Most of us work to provide for ourselves and our families. It includes accumulating enough for when we will not be able to continue with economically productive activities. With increased uncertainty of jobs, youngsters are also driven to FIRE. (Financial Independence Retire Early).
Money is not real wealth. You cannot eat, wear, or live inside money. Money is a tool to buy food, clothes, shelter, and everything you need to live a comfortable and fulfilling life. This is true for every human being for all his life. But understanding and assimilating this concept of abstractedness of money can make all the difference to the quality of life, especially retired life – objectively (quantum of money) and emotionally (feelings about money).
Real wealth is having everything needed to live a fulfilling, happy life. Money is a tool to get all of it at the right time. Because real wealth, such as food, is perishable, we need a storehouse of wealth. Money fulfils this purpose and avoids the inconvenience of barter. The demonetisation of 2016 brought the fiat nature of money to the forefront. The purchasing power of the ‘notes’ disappeared overnight. Clearly, if the money was accumulated as unaccounted notes in personal lockers, it had zero purchasing power and hence could not be considered wealth.
This event gave the whole generation a practical understanding of money/wealth. Money can be considered wealth only if it can buy us what we need. The fiat nature of currencies became evident to the common man in the country.
Money should be evaluated on three criteria:
- As a means of exchange (Liquidity)
- Its capacity to buy (Purchasing power)
- Certainty of availability (Safety of principal)
All the criteria become critical to retirement planning and management. Comprehending them will enable an individual to take the right decisions and ensure a peaceful life of plenty. All savings made for retirement should pass the above two tests.
Liquidity: It is critical to ensure the resources can be used to buy the products and services needed at the right time. Medical emergencies, daily needs and many other necessities need immediate cash. Not having enough liquidity ruins the whole purpose of having wealth. Money that is unavailable when you need it is as good as not having it. This is truer during the twilight years of your life. There is no ‘Inter-life Money Transfer’. Money derives its power from its ability to purchase. Its power diminishes if the potential to buy goes down.
Purchasing Power Of Money: The most crucial criterion during retirement planning. This generation may spend 30-plus years in retirement! The earnings start after 25 (owing to higher education and specialisations), and the average retirement age in India has come down to 58. With life expectancy improving every year, the current generation of youngsters can expect to live well into their 90s. The compounding effect of inflation can cause havoc during retirement. Any money invested for retirement must overcome the compounding impact of inflation.
Wealth creation means the money is kept in a manner that it can buy more tomorrow than it can buy today. This implies that money is not kept idle, and it keeps working to help you live a better life in future. The dictionary meaning of investment is ‘the action or process of investing money for profit’. This profit should be in real terms (inflation-adjusted) and not just nominal.
The Safety Of Capital: It is always desirable and should be an important investment factor. The common error most people make is that they ignore the time frame. A retirement fund which will be used after 20 years shouldn’t worry about short-term volatilities. The corpus should be protected against the volatility of the market closer to retirement. Before that, volatilities should be used to create better wealth and prosperity for retirement.
An illogically conservative portfolio results in an impoverished present and a penurious future.
All investments made for retirement should pass the test for the three criteria. We have graded the commonly available retirement tools on these parameters.
A good plan will have a judicious mix of various instruments, ensuring that while liquidity is available at the right time, the money grows to maintain its purchasing power, but the wealth is also safe. Take the help of a fiduciary advisor to ensure success in achieving this.
Focus on creating wealth while you are in the accumulation phase and orient yourself to find happiness from accumulations during retirement rather than getting worried about the sporadic tomato and ginger prices.
Renu Maheshwari is chief executive officer and principal advisor, Finzscholarz Wealth Manager and a Sebi-registered investment advisor