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Making money for the money-makers
Rishi Nathany in Mumbai
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August 13, 2007

Yes, one could complain that stars do not need to save; their coffers are always full. But the fact is that their careers may also end very fast. There are enough cricketers, film personalities and footballers who have come and not become a success. There are many more who started with success and faded into oblivion.

Live life king-size

More importantly, these are people who have invest a lot in themselves like staying in an accessible locality, possessing cars, keeping personal bodyguards, spending on attire to attend lavish parties and going for foreign jaunts. But all this costs money, in fact, lots of money.

That is not a problem as long as they are in the prime of their careers. But they also have to work out a way to sustain and finance such lifestyles, even if their income is not always there and especially, after they retire from active careers. This requires responsible planning. Let us look into how to plan for such individuals.

Problem of plenty

It starts with really earning well when the actor or sportsperson is active in profession. And often, they don't have any time to manage their own finances. Also, since celebrities often do not track their finances, they could land up squandering a lot of their funds and not saving enough.

The way forward

Since incomes could be large but irregular, their savings pattern has to be different than most people. Here are a few quick tips:

Hire a professional like wealth manager or advisor to work on a realistic age when he/she could be forced to retire from active and regular work.

Since most sportspersons could retire as early as in their mid-thirties, they would definitely need a lot of funds to sustain that standard of living. Of course, there would also be thoughts of setting up a business to create additional income flow.

For instance, Indian cricketers like Sachin Tendulkar and Saurav Ganguly have created their own signature restaurants. However, that does require additional capital to be set aside for that. Also, there would planning required for family and children.

A plan in place

Celebrities have two major sources of income. One, from their profession and the other from endorsements and appearances. Both could be substantial. Ideally, they should look to fund their lifestyle needs from their professional income and save whatever is surplus.

All their endorsement income could go towards funding their financial goals. Whenever they have a huge inflow, they should look to park it immediately in liquid or short-term debt funds, so that it is not spent. They can then proceed to invest it according to their asset allocation.

Pre-retirement asset allocation

Let us look at a typical asset allocation for an unmarried celebrity in the mid-twenties, looking to save for a comfortable retirement as well as other lifestyle goals.

Assuming that this person has not saved much, since the initial earnings went into uplifting the standard of living and buying their own residence, their recommended target asset allocation would look somewhat like this:

Since the celebrity is earning well, we do not need to provide him with a substantial amount of fixed income assets, like bonds or debt funds, which have been kept low at 5 per cent.

However, since they have irregular incomes, contingency funds have been kept high at 10 per cent to sustain their standard of living, especially if there is a long gap between assignments.

Since the focus here is on building wealth, the balance assets have been allocated to asset classes that may be volatile in the short term, but can help create substantial wealth for them, say over the next decade.

Therefore, we have equities, equity portfolio management schemes and mutual funds at 40 per cent, real estate for investment (excluding own residence) at 30 per cent, art for investment, commodities, bullion and international investments like overseas equities or real estate at 5 per cent each.

Post-retirement asset allocation

Assuming the celebrity retires after a decade in his mid-thirties after having earned substantial returns on their investments. The asset allocation would need a bit of tweaking.

The new asset allocation will see the contingency funds reduced to 5 per cent, since the celebrity is no longer working actively. We have increased the allocation to fixed income instruments to 20 per cent to provide them with a regular income and to reduce portfolio volatility, by reducing equity exposure from 40 per cent to 30 per cent.

However, we have kept exposure to other asset classes more or less constant, since the celebrity is still very young and would need both income as well as capital growth over his lifetime, which can be provided by these asset classes.

Real estate is one such ideal asset class, since it would provide rental income as well as give capital appreciation to the portfolio.

A proper asset allocation determines around 92 per cent of portfolio success, and is hence important. Even though the situation of each celebrity would be different, proper asset allocation would ensure timely realisation of financial goals.

Though these asset allocations are given as an example only, they do show how a celebrity should invest his money into high growth asset classes, which build wealth over a period of time for them, enabling them to retire while fulfilling their lifestyle goals.

The writer is a director, Touchstone Wealth and Financial Planners.

Additional inputs from Deepali Nandwani

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