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Cash flow in retirement

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What rate of return do you get from your bank account? This question triggered a lot of discussion at a recent event. The answer seems to vary a hundredfold. At the low end, people said they were getting 0 .01%. At the high end, some people claimed they were getting nearly 1.00% So for $100,000, people were getting between $10 – $1,000 per year. In many cases, you still have to pay taxes on those paltry earnings.That is pretty hard to live on that if you are retired.

This is not somebody’s problem. It is everybody’s problem, particularly if you are retired.

When you look for a solution, the most common solution seems to be annuities. Annuities claim that they give you between 5-7% per year, for the rest of your life.

That seems pretty wonderful in today’s climate, but there are two problems. First, they are not giving you a return on your money. In many cases, they are taking your money and giving it back to you … in small doses. Say you invest $100,000 in an annuity and you get back $5,000 per year. After 20 years, you have just got your own money back. Then, if you happen to die, your principal of $100,000 is gone and you got nothing more than your own money back.

Of course, if you live another 10 -20 years, you will come out better, but the problem is that the insurance companies have pre-calculated the probability of how long most people will live and then set the annual returns accordingly … in their favor. They call this the law of large numbers.

The second problem is that you may have to pay taxes on some part of the returns that you get.

There are many different types of annuities, but the basic problem with all of them is that you rapidly lose your principal after you annuitize. This is because of their high fees.

Are there any better and safe solutions to the cash flow problems in retirement? Yes, there are. After I retired, I searched a lot. This is what I found:

 

  1. Laddered bonds. Both corporate and municipal bonds, give better returns, depending on how far out you are willing to go out in time and what your tax bracket is.
  2. Preferred stocks of solid companies.
  3. Dividend-paying stocks of first-rate companies that are currently selling at attractive prices. I like this option for retirement accounts.
  4. Special dividend paying life policies from mutual companies, that can give safe returns starting at 3% and increasing to 5% over time. While the returns are not guaranteed, they have never had a single losing year in the last 50 years and the returns are tax-free. This is one of my favorites.
  5. REITs (real estate investment trusts) that pay good dividends. Their returns have been between 3-5%. The principal goes up and down with market conditions.
  6. Energy pipeline transport companies are selling at attractive prices and are less risky than oil companies.
  7. Selling put options and covered calls. We are teaching classes on how to do this.
  8. Rental real estate, if you are willing to manage it. I am not.

Of all the above options, I have chosen to spread my risk, by investing small amounts in many of them. Of course, some of these options are better for my temperament than others, but I have sold most of my annuities.

I am not a financial advisor, the purpose of these articles is to educate people on investment issues. I cannot tell you what to do, but I am happy to share with you, what I have done to improve my returns.

I believe nobody can live on the returns that the banks are giving. It does not matter if it is 0.01% or 1.0%.

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India vs. China: Who will win the race to the future?

 

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India and China have been rivals for over a 1,000 years. In the old days, their rivalry overflowed into the rest of Asia, which was named appropriately as Indochina. Both countries were technology and cultural leaders in the past. They exported both ideas and products to the world.

Just prior to Western dominance, during 1650-1750, India and China contributed over 65% of the global economy. China produced fine silks, porcelain,iron products, tea, gunpowder and many things that were desired by other civilizations. India produced cotton, spices and precious stones. With the rise of the West, both their economies were destroyed. At the low point around 1914, India and China jointly were reduced to about 15% of the global economy.

Now both countries are on the rise again. China has become the second largest economy

(after the USA) and India has become the sixth largest economy. What is interesting to note that the numbers are even more favorable when adjusted for purchasing power parity (PPP). China comes in at No. 1, USA is at No. 2 and India at No. 3. China’s rise is based on the country being the manufacturing powerhouse and India’s success has been based on its lead in computer software and information technology.

 

Today, China and India are following totally different paths and the race will become even more interesting in the future. China is a centrally planned economy based on Confucian discipline, whereas India is more of a free market economy based on numerous fits and starts.

At the present time, both countries have about the same population of 1.3 billion people each. The average Chinese per capita GDP adjusted for PPP is about two times that of an average person in India. Before this PPP adjustment, the average Chinese GDP per capita is 4.5 times that of a person in India. The average Chinese person is in middle class whereas the average Indian still remains poor.

Moving forward, how these countries employ their resources is going to determine who will take the lead. In the past several decades, China was the fastest growing economy, growing at nearly 10%. While China’s growth has slowed, India has become the fastest growing major economy.

China’s strategy is to use its vast surplus capital to build massive infrastructure projects. An example of this strategy at work is the One Belt, One Road (OBOR) initiative to build a new silk route to spur trade with countries from China to the West. An investment of over 100 billion is expected for this project. These shares are now being trade in the US stock market under the symbol OBOR. They may make an interesting long-term investment.

India’s strategy is to modernize the economy by using its strength in Information technology. The recent demonetization, followed by electronic payments is one example. Another is the introduction of a single GST to simplify movement of goods across the country. Despite the hiccups with the implementation, all these projects are moving the country into the modern electronic era. Also,India also has a much younger labor force, which could be an advantage in the long run.

Who will win the race into the future? Will it be China’s massive capital spending approach or will it be India’s implementation of technology? I believe that neither approach will carry the day. The race will be won by the country that can be the global creative and innovation leader.

From the late 1970’s, China has benefitted from the technology transferred to it by the Western countries in their quest to seek lower manufacturing costs. With rising costs in Japan and the Asian Tiger countries, manufacturing in China was a natural choice. With free technology and great discipline, the Chinese have made enormous prosperity and economic growth.

China is an ethnically homogenous country with a lot of pride about its past prominence. However, China also has cultural barriers against innovation. In the Confucian tradition, the emphasis was on becoming a civil servant, rather than a business person. China had a complex system of examinations to become a civil servant. The apex of success was in rising up the ladder in the State bureaucracy. The question is how can the Chinese move from being a copier of Western technology to become an innovator again.?

 

India has a giant human resource of technicians and engineers. However, the education system in India is too rigid and does not reward creativity. At a very early age, young people have to make career choices that are hard to change. Often times, these choices are imposed by well-meaning parents without regard to the talents and interests of the individuals. Most parents are risk averse in making career choices for their children. Students get to the top by following the rules and working within the system and not by challenging it. The education system combined by the heterogeneous ethnicity, deprive Indians of the National pride that is essential to be global leaders.There remains a long shadow of the British colonial rule.

The large majority of the computer work performed in India is low-end technical work and not high-end creative work. Also, because of the large period of colonial rule and the heterogeneity of the Indian people, there seems to be a lack of confidence and pride that Indians can lead on the global scene. (China was never subjected to colonial rule the way India was subjugated.)

The Indians, who are fortunate to escape the rigid system in India, seem to quickly develop the pride and confidence to innovate and lead.Their peers in India still lack that confidence. Clearly, the ability and potential are there. Can these be injected at the systemic level?

 

China or India: the one that can develop internal innovation leadership and not live on external technology handouts will inevitably win the race to the future.

 

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Aadhaar card for NRIs

Demystified: Aadhaar Card for NRIs

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Despite the very best intentions, sometimes a rule may be implemented that is contradictory or confusing. I believe that the question regarding Aadhaar cards falls in this space.

 

The purpose of the Aadhaar card is to provide residents of India a Unique Identification Card in order to ensure that welfare services are delivered efficiently and effectively. Originally, the card was granted only to Indian residents, but now it may be granted to NRIs… under certain conditions.

For NRIs to hold an Aadhaar card, they must reside in India for 182 days preceding the application date for the card. This may seem like a small detail, but in fact it can have serious consequences from an income tax perspective.

Basically, the purpose of the Aadhaar card is to give benefits to residents of India and not to people who are not residents. Well, most NRIs will not and should not be qualified as residents of India. That is what it means to be an NRI — Non-Resident Indian.

If that is the current law, then the following things follow.

  1. NRIs can operate NRE and NRO bank accounts in india without a Aadhaar card
  2. Their PAN card will not be blocked if it is not linked to an Aadhaar card.
  3. NRIs who really want an Aadhaar card must be present in India to apply for one. They cannot do so on line.

So why should an NRI want an Aadhaar card, when there are no advantages, but serious disadvantages. Beyond this, it is not even allowed under the current laws, unless you meet the 182-day rule. The main reason is ignorance on the part of the people that you have to deal with in India. They may not understand this exemption for NRIs and insist that you have to have an Aadhaar card before you can make a transaction with them.

Examples may be that they do not give you a water connection, electricity connection or a mobile phone account without an Aadhaar card. This is not anybody’s fault. It is just the confusion that exists at the present time.

Hope this helps dispel some of the mystery surrounding the Aadhaar card rules. Of course, the laws could change in the future, but we will try to keep you informed.

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Annuities Exposed

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Many questions have been asked about the problem with annuities.

 

They seem to be a almost sure way of getting a 5% return, which seems wonderful in today’s low-interest environment. Actually, I was sold annuities so well that I had bought annuities with many major insurance companies. This includes Pacific Life, Voya, Jackson National life, John Hancock and Nationwide, to name a few.

 

The key operative words are that annuities are are sold to customers who do not have the insights to ask the right questions about them. They are marketed as amazing products, with many bells and whistles. The average customer is so overwhelmed by all the marketing hype that they do not know how to ask the right questions.

 

Here are some key questions that are seldom asked.

1. What are the true costs of an annuity?

Typically, there is about a 5%-plus sales charge and a 3.5%-plus annual fee. All those wonderful riders have fees attached to them. These are pretty hefty fees.

2. Despite great stock market returns, I seldom got much more than the guaranteed rate of 5-6%. Why is that?

I think it is because of high annual fees.

3. When you start taking out the money from the annuity, what is the rate of depletion of your cash value?

This is a vital question that is seldom asked, because this rate is very high, very little cash value is left that goes to your heirs. So the deal is that the normal person puts in money for about 10-plus years. Then he starts to withdraw, normally at the age of 65 or greater. If the withdrawal rate is 5%, most people only get their own money back, before they die.

4. What is the real return from annuities?

We estimate that it is between 1-2% in most cases.

5. What is the rate of decline in cash value of the annuity after the withdrawal begins?

Notional values after 10 years are about double of the original investment. Let us say that the market is giving a 6-7% return, depending on the funds that you have chosen. If the payout is 5% (of the notional value or 10% of the original value) and the  annual costs are  3.5-4%, the rate of decline is very rapid.

 

Normal experience is that too many things have to go right,for an annuity to be a winning investment. Of course, it helps, if the market does well and you live a very long time. But remember that the insurance company is always the winner. It is called the law of large numbers.

 

To quote leading financial investment guru Ken Fisher, he has never sold an annuity … and would never sell an annuity. Fisher says that whatever an annuity does for you, there are better ways to accomplish the same things. I agree with Ken Fisher. Once I truly understood annuities, I have sold all my annuities.

 

If you want a true assessment of your annuities, I am happy to provide you an unbiased opinion.

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Retiring in India— A shattered dream due to changes in tax laws

RANVIR MOHINDRA

Many people of Indian origin have dreamed about spending more time in India after they retire. Under the changes taking place in the U.S. and Indian tax laws, this dream may result in much higher taxes (sometimes more than double).

To understand all the changes that have taken place recently, as well as the severe civil and criminal penalties for non compliance, we are providing a quick snapshot in this article. This is not to be taken as tax or legal advice, but intended to guide readers on the relevant issues.

1. Tax coordination between US and India

Both countries have agreed on reporting of tax information to each other. Points of interest include:

  • The United States requires each U.S. citizen or permanent resident to report worldwide income. This includes reporting of foreign financial assets in excess of $10,000.
  • The foreign financial assets have to be reported annually on a form known as FBAR.
  • The foreign income has to be reported in the normal income tax filings on the Form 1040.
  • Special attention has to be paid to completing form 8938.
  • The penalties for not reporting are from 5% to over 100% of your foreign assets and may include criminal penalties.
  • Sometimes, people think that the U.S. government cannot find out about your foreign assets. This has also changed. Banks and financial institutions in India are required to report your earnings to the IRS under the FATCA (foreign account tax compliance act).
  • Once this information is reported, you may receive a letter from the IRS. There are severe penalties for every day that you do not respond.

2. Residency and taxation in India

The Indian government will normally tax foreign citizens only on income in India. However, this changes when you become a resident in India. In such a case, you will be taxed on your worldwide income.

Most people think that if you stay in India for less than half the year (182 days) you are not a resident. This may not be true. India has multiple tests that determine residency. In many cases, you will be deemed to be an Indian resident if you stay for more than 360 days over a four-year period. As a consequence of becoming an Indian resident is that your total tax bill may more than double. This is in spite of the double-taxation treaty between the two countries.

Take the example of a senior couple with a gross income of $100,000 per year. After personal exemptions and deductions, their taxable income would be about $75,000, resulting in a Federal Income Tax between $10,000-11,000 per year.

If they are also deemed to be residents of India, their taxable income in India would be above $22,000 per year. Under this situation, the couple would pay $11,000 to the U.S. treasury and an additional $11,000 to the Indian treasury.

3. Selling property in India

If an NRI sells property in India, the withholding of taxes is much higher than what is required for Indian citizens. In most cases, the buyer has to withhold and deposit up to 30.6% of the sales price. For Indian citizens, this requirement is only 1%. You are told that you can get the refund from the Income tax department, but that is very cumbersome. There are proactive ways to avoid this situation from happening to you.

4. Taxation of ancestral inherited or gifted property in India

If you inherit a property in India, you are required to pay normal capital gains in taxes. These gains are calculated as the difference in sales price minus the indexed cost price of the property. However you could have a big windfall under the U.S. tax laws.

In the U.S., the profit for inherited or gifted property is calculated as the difference in sales price and the stepped up cost basis of the market value of the property on the date of inheritance (or gifting). This treatment could result in a windfall of many thousands of dollars and the refund comes from the U.S. treasury and/or is given as a lifetime foreign tax credit.

5. Investing in India

Interest rates are higher in India, but so is the rate of inflation. If you keep money in a NRE account in India, there are no taxes to be paid in India, but they must be paid in the U.S. The same thing is true for capital gains and dividends in India. No taxes are due in India, but they must be paid in the U.S. With the coordination of taxes between the two countries, there is no possibility of avoiding these taxes. Also, many institutions will not accept investments from U.S. citizens because of the cumbersome reporting requirements.

I hope this article provides a brief summary of the new rules on income and taxes that have emerged. We will be covering some of these issues in greater detail in future issues. If you need additional information, please feel free to contact us for a no-obligation, initial review of your individual situation.

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A resident of Texas for over 40 years, Ranvir Mohindra has been involved with many issues that are relevant to the South Asian community living in the United States. Whether you have money in India that you did not report or have inherited an ancestral property, there are new rules of compliance. Mr. Mohindra’s expertise is built on personal experiences and access to tax and legal professionals, both in Houston and in India, who can provide additional support to bring you in compliance and protect your assets. He can be reached at 713-805-0915 or nritax.wealth@gmail.com

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Why are FBAR and FATCA important to your financial health?

RANVIR MOHINDRA

We all know that knowing your blood pressure, cholesterol and A1-C numbers are vital to your health and well being. You could live a long life without knowing these numbers, but that is only because you are lucky and not because you are wise. In today’s complex world, it is very important to understand FBAR and FATCA. These are vital for your financial health and well being.

What is FBAR?

The United States government requires all U.S. Citizens and Permanent Residents to declare their Foreign Financial Assets on an annual basis. This information is collected by the Internal Revenue Service and Department of Homeland Security. The reporting threshold is a total of $10,000 that is held in foreign banks and securities (such as mutual funds and bonds). This information is to be reported annually on a form also known as Fin.Cen.

Many people of India Origin have not complied with this law and now face severe civil and criminal penalties. The penalties used to be 27.5% to over 100% of the value of the assets, but now there is a special amnesty program that reduces the penalty to 5%. There are, however, special conditions that must be met to qualify for this amnesty. The most important aspect is to prove that your neglect to comply was not willful (intentional).

What is FATCA ?

Since many people did not comply with the reporting requirement outlined above, the U.S. government passed a law that required the financial institutions to report your holdings directly to the Internal Revenue Service. This law was passed in 2014 and is known as FATCA (Foreign Account Tax compliance Act). If the IRS contacts you because they have received information from your bank or financial institution, you are generally in deep trouble. There is a fine for every day that you do not respond to the IRS letter. Further, if your bank in India does not comply with the IRS, it may be placed on a dirty banks list, which has bad consequence for the bank.

What is Form 8938?

This is a part of your Schedule B on the annual 1040 reporting of your annual taxes to the IRS. On this form, you are required to report any income received in a foreign country. All interest in NRO, NRE and savings accounts in India must be reported. All dividends and Capital gains must be reported, both from sale of securities and real property. If you own any real estate that produces income, that income must be reported.

What must be done if you are delinquent?

The main thing is to act quickly. The penalties are much lower if you report this information vs. if the IRS contact you. The actual actions vary depending on the facts of the individual situation.

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A resident of Texas for over 40 years, Ranvir Mohindra has been involved with many issues that are relevant to the South Asian community living in the United States. Whether you have money in India that you did not report or have inherited an ancestral property, there are new rules of compliance. Mr. Mohindra’s expertise is built on personal experiences and access to tax and legal professionals, both in Houston and in India, who can provide additional support to bring you in compliance and protect your assets. He can be reached at 713-805-0915 or nritax.wealth@gmail.com