Why should we plan for Retirement as soon as we start working?

If we talk to some young person about retirement who has just got his first job, he may definitely laugh on us.  In India there is almost no seriousness for retirement planning and talking to someone who has just started working is too long for planning. At the mass level, people are very short sighted and plan for their short term goals, but not “long term goals”

Why retirement planning is important?

As we all know the inflation is the biggest enemy for any person who need to survive in future. Although the inflation numbers may not look very high in govt. statistics but if we talk about actual cost of living the numbers are quite different. If we assume 10% rise every year in our cost of living then for every 7 years, we require almost double of the amount to maintain the same cost of living.

So for a 30 year old person if we assume he would retire at 58 then the money required for same life style will be 16 times of the current value. Yes it’s not a small number. If a person’s monthly expenditure is 25000 today he will need about 4 lakhs at the time of retirement.

But still people don’t plan for retirement, why so? Let’s understand the reasons and also why we should actually plan it.

1. It’s too early

As mentioned above, most of youngsters feel that I have just started working so I have different priorities. The top most thing in his mind right will be “how to buy the house?” or a New Car and maybe how to get the better pay package in the next job?

Thinking of retirement at this age is simply too much when there are so many other things before that. But the fact of life is that everything comes on its time and if we have not planned it in advance we have to suffer at that time and we can’t go back to plan again. So let’s plan the things when we have time to control it.

2. My Kids will take care of me

In India there is a famous saying that our children are “Budhape ka Sahara” this holds true even today for many of us and yes we have much better social fabric compared to western countries and lot of children take care of their old parents. But still there are many people who don’t want to be dependent on their kids. They want to give the best to their kids and raise them as amazing people, but then they do not expect anything back from them.

There was a famous movie “BAGHBAN” of Super star Amitabh Bachhan which reminds us of some hard truths about life. It’s good that our children may take care of us but should we totally dependent on them?

3. Don’t have Money

This is a very common reply if we ask some youngster. It’s getting tough to save in today’s times especially if you are single earning member in family with 5-6 people in a big city. Since this is last priority for a young person and he have got so many other expenses lined up that for retirement there is no money left.

But the hard core truth is “Just because you were not able to save enough for future, no one is going to give you money at your retirement.”  So let’s control the expenses and start saving whatever little we can start with and increase it gradually.

Even if we start saving small amounts we can create a good corpus if we continue for a long time. For example Rs. 5000 saved every month can create a corpus of about Rs. 2 cr in 30 years (assuming annual return of 12.5%).

4. We can’t visualize for so long

Future is unknown and uncertain, and generally we can’t predict what will happen after 10-20 or 30 years later so we also don’t worry about it much. Therefore most of us are unable to visualize how serious it is to plan for retirement and how tough it will get if they do not have enough retirement corpus.

It’s not easy to look far ahead in future and visualize it especially when we have a very active income right now. Just like its very tough to image how it feels to be hungry, when we are easily getting 3 meals each day. Our salary/regular income will stop coming and still we have to live another 30-40 years, its not that easy we don’t have enough money to take care of regular expenses including rising medical bills.

As we become older, our health will not be at the best level and kids will be busy and struggling with their own life issues hence may not be in position to take care of in the same way we had expected.

There are various examples of successful people who died poor and struggled in their retirement life. If we do not have enough money at retirement, we do not have power. People do not treat well, and that’s the harsh reality of life.

5. So what should we do?

We should do some basics to create a retirement corpus, which will be as follows:

1. First calculate the time of retirement

2. Find out currently monthly expenses and amount required at the time of retirement.

3. Calculate the corpus required and amount to be invested to achieve it. Take professional advisor’s help to get the clear picture.

4. Invest among different asset class i.e. equity & debt to diversify the portfolio

5. Be debt free at the time of retirement

6. Be disciplined in the investment. Invest regularly and increase it as the income increases.

7. Don’t touch the retirement corpus for any other purpose.

Smart Cashflow Strategies for your Small Business

Two weeks back we have discussed the basic of cashflows and also how to manage individual cash flows (for details plz see my blog dated 12^th March 2016). This time we are discussing more about business Cashflow,

Cash inflow is the lifeblood of your business and comes from sources like payments from customers, interest on savings or investments, receipt of a loan, or monetary infusion from an investor. Cash is very important because through this payment are made for things that make your business run: expenses like employees, rent, stock or raw materials, and other operating expenses.

POSITIVE CASHFLOWS:

As we all understand that positive cashflows are required to run any business smoothly and successfully. For positive cash flow any business has to plan its all inflows and outlfows in advance and organize them systematically.

The positive cashflows are the cash in hand, this could be money we have invested in the business, cash in the business bank account, loans received, or an investment from a partner.

After that we have to determine your monthly expected cash sources. These can be projected sales, loans that may be coming in at a certain date, investments from partners or investments. If we are in a new business we should be projecting sales conservatively (better to outperform and have a better inflow of cash than you thought). If we have already started our business or are purchasing a business from someone else, we have some clarity regarding: sales history. History can’t predict the future, but it can paint a decent picture of what the future looks like and what business changes are required.

After assessing the infows we will need to assess the monthly expenses. This can be a bit complicated because some time we overlook things and get a surprise which we don’t want. Monthly expenses to factor in can include employees salary, rent or mortgage, insurance, advertising, marketing, website hosting, travel, utilities, payroll, inventory, taxes, loan payments, working capital, and last but not least paying ourself!

How to improve Cashflows:

Improving the cash inflows and utilizing them efficiently will help to run the business comfortably further it can improve the overall profit or return on the business as well. There are some tips for that.

• We should be issuing the  invoices promptly and follow up on them regularly. It is very  simple, but  still many people don’t pay till you remind them as its common mentality and people don’t like parting with their money.
•  By giving some incentive for early payment we can get our payments more timely. Say if our standard contract has a sixty day term, we give a  discount of say 5% for payment within 10 days or 2% if within 30 days. BY this we can encourage the early payers.
•  For long term projects we can structure the payment with an upfront deposit or partial payment based on the level of completion throughout the project lifetime. This will ensure that we are getting some cash regularly and all the money is not stuck-up  and we are putting all pur cash throughout the project life.

MANAGING CASH-OUTFLOWS SMARTLY:

There are certain bills like electricity, telephone, internet etc which are to be paid regularly and on time, It’s to always better to  pay them in a timely fashion by this we build trust with your creditors and also get discounts on prompt payments like we offer.

Managing Bills/Expenses Smartly:

There are ways to pay your bills in a smart way to make sure that your cash flow remains positive:

•  Use the payment term to its fullest. If got thirty day term on a bill, we should use the thirty days to build up the cash. That way, you’ll have a better handle on what your cash flow looks like than if you simply write a check the day you receive the invoice. However if we are getting discounts/incentives we should check whether its beneficial to pay within discount period or till the last day. For example is some one is offering a 5% discount if paid in 15 days as compared to 45 days normal period means we are saving 5% by paying 30 days means 60% annualized (5*12%). As this is a return we won’t get normally so its better to pay in discount period.
•  Negotiate the payment terms when dealing with a vendor. we’ll get something if we ask for it so don’t feel ashamed to ask for it. However be cautious with this though:  don’t ask for flexible payment terms before a deal is done can raise suspicion.
•  Make online payments through NEFT/ECS/RTGS/IMPS. That way we can pay immediately when a payment is due, but won’t have to let go of the funds before we are ready and also get the confirmation immediately.
• We should build a real and healthy relationship with  vendors. If they trust us and we are honest with them it would help in doing the business easier and smoother. This will also make our life easier if we need to ask for an extension or an accommodation.

Putting idle cash on work:

• Don’t keep idle money in Current account. Money is something which should always be earning not lying idle. So if we have extra money in current account where we don’t earn anything its better to put this money on work by investing in Mutual Fund’s schemes especially structures for that purpose. Liquid or Ultra Short term bonds funds are those where we have almost negligible risk on our capital and we can earn a decent retur. BY investing the surplus money in mutual funds we earn extra cash without hampering our normal business operations and we can get our money back within one day so as to run the business smoothly.

Surviving Lean Months:

• Business don’t run in a normal pace always. We have some good months and some slowdown times however the regular expenses/bills aren’t going to magically disappear or change their due dates, So we should be ready for that. We need to have cash buffer to survive those periods when the flows are not sufficient.  

Be prepared for rainy days:

• We should build up some cash reserves to avoid this problem. Review the cash flow history and arrive at a reserves estimate that would cover our business for three months, six months, and a year. Just knowing those numbers can help us to paint a better picture and, thus, make better business decisions.
• We can also arrange a line of credit with your bank. When we are flush it’s easier to get money than when we are running on cash negative position, So its better to talk to  banker about having the ability to borrow up to a preset limit any time you need it when we are in comfortable positions rather then waiting for the time when actually we need it.