Personal Financial, Wealth & Estate Planning

Personal Finance Planning:

The general perception of financial planning is managing one's money. It is widely considered as just managing cash flow and wealth management. Precisely the questions being asked are:

1. How much should one save? 

2. How much should one spend? 

3. How much money is required to survive in the future without compromising on lifestyle?

For this take following steps:

1. Define your goals
2. Estimate your present financial position
3. Choose your investments according to your life stage
4. List of Different Asset Classes for Investing
5. Calculate How Much Money You Need to Retire?
6. Getting the Money that you need for Retirement Corpus

Personal financial planning is a far broader process covering a whole gamut of aspects other than creation of wealth. These are:

? Protecting the wealth and value of assets including life;

? Avoiding tax leakage by making all our financial transactions tax-efficient; and

? Passing on the assets created with our hard work to its rightful owners of our choice, and in totality ensuring that our life goals are duly met.

All these go concurrently with achieving our life goals in a systematic manner. This is the true essence of wealth creation and progression.

To understand the nuances of financial planning we propose to look at answers to the questions given below:

? What is financial planning?

? Why should one plan?

? Where can we invest to supplement income?

? How can we achieve the objectives of a financial plan?

One aspect that clearly distinguishes financial planning from management of money is the focus on all the areas of personal financial needs of an individual which include the need for protection of wealth through insurance planning, optimising the returns on existing assets for future through investment planning, planning for the sunset years and thus covering the risk of outliving one's corpus through retirement planning and management of tax flow utilising the benefits provided by regulations through effective tax planning. Financial planning also takes care of succession through estate planning because it is important that the hard earned wealth is distributed as per one's effective desire.

Many people do not have a clear idea about their life goals, as they fail to pay proper attention to these due to a long time left in the goals. Goals like retirement and children education look too far to be cared for in the early stages of life, which if ignored to a later date may pose a challenge later.

Financial decision-making is a complex situation and the presence of professional can help an individual making a rational decision. As an example, buying a luxury car might be high on an individual's agenda even if it would mean compromising on planning for retirement as retirement being away does not look so urgent, but the presence of a professional will ensure that the individual does not fall into this trap and the long term financial plan does not get derailed.

Most of the decisions in our lives have financial implications and during such times having a trusted professional holds us in good stead, as a professional is equipped to handle all the matters related to finance in the life of a client at the same time keeping an eye on the long term financial goals of the client which are enumerated in a comprehensive financial plan.

Common Mistakes in Personal Finance

? Spending more than you should

? No Financial Education to Spouse and Kids

? Imbalanced Asset Allocation

? Insurance is not investment

? Insurance is for the earning member of the family

? Unrealistic returns

? Feeling special when it comes to Life or Health Insurance

? Excessive Leverage and careless spending

? Short vision

? “Papa Kehte Hain” problem in Personal Finance- Unsuitable Psychology, No Idea of Investments and documents, No Self-dependency and hence lack of knowledge,

In today’s world most of the fathers and Uncles have no idea how to take investing decisions. It’s a new and different world now compared to their days. They have not much idea of how things should happen in today’s world. Our fathers, grandfathers and Uncles have come from a very different time when there were no choices other than LIC polices and FD’s.

The most crucial aspects of post-retirement investing depend on the following:

1. Size of the accumulated nest egg (Corpus)
2. Desired standard of living and expenses
3. Providing for his children's education expenses
4. Providing for the likely expenses on marriage of the children particularly Daughter's as demanded by our social tradition
5. Life expectancy
6. Desire to leave some inheritance for your loved ones
7. Real rate of inflation
8. Returns from your investments and their tax implications
9. Risk-return profile.

Retirement is generally associated with safety. However, given the present levels of high inflation, investing in most fixed income instruments would give you a negative real rate of return. Further, rising inflation might upset retirement calculations quite badly. It involves a holistic approach to assess where one is financially, and what needs to be done to achieve the life goals in consultation with a competent professional.

There are following steps of financial planning process.

The process involves:

? Gathering relevant financial information,

? Setting life goals,

? Examining current financial status and

? Coming up with a strategy or plan for how one can meet the goals given the current situation and

? Future plans along with continuous monitoring and adjustment so that the journey toward achievement of life goals stays on track.

Ability and capacity to take risks varies and the horizon for investments changes depending on the life stage one is in. The type of instrument best suited for an individual depends upon the life stage he or she is in.

If you are between 20 and 40 years of age

People in their twenties and early thirties are in the beginning of their careers. The type of financial planning they do is often influenced by the work sector of their employment. Many are married and either thinking about having children or already have young ones around the home. People in their thirties and forties are established in their jobs and in the midst of raising a family. They are concerned about their children's future and, perhaps, equally concerned about elderly parents. The 20-to-40-year stage is one where responsibilities are relatively less and hence risk-taking capacity is at its highest. Apart from investing in tax-saving instruments, investing a sizeable portion of your invest-able surplus in stocks-either directly or through a mutual fund makes imminent sense.

If you are between 40 and 50 years of age

This is the age when one has to plan for expenses like kids' higher education, their marriage, etc. In this stage, capacity to take risks is lower than in the earlier stage.

Beyond 50:

Many people get serious about retirement planning only when they reach their 50s. It’s like running a marathon race and getting serious about winning when you enter the last mile. As retirement is a lot like running a marathon, investors who take the right steps can effortlessly reach the finish line. But even the stragglers can secure a decent place in the race if they make the right adjustments in time. This week’s cover story looks at smart money moves that pre-retirees should take in the last few years before they hang up their boots. 

How to Calculate How Much Money You Need to Retire

Estimate How Much You'll Need for various purposes-monthly house hold exp., children education & marriage, medical emergencies, house, charity, social causes

Calculate a figure that's equal to 65 to 70 percent of your current annual living expenses.

Your needs may change because life expectancies are getting longer. Living longer means better health, and better health means added expenses (travel, entertainment, etc.) if you want to live the good life while you're retired.

You will have not had following Expenses post Retirement:

1. Rent, Mortgage, or other Housing Expenses
2. Work Related Expenses-Commuting, Business attire, or Eating out
3. Your Children will be Financially Independent
4. You will be retiring with No Debt

Following Factors also affect Retirement Plan

? Do you want to continue to Travel?

? Relocate to Native Place

? Increased Medical Expanses

? Continue working/business, Part time, Flexible Schedule

? Your Job has made part provision of Pensions

? Unknown Inflation

? Guessing our own life expectancy

? Leaving behind or not for Heirs

List of Different Asset Classes for Investing

Below is the list of different Asset classes one can consider for investing in Indian markets. For building a successful balanced portfolio one has to understand different asset classes and as per their risk appetite, one has to build his/her portfolio so that it’s optimal from his risk return point of view. In this post you will look at different asset classes and their sub categories with the risk potential. This is not an exhaustive list of categories; however it covers most of them.

Leanings

Equity Returns 12-15% over long term

Debt is extremely important! at high tax bracket look at Tax Free Bonds

Have a long term view to get results

Returns is not everything in Investments

You should Start Early in Life

Getting the Money that you need for Retirement Corpus

Start saving today

Redistribute your Portfolio as you get older

Once you arrive at Expenses that you need to incur, apply current interest rate to that to arrive at Corpus.

Annual Expenses/Interest Rate on regular instruments

If monthly expenses is Rs.50, 000, then Annual requirement is Rs.6, 00,000/- and if Interest rate is 8%

50,000*12=6, 00,000 = Corpus Required Rs.75.00 lakhs

           8%

Review this regularly, may once in 3 or 5 years.

Life Insurance

Get your life covered but don't hand over your savings. Insurance is for the earning member of the family. Life insurance is a replacement for your income. When your income ceases or falls insufficient either due to death, illness, retirement or a major goal such as children's education or marriage, insurance fills in the gap. On your death, the money received from term insurance policies will provide a corpus with which the family can pay off debts, convert dreams to reality and still lead a comfortable life. You must have seen cases of non-working mothers or non-earning family members getting insured. It goes against the fundamental principle of insurance.

Term Insurance

The cheapest and the most basic, this is a no-frills life cover that should be one of your first financial instruments. Being a pure insurance cover, it does not return your money if you survive the policy term. Most term plans provide cover till 60-65 years of age. Few even offer plans till age 75.

For what term do you need this cover?

Ideally, insurance must be taken to cover the working period in one's life. You take insurance to protect your dependents from the loss of your income; using the same logic, you take insurance for the time that the dependents are being supported by your income.

There are basically only four roads to wealth:

·        You can marry it (don't laugh, some do);

·        You can inherit it (others do that);

·        You can get a windfall (from a lawsuit settlement, lottery, or some other unexpected good fortune); or

·        You can accumulate it.

Estate planning

Estate planning is a process of succession and financial planning. It makes provisions for estate management, estate preservation and creating a legacy for the estate. Estate planning can be done in a number of ways -- through wills or trusts or a combination of both.

Indians tend to neglect estate planning. At times, it's simply because of a complacent attitude, or, at times the motive to plan succession in a tax efficient manner is lacking. This is in contrast with countries such as the US and UK, where inheritance taxes are applicable and people focus on estate planning as a mode of taxation planning as well.

As a result of a lack of well-structured estate planning in India, intended beneficiaries at times do not receive the property after the death of loved ones. Furthermore, the process could get embroiled in legal battles and the intention, that the estate must pass on, in a timely and hassle-free manner, gets defeated. It is easy to see that one of the most important things we can do is plan for the protection and smooth succession of our assets.

What is estate planning?

We Indians have one of the highest per capita saving rates. On an average Indian saves 28% of GDP (gross domestic product). The reasons for saving include lack of social support for senior citizen from government (in short planning for our own retirement), habits (we have seen our parents saving extra pie for rainy days) and goal based saving (like for buying house, car, etc.) among others.

When to plan

Most of us defer estate planning for later date or time. Not that we do not want to plan distribution of our assets, but we avoid for various reasons such as—to avoid discussion on demise, avoid difference of opinion with better half on distribution of asset, lack of knowledge, etc.

Will: Powerful estate planning tool

A Will is the most practical first step in estate planning. It is a legal declaration of the intention of a person regarding assets that the individual desires to take effect after his or her death. It is an extremely personal document and showcases an individual's love, care, opinions and feelings towards loved ones.

The importance of drawing up a Will is often highlighted as one of the biggest financial planning steps you Will take. It clearly states how you want your assets to be distributed when you are no longer physically present. If you don't have a, Will, which means you die intestate, your estate will be distributed according to the succession laws of the country based on your religion, and your property could be distributed differently than what you would like it to be. The laws of succession certainly do not cater to the specific needs of your family.

Giving away / beneficiary transfer: Distribute the property (estate) when one is alive.

Joint ownership

Estate planning through living trust

Revocable trust: Create a living trust and transfer assets to trust

Advantages Control is in hand of creator, Can change / revoke any time, Instruction are carried out when one is incapacitated or dies, Saves trouble of probation

Disadvantage Costly

Trust can be created by writing of trust deed. This requires person to specify the purpose of deed, its objective and how will it function. He needs to identify the trustees and give instruction of appointing successor trustees. He also needs to specify when trust has achieved its objective and how (& when) trust can be dissolved and assets liquidated. Trust needs to be registered with registrar office of state government (trust falls under state list and hence are governed by state laws) by paying stamp duty.

CA Harshad Shah @ Mumbai

[email protected]