To
understand something, we need to dig slightly deeper, this is one such
initiative, hope this helps to understand and where we stand all the
days...
When I started my career
in way back March 1996, 17 years before my salary was Rs. 3000 and I used to spend
more than Rs. 2000 for the rent as well as food and transport. No mobile, No
internet and No TV in the room.
Expenses in Mar 1996
|
Rs.
-2,000
|
Expenses after (Yrs)
(1996-2013)
|
17 Years
|
Rate of Inflation
|
8%
|
Expenses in March 2013
|
Rs.
7,400
|
Assume
at 8% inflation, the same amount today will be in the 17 years is Rs. 7,400.
Today, we can't eat less than 50 rupees for breakfast, lunch and dinner, so it
would be Rs. 4500 for food alone.
Assume
rent is Rs. 2500 and mobile; transport and other stuff will easily be over Rs.
7400. So we can comfortably assume 8% inflation in the future too!
Unfortunately, many of the
investor will never ever understand two things in finance 1. Inflation 2.
Purchasing Power.
1. Inflation:
Whatever is your investment vehicle, if it is not beat inflation, then sooner
the inflation will eat all the money and you will go bankruptcy?
2.
Purchasing Power: Investor will always look at the absolute
value and never understand whether the money has the purchase power. Most of
the investor will be happy, even if they get the money back after 5 years. At
the rate of 8% inflation the value will be 50% only, which means the money has
50% of the purchasing power which investor hardly realize or notice.
I have enclosed excel file
to understand the power of inflation much better, by putting inflation versus
return to understand better. If something is demonstrated with numbers,
generally people understand and relate easily.
1. Money Invested in
Insurance Policy for Long Term or Retirement
2. Money Invested in PPF
3. Money Invested in FD
4. Money Invested in
Mutual Fund SIP
Inflation
Template:
This is the template
wherein you can put the current expenses and the number of years and if you
want to change the inflation percentage also, you will get future expenses.
Whole
Life Policy, Very Popular one
For 12 Lakhs life cover,
the premium will be Rs. 1,04,400 per annum for 15 Years, for 25 years old Male.
From 6th Year onwards, 3%
(approx.) of life cover will be given till 10th year, from 11th year till death
or 100 years whichever is earlier. 5%
of Sum Assured plus cash incentive (assume 3%), so it would be 96K per annum
and I took it as 1 lakh.
Assume, the investor is
living up to 80 years; he will continuously get only 1 lakh as long as he
alive. In this case, he will get 1 lakhs for 35 years.
After death Rs 12 Lakhs
plus guarantee addition, and it will not be more than double, so it would be 25
Lakhs. If he dies within 15 years, then the investor will get Rs. 12 Lakhs.
Assume monthly expenses of
20K today in 15 years will be 63K, which means 7.5 lakhs per annum, whereas insurance company is giving 1
lakh and no inflation adjusted payment in the future. This policy will be a disaster,
yet it is sold like hot cake, because investor never ever understand what is
inflation and what is purchasing power?
If the same can be put in
a mutual fund the maturity value at the end of 40 to 80 increased by 5 years as
follows, which is much bigger than whole life policy and the beauty is we can
take whatever the amount we want, whereas in whole life policy we have to
receive very less amount only.
Age
|
Maturity Value
|
40
|
Rs. 44,05,706
|
45
|
Rs. 70,54,603
|
50
|
Rs. 1,17,21,101
|
55
|
Rs. 1,99,45,066
|
60
|
Rs. 3,44,38,503
|
65
|
Rs. 5,99,80,890
|
70
|
Rs. 10,49,95,305
|
75
|
Rs. 18,43,26,083
|
80
|
Rs. 32,41,34,020
|
Family
PF (Husband and Wife Contribution)
Many of us believe that
PPF is one of the best (safe) investment and returns are tax free and almost
all the individual open PPF account. I have assumed 8.8% interest throughout,
which is not possible for the next 15 years, yet I assume. At the rate of 8%
inflation, the PPF money will get drained in 8 years after PPF closure. See the
excel sheet attached.
I remember the saying GOOD
is not GOOD Enough, When BETTER is Expected.
Popular
Investments are FD, Senior Citizen Savings, Post office MIS
Most of the retiree wanted
to safe guard their retirement funds to any of the above investments and all
the interests are subject to tax, yet I assume 9% post tax return.
For example, if the
individual invest 50 Lakhs rupees at the rate of 9% interest, and inflation
assumed as 8%, in 11 years entire corpus will get drained, which means he will
have no money left if he lives beyond 71 years!
Right
Amount Invested in SIP
If you want to retire at
40, you need to save 24K per month for the next 15 years and you can live up to
78 years comfortably. You start doing whatever you like after 40 years.
We are living in the world
of nuclear family and it will be worsen in the coming years. Moreover, the
Generation Next wanted to retire quickly which translates into more retirement period
than working period. If we have not created enough corpus's for our retirement,
then future will be a big question mark?