REUTERS/Rupak De Chowdhuri
REUTERS/Rupak De Chowdhuri

KARTIK JHAVERI gives you a case history of a person who made an “Optimal Level” of money.

This is a story about Prakash Mehra is today 66 years old but worked on a personal finance plain in 2007. He lives in Hong Kong and had retired in early 2009 at the age of 60. Upon retirement he planned to settle down in Mumbai his hometown. However, the month of October 2007 will go down as the most historic month of his life.

He has sold every share and mutual fund he owned. His bank account had Rs. 5.5 crores and that is totally tax-free! All these were long term capital gains. In addition he has his own apartment in Mumbai which was free of loan about 10 years back. He still has about 1 crore invested across RBI Bonds, PPF, POMIS, KVP etc that are still to mature over the next couple of years.

He had been investing into all products available in India over the last 30 years of his working life. He had much more investment surplus during his last 10 year stint in Asia. The question is why did he sell out in October 2007? Was he scared? Was he trying to do profit booking? No.

He has sold because he achieved his “optimal level” of money. He has reached his goal. The Indian bull market was perhaps far from over, in fact things were just becoming really exciting, but he did not want to be bothered by that. This was his game plan going forward from October 2007.

  1. He must get a monthly inflow of Rs. 1.5 lacs pre tax, so that post tax this may work out to about 1 lac. On a yearly basis this works out to 18 lacs and 12 lacs respectively.
  2. Each year he wanted to have an increment of 10%
  3. The funds should be enough in case he lives till 90 years of age.
  4. All savings from current income will be kept as contingency funds post his age of 60.
  5. In the event that he and his spouse die before reaching the age of 90 his children will have an inheritance and this he feels is quite likely.

His life is going to be non-compromising. He will have his holidays, chauffer driven cars, wining and dining at places of everyone’s desire and all the other nice luxuries of life. The optimal level of money for him was Rs. 6.5 crores. This was worked on the basis of the assumption that if these 6.5 crores earned him 8% p.a. before tax then he would have a stream of cashflows beginning from 1 lac post tax per month and increments of 10% each year.

For the Future…

To be able to earn 8% before tax Mr. Mehra does not necessarily require professional help to manage his affairs and advice him on his investment strategy going forward. I am sure anyone could do this. The only thing he needs to do is to invest in a manner that will yield him 8% before tax. To get this 8% pre-tax assured return is also quite easy and straightforward.

Regarding the past…

You might be thinking that he is fortunate to have had 5.5 crores of equity portfolio. The truth is far from that. As a matter of fact he has broadly followed a strategy of 60/40 equity to debt allocation, generally buy and hold for a couple of years before selling a stock or mutual fund. He has done such a grand selling only once in his life. Please note that his money could possibly double or tripled in the next 10 years if he continued to hold his portfolio. But he is content with what he had, the most important thing being he reaching his “optimal money” level.

Optimal Money

Now here is where the challenge is. The question to ask is… If I wish to stop working today what is my “Optimal Level” of money. If I plan to quit work in say 1 or 2 or say 20 years what is the optimal level that I must target for? Mathematically speaking optimal level is that amount of money which when invested at a certain rate of return for a certain number of years will enable you to create a stream of inflows such that the money will last you for your entire life and probably have some surplus to leave as inheritance as well. Optimal level is different for each person and depends on the family situation. The entire family’s perspective has to be included without which this calculation is not possible. One this level is reached its almost like financial nirvana.

(Kartik Jhaveri is a Certified Financial Planner and can be reached at kartik.jhaveri@transcend-india.com)