A few days ago I did a post saying you need Rs. 3 crores (allocated among 3 asset classes equally) – most people reacted saying ‘this is too much’.
Let us take an example. If you were to go from your house to office (a journey that you undertake every working day) and you needed Rs. 50 to do that journey, how much money would you carry?
Rs. 40? Rs. 50? Rs. 200?
or literally Rs. 500 + credit card + debit cards…..
good chance is it the 4th option, right? Why does this happen? Because the human mind needs to keep that ‘extra’ something – just in case something goes wrong.
If you are a student of Economics, you understand ‘motives for holding cash’ – one is precautionary motive.
So if you need about 4 L of current income during your retired life (Rs. 30k pm approx)..YOU WILL create an income of about 7-8L – just in case. In the example that I had given the person needed Rs. 4L but he had created 4L from equity, 4L from debt instruments and Rs. 4L from rent. This ensures that he does not have to worry about :
a) what if the house remains vacant for 3 months?
b) what if a big company in which I have a holding skips dividend?
c) what happens if a company in which I have a FD defaults (default means loss of income and loss of corpus also!)
So the cushion building has to be a very imp part of the portfolio management process. Do not ignore it.
For all other goals in your life, you know that if there is an over-run, you will dip into the corpus for retirement….but if you fall short of the retirement corpus, you cannot even borrow.
Erring on the side of caution is what you are taught as a CA. Life long it will remain as an imp lesson. It helps especially when conditions are so fluid all over the world.
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