Emotional Insurance

"The most terrible poverty is loneliness, and feeling of being unloved." - Mother Teresa

It’s worrying that tally of aging citizens lending up in old age homes are on the rise. What kinds of insurance policies can we offer to the elderly people who need our time, who need our compassion and love, and who need our togetherness? Don’t they deserve these? Can our financial planning throw any solution?

We have insurance to cover the economic losses due to accident, sickness, old age, theft, partial & permanent disability and what not. But how can we ensure our time for our elderly parents? Honestly we do not have any mechanism to INSURE our time for our ageing parents in home at a far away place. Its not that children do not care for ageing members but the nature of today’s economic activities force them to work afar from them and their native town. Many children diligently send money to their parents and try to cater their needs remotely. So, children should not be blamed alone for the plight of their ageing parents. Then on whom the responsibility should be fixed?

Last week I had been to an old age home about 30km away from my town. Unlike old age homes in cities this one was set in solitary place on a rural backdrop. At the entrance there was a kitchen garden, also there were plenty of trees inside and outside the premises boundary that enhancing the serenity of the place. The old age home was run by a semi-literate farmer with help from few generous people of adjacent villages & dropped in by passers. The shelter building capacitated about 15-20 inmates.  Most of them were poor. Like in a short story book each one had a different tale to tell.  Their stories were very emotional and heart rendering.

Broadly on three issues the inmates of the shelter were struggling –i.e. economic, physical (health & infrastructure) & emotional. For first two issues we have answers. Pension & annuity plans, donation, corpus fund, government’s financial assistance, reverse mortgage etc. could be few solutions to our first issue. Similarly old age home, senior citizen home, hospice, health insurance etc. could be few replies to the second issue.

Perhaps the emotional issue is most difficult one to resolve. From the interaction with the inmates it was eminent that elderly parents missed their children despite they care or not. So what could be done when aging parents want their children’s time and company? There is no answer to parents whose children have dumped & discarded them. They have to seek emotional solace from outside.

Other categories of children are those who send money and honestly want their elderly with them. But the constraint with the aging parents is that they do not want to leave their native place and accompany their children to a more isolated unknown society. On the other hand for the children there is no option to return back to their parent due to nature of economic activities they pursue & lack of financial security at home.

For such children there is no immediate answer, but with little bit of planning and attitudinal change things can be resolved. To me the eminent prescription to such dutiful children is EARLY RETIREMENT, i.e. retiring in between 45 to 50 years. But how that could be achieved?

What are things we need to do for an early retirement:-

1.       Total life insurance sum assured of retiring members need to be at least 10-12 times of total annual house hold income at the time of early retirement. Preferably they should have Term policies because it cost less and surplus could be used for investment purpose.

2.       Adequate health insurance is a must for all the members particularly of the aging parents.

3.       Diligently estimate the probable expenses of the family including the aging parents with whom you want to live.

4.       The vital factor is to generate sources of cash flow to fund your early retirement.

Let’s elaborate the last factor and most important factor a little. For early retirement one need a large corpus so that income generated form it funds your retirement. Few important things listed below could help someone to build a good enough corpus.

• Be an early investor. For example an investment growing @9% get doubled in 8 years, tripled 12.75 years, quadrupled in 16.1 years, five times 18.68 years, 10 times in 26.72 years. This is what the power of compounding or magic of compounding. On other way say someone invested Rs.1 lakh @9%p.a. when was 25 years old will get Rs.8.62 lakh when he becomes 50 years, and someone started late by 5 year invested Rs.1 lakh at 30 will get Rs.5.6 when he becomes 50 years old. An investment decision taken 5 year late makes someone poorer by Rs.3.01 lakhs when the rate of return is 9%pa. The margin becomes more wide once the rate of return is high.
• Invest in equity indirectly through diversified mutual fund or Index fund. Better option to accumulate & generate wealth is through SIP. One can note that since inception NIFTY50 & BSE Sensex indexes have delivered return over 15% CAGR.
• Gradually built income generating assets, i.e. a portfolio of stocks paying historically a consistently growing of dividend; rent paying houses etc. It has been observed that dividend income and rent income have historically outpaced inflation.
• One must keep of note of all expenses on daily basis. This enables us to curtail unnecessary expenses and help us to increase allocation for investment. This habit is a great tool for saving.

Besides all the above for early retirement the most needed factor is our attitude to accommodate our parent at time of their need. Further we must learn to draw a line between “what is necessary” and “what is luxury”, or else we will spend our precious life only chasing wealth. Be aware the line is very thin.  

So the impression of early retirement as an Emotional Insurance is quite possible. The advantages are that besides being with your parents when they needed you most, an early retirement gives you ample of time to pursue your personal interests. Further its gives you plenty opportunities to pay back to your society which is a must. Personally for me creation of wealth is important but more important is distribution of wealth in a productive way for a better society.

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Send your feedback at:  ranjit_sahu@yahoo.com

Disclaimer:

All content provided on this "[www.investmentroot.blogspot.com]” blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.

Living Off the Dividend Income

“The only thing I like about stocks is they’re not bonds.” …..Tom Hancock

Are you worried about your retirement earning? Do you feel your retirement earning will fail to beat inflation? Do you fear that you have to compromise your post retirement life style? We worries a lot but do little to seek solution seriously. Here I have a story to tell, a story known to many but followed by very few. The story offers a solution to our retirement earning.

Few years ago I had met one middle age gentleman in an investment workshop. The workshop was all about retirement funding. During the lunch break the participants were discussing various retirement options & also proposing their postulates. The middle age gentleman eating besides me was quit and not participating actively in the discussion. Out of curiosity I asked him about his retirement planning. With a smile he said he was retired and living off on dividend. He further added that he was pursuing wildlife photography once his dormant hobby actively now after retirement.

I was baffled that day, the gentleman must be joking I thought. How could it be possible that a man in his fifties, doing nothing but photographing in wild? Probably he could have inherited plenty of wealth to live the current life. Too many questions came to my mind which remains unanswered at that time.

My gradual friendship and subsequent meeting with him taught me my life’s greatest financial lesson. It was he who taught me practically the concept of income generating assets. And years later I read similar ideas form Robert Kyiosaki’s Rich Dad, Poor Dad.

Recently on a Sunday morning over a cup of tea he narrated me his story of retirement funding. By profession my gentlemen friend was a software engineer. Unlike other he had no engineering degree. He was a science graduate with physics major. His keen interest in computer programming took him to a bridge course in programming. He said he was lucky to ride the software boom of nineties and his programming skill took him to higher echelon of career. To him opportunities and bit of hard work of his early days of career helped him to accumulate fair sum of money.

I was getting impatient; I was not interested about his personal history. Probably he understood my gesture but he continued as before. He told me about his father who was a small time businessman, and how he used to buy houses from his business surplus. When my friend was in college his father had four rent paying houses and one scooter to his credit besides his ongoing business. Whole of my friend’s education & his sister wedding expenses were financed from the rent income of the houses.

As per him this how he learnt the power of income generating assets and getting rich slowly. He said he had set two goals during the beginning of his career in Bangalore. First, he would be with his parents when they grow old, and second one was that he needs to set a mechanism to generate a steady cash flow to fulfill his first goal.

He told me that unlike his father he had no time to create and maintain income generating real estate assets. His few years of investment activities and his accumulate learning led him believe that dividend from companies could be a good source of income and if well managed one could live on it. When I asked why stock? His best reason was that unlike the interest from bonds, stock dividends tend to grow over time. More importantly to him, the dividend growth has historically outpaced inflation. For him stock fit his bill with a long timeline. Based on these facts he created a portfolio strictly on a set of parameters for living on dividend-income.

I summarised the parameters which helped him to generate living from stocks dividend. Following highlights are few of them.

·         Create a portfolio of at least 10-15 dividend paying stocks/companies.

·         Build the portfolio over a period which may extend to five years. Because long time frame gives opportunities to buy the stock at near the bottom of its PE band.

·         Best suited stocks to the portfolio are companies which historically paying a consistently growing dividend.

·         Don't just go by which stock has the highest dividend yield.

·         Be suspicious of a company that has cut its dividend.

·         Buy companies which have clear growing business prospect for years to come.

·        Prefer low debt or no debt companies with strong brand image, immense pricing power, and honest and transparent management.

·        Take into account other quantitative figure like ROE, ROCE, Dividend covered ratio etc.

                           

To illustrate his point my gentleman friend acquaints me with one of his holding that was ITC Ltd. As per him he had accumulated 1000 shares of ITC by the beginning of the year 2000. And his total cost of investment was about Rs.7 lakhs in the stock. I was surprised when I came to learn that he had received Rs.1.57 lakh as dividend for FY12-13 from ITC Ltd. alone

  When I did the mathematics, I found that his return from ITC dividend [i.e. (dividend / purchase price)*100] for the FY12-13 year was baffling 22.5 %. Further, total cash flow from the dividend over the 14 years was more than Rs.9 lakhs. In addition to above, if we factor in all the bonus and one stock split for the period 2000 to 2013, the purchased 1000 quantity (FV-10)  of stock is now 30,000 units (FV-1), and whose market valuation is about Rs.95 Lakhs (i.e. current MP Rs.315/-).

The gentleman did not disclose me dividends from other stocks of his portfolio. Nor I had the courage to poke into his confidential data though I would have like to listen from him. Whilst returning home from the tea one famous line came to my mind was “Stock is for the next generation” and I added to that “Dividend is for this generation”.

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Send your feedback at: ranjit_sahu@yahoo.com

Disclaimer: All content provided on this "[www.investmentroot.blogspot.com]” blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.

Good to See You Again

In July’2006 I had posted my last writing on this blog on investment. Since then I had lost my inherent interest in writing on investment topics. In fact until few months ago I never thought of reviving this blog.  Thanks to my daughter who wants to me write stories for her made me come back to this page to write investment stories may be not for her for the time being. I hope you all will like my next post on the topic -Retiring on Dividend Income.

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