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The growth of the Financial Services Industry has provided significant benefits to the consumer including ATMs, Money Market Accounts, Mutual Funds etc. However, given the increased complexity of products and information, it is important for families and individuals to have a better understanding and knowledge of the markets and their Personal Finances.
This is most critical for retirement planning. Today most of us can be expected to live up to 30 years in retirement. Yet companies are increasingly moving away from "defined benefits plan" (guaranteed pension) to "defined contribution plans" - with individuals bearing responsibility for both - investment decisions and risk of running out of money
As a rule of thumb - financial planners recommend withdrawing no more than 4% - 5% of retirement savings every year. That means a lot of savings even for an average family:
  • to get a income of $ 5,000 per month - will require a retirement nest of $ one and a half million! Even assuming $ 1,500 from social security etc. - a monthly income of $ 3,500 in retirement would mean savings of just over 1 million.
  • 80% pre retirement income during retirement will require approx 16x - 18x annual salary in savings.
How does one save enough over 30 years of working life for 30 years in retirement? The answer is simple - the magic of Compound Interest
  • Simulations show that - starting early, saving regularly and getting a steady rate of return - will mean your required retirement nest will consist approx. 30% of your savings and 70% from cumulative interest.
Importantly - Savings is different from Investing. A few percentage points in interest rates can mean a huge difference in your future wealth. Therefore, while stocks may be a riskier investment in the short run, in the long run the rewards can certainly outweigh the risks. But, again "speculation" is different from Investing. Do Not speculate
  • If you saved $ 100 per month for 40 yrears. At 3% interest you would have approx. $ 92,000 (2x savings); At 5% - $ 152,000 (3x savings) , And @ 9% - over 465,000 (10x your savings)
  • Conversely ofcourse - Inflation is yoır # 1 Risk in retirement. As an example to maintain a lifestyle of $ 60,000 per year at 3% inflation (historical average) - you will need $80,000 a year in 10 years; $120,000 a year in 20 years (age 85, if you retire at 65). Along with safety, one needs to ensure a good return on investments - even after retirement.
Savings and Investments - are amongst the most important and long lasting decisions - one may make today. And while the sheer volume and complexity of information and products can be over whelming - it need not be complex. And there is no need to reinvent the wheel here. There are enough good books and tools in the market. The aim of this web site is to list my personal favourites:
But, some basic guidelines: (i.) start investing early, (ii.) invest as much as possible, and (iii.) attempt to earn a reasonable rate of return.
1. Investments:
  • Pay yourself 1st: Set up regular monthly plans. This ensures discipline as well as allows benefit of dollar cost averaging.
  • Asset allocation: Over a longer period asset allocation has shown to be the most important factor in determining returns from investing (with stock selection and market timing, having only secondary roles). The mix should be determined by both - (i.) Individual objective(s) - growth, income, safety, and (ii.) timing, when money will be required (Equities are best suited for long term investments)
  • Keep it Simple: Diversified and low cost index funds (or ETFs) – have the advantages of - (i.) diversification , and (ii.) lower costs. Focus on Fees (in the Investment world - you get what you do,nt pay for!).
2. Stocks:
  • If you do want to invest in stocks - one needs to educate oneself and be prepared to spend time. But some simple rules In stocks you are purchasing future cash flows. Price at which you buy is as important as what you buy. Analyze companies "economic moat" and earnings. Ensure the price allows a margin of error.
3. Debt: Pay down your Debt.
  • Mortgage: Not an investment but a home. Try and pay back early in a prudent manner
4. Life Insurance: Sole purpose of life insurance is to replace your income in case you die, so that your family can maintain their quality of life. Amount of coverage should depend on your and your chidrens age - (a.) balance of working life with income, and (b.) balance of years children at home. Maximise "Term" coverage
  • Insurance is not an investment. Keep your investing and insurance strictly separate. Pay the minimum premium for a "Term" coverage, and use savings for Investments (in diversified low cost index funds or ETFs). Whole Life or Investment policies are very expensive (with high commission to agents) and based on (very) low interest rate assumptions.
5. Annuties are not an asset class, for asset diverification (i.e. like stocks and bonds, that should account for a certain percentage of your well-rounded portfolio). Instead they are to ensure a mimimum income - to cover basic expenses - for life ( irrespective to movements in financial markets). However, you have no access to those funds - so you want to balance your portfolio to ensure you still have other assets to provide liquidity and some long-term growth.
6. Retirement: Some rule of thumb
  • Need 80% of pre retirement income, post retirement
  • Withdraw no more than 4% -5% of retirement savings per year
  • To retire at 65 with 80% of your pre-retirement earnings, you'll need savings equal to roughly 16 - 18 times your annual income
7. Build your personal road-map:
  • How much you need to to save every year?
  • How much should you should have saved at your age?
  • How much debt should you should have?
  • Your Investment plan, asset allocation and need (if any) for rebalancing?
  • How much Insurance do you need need?
8. Will: Every one needs to have an updated will
9. Ensure your critical financial documents are updated and uncluttered/ easy to access.
10. Money is only a means to an end. Stay Happy & Healthy.
Disclaimer: "This website merely a compilation of my favourite sites relating to Personal Finance. Any financial transactions must be done in consultation with your own financial advisors. Please note I am not a qualified, certified or practicing financial advisor"
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