frequency would mean your debt would attract more interest liability for you. So be careful.

### Cost of Delay

Majority of us start thinking about planning our retirement generally around the age of 40 years.  Assuming the retirement age at 60 years, he/she would save for 20 years.  Thus, one saves a small sum of Rs 1,000 every month and invest it for 20 years (240 months). This investment, on conservative basis i.e. the prevailing bank deposit rate, gives an average annual return of 9% over 20 years. At the time of your retirement, your total corpus will be nearly Rs 6.73 lakh, for which your actual investment (principal) is Rs 2.40 lakh only.

Now, if such retirement planning is started at an earlier stage, say at the age of 35 years or 30 years or ideally when you are 25 years of age, the retirement corpus would be Rs.11.30 lacs, Rs.18.44 lacs or Rs.29.64 lacs, respectively, at the same rate of interest.  Thus, while the principle amount is nominally higher by Rs.60,000 in each such period of five years, the retirement corpus increases exponentially, from Rs.6.73 lacs to Rs.29.64 lacs, if savings start at the age of 25 years.

### Delay in saving by 15 years would save you Rs.1.80 lacs but you end up losing Rs.22.91 lacs in your retirement corpus.

Also imagine the impact if such rate is higher than 9% assumed above, when one opts for mutual fund SIP or other options.

The secret lies in- Start early – longer the period stronger is the impact.

Besides, higher the rate, higher the corpus.

### To take full advantage of compounding, start saving and investing early

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