I watched the movie Star Trek- First Contact a long time back, but the below exchange between Captain Picard and Lily has stayed with me.
Captain Jean-Luc Picard: The economics of the future are somewhat different. You see, money doesn’t exist in the 24th century.–Star Trek- First Contact
Lily Sloane: No money? You mean, you don’t get paid?
Captain Jean-Luc Picard: The acquisition of wealth is no longer the driving force of our lives. We work to better ourselves and the rest of humanity. Actually, we’re all like yourself and Dr. Cochrane.
If only, we were living in the Star Trek’s version of the 24th century. We live in the 21st century; Money still makes the world go round! Hard currency, dough, bucks, moolah, bartan; call it by any name, the usage remains the same, i.e. to improve our and our loved ones’ lives.
We are always in a constant battle with our past, present, and future. We want to, improve upon our past, live our present comfortably, and secure our future.
While we invest, to improve upon our past (wealth creation) and secure our future (retirement, child’s education, etc.), our ‘present’ dominates the thought process, especially in a crisis like this pandemic.
The future takes a back seat and let me think about the now first’ thinking comes over. ‘If I do not take care of the present, then how will I build our future?’ We start making decisions based on today’s circumstances without thinking about how the future is getting impacted due to those decisions.
We start cashing-in our long-term investments earmarked for non-negotiable financial goals like the child’s future, retirement etc., stop paying life insurance premiums, stop our regular savings/investments. This can be evidenced by the persistency data of life insurance and investment companies.
These are tough times, no doubt. The uncertainty is irritating—loss of a job, salary cuts, compounding the uncertainty. Nobody is sure if this is going back to normal or not. If it is, then when? But this will pass. Hence, we can’t stop planning for the future.
Food for thought to help you keep track of financial goals:
- A 50% withdrawal from your investments will require 100% returns!
Example: If you withdraw USD 25,000 from your investment value of USD 50,000 earmarked for your retirement then the remaining USD 25,000 will require 100% returns to reach the same USD 50,000 [(50-25)/25]. This 100% returns will take time. If your financial goal is nearer, then you would have to invest more or take higher risks to achieve higher returns to make up for the money withdrawn. Think ‘Do I really need this much?’ before you withdraw.
2. Avoid foolish thoughts
Stopping the premium now of your long-term protection policy like life cover, critical illness cover or disability cover, thinking you will reinstate or buy a new one later, will be a foolish decision. The reasons are-
- You are not getting younger, reinstating a policy or buying a new one requires underwriting. There is always a risk your application may be rejected due to a health issue you are not aware of. Keep the existing cover running!
- You bought it cheap as you were younger.
- Life insurance need is acute in times of crisis like this pandemic. There is always a possibility of a double whammy of loss of job and a critical illness. An existing protection cover is like a pot of gold for the loved ones to meet any eventuality. Cut down on your non-essential expenses and make sure you pay your premiums.
3. Any withdrawal or halt in regular savings diminishes compounding effect
Example: Say you were saving USD 20,000 per annum for retirement to accumulate USD 1 million (expecting 6% CAGR) in 25 years. You saved for 5 years, and the pandemic hit. The below table illustrates the effect of the decisions taken.
|Scenario||A Break in Savings||End Fund value @6%||Deficit|
|Ideal||No breaks||USD 1,163,128|
|Not so ideal||Missed one premium |
in the 6th year
|USD 1,098,985||USD 64,143|
|Worse||Missed one premium |
in 6th year and withdrew USD 50K
|USD 947,705||USD 215,423|
As you can see, the returns are diminished.
Whatever be the current circumstances, do not lose sight of your future financial goals. Stay calm and make informed decisions; speak to a financial adviser. Your decisions today have the potential to have a snowball effect on your future-positive or negative.
Stay safe, stay protected. Your’s and your loved ones’ future depends on it.
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