Million Dollar Retirement Plan in Islamic Perspective
$ 1 Million Wealth Plan
How to build $ 1 million plan for safe and secure future – Islamic Perspective
Definition of Investment Planning
INVESTMENT PLANNING: It is designed to help with investment strategies with the objective of generating positive return on investment.
The following steps are necessary:
§ Assess his risk appetite
§ Develop an investment strategy by choosing a wide array of investments
§ Provide continuous counseling to help client invest and save his time and energy
Investment Planning involves tradeoffs between:
§ Growth & Income
§ Risk & Return
§ Spending & Security
§ Wealth Transfer & Wealth Control
Achieving a Balance
An effective Investment Planning program creates a ‘ plan’ for the customer that helps them understand the ‘big picture’…and how to balance these objectives, make decisions, and implement changes that provide a total wealth planning solution.
Process of Investment Planning
Process of Investment Planning has 5 step which are as follows:
§ Inventory taking
§ Analysis and evaluation
§ Plan designing
§ Monitoring and reviewing
The liquidity issue
§ Liquidity is necessary for immediate consumption
§ Assets should be kept in different grades of liquidity so that it is easy to liquidate when necessary
§ The amount of assets that are near liquidity should commensurate with the need
§ At the same time there should be a balance between liquidity requirement and investment returns
Investment Planning: process from planner’s perspective
§ Gathering client data including goals
§ Wealth planner needs to seek detailed information about client’s financial position
§ Both need to define personal and financial goals
§ They should decide on time frame to achieve those goals
§ They should know the strategies and risks associated with the strategies
§ Developing and presenting financial planning recommendation and alternatives
§ Wealth planner should underline the recommendations he made to the client
§ The client should go over all the recommendations and understand their implications
§ Wealth planner should be concerned with the client’s point of view and if need be make amendments as requested by the client
§ Implementing the Financial Planning recommendations
§ The client and the planner should mutually agree on how the recommendations will be carried out
§ The planner should serve the client as per the agreement
§ The planner will coordinate the whole process with the client and other relevant parties such as solicitors, stockbrokers, etc.
§ Monitoring the financial planning recommendations
§ The client and the planner should agree on the monitoring process to meet the client’s goals
§ The planner must report to the client periodically as agreed
§ Reviews will be done when necessary to ensure the results are in line with client’s expectations
The Islamic Angle
§ Muslims are supposed to have surplus wealth to be strong
§ Surplus wealth can only be obtained through higher income as a result of hard work
§ Having surplus income alone is not enough.
§ One must also know how to generate more wealth through INVESTMENT PLANNING
§ According to Islam the process of INVESTMENT PLANNING should include the following
§ Co-operative effort through helping one another (“Help ye one another in righteousness and piety”al-Maidah5:2)
§ Peace and stability to ensure greater development
§ Service to others is an important social responsibility
§ Charity to help others
§ Principle of sharing
§ Responsibility towards development
The Trade-Off Concept
§ The traditional trade-off concept is between risk and return
§ Higher risk will yield higher return and vice versa
§ Wealth planner needs to understand the trade-off concept and the client’s willingness to take risks
§ The concept of risk-free investment where capital is guaranteed means that the returns are low since the product provider charges a fee for the guarantee
§ Another risk the clients might face is the consistency of performance. While on average it looks like the return is high but this does not guarantee that the client will always get the average rate
§ With more complex financial instruments like fixed income instruments, with its own individual risk characteristics, the wealth planner has to be more skilful in drawing up the right strategies to ensure the required rate of returns for the clients
§ Apart from trade-off between risk and return, clients are also looking into the trade-off between service and return. The level of service is also important for the client who may even forego higher returns
The Trade-Off Concept in Islam
§ In Islam the trade-off is not only between risk and return but it is also between life in this world and the hereafter
§ The Quran has in various places guided man to diversify their risk (Story of Jacob who tells his sons to enter from different gates to collect food from Egypt)
§ The Quran also reminds Muslims not to sell life in the hereafter for the life in this world. In other words the life in this world is not worth compared to life in the hereafter
Objectives of Wealth Planning
§ To get consistent regular income
§ To obtain capital gain
§ To get a level of return within a certain level of risk
§ To have a high level of liquidity
§ To preserve assets
It is the hope of every individual, irrespective of religious belief, to be able to live comfortably to the end of his or her life in this world. For those whose religion emphasizes on the after life as well, they will certainly wish that they will also be comfortable, in fact successful, in the hereafter as well.
One of the most important ingredients for comfortable living in this world, in fact in the next world as well, is to have sufficient wealth throughout life. This is to ensure that all the needs are met without much change in life style, the extraordinary or unexpected expenses can be easily met, and the social, legal as well as all religious obligations are fulfilled. It is only then that one can feel that he or she has led a very balanced and fulfilled life to meet the Creator in the end.
It is this imperative that makes every individual work hard when young to set aside sufficient savings to achieve all the objectives stated above if ever he or she lives to a reasonably old age.
Wealth planning from Islamic perspective
In the first place, Islamic concept of wealth is such that all wealth belongs to God and man is appointed as a trustee to the wealth that he has generated. As a trustee of someone else’s wealth obviously we need to be responsible for its safety, for its use and even the way we obtain them. In other words we will surely be accountable for how we acquire and use them.
The concept of spending is the second principle in Islam that should be applied in Islamic wealth planning. Spending in Islam implies the sharing of whatever we have with others. Of course the order of priority is that one should first spend on himself, then his family, then his next of kin then on others. After all, the Holy Prophet Muhammad (saw) is reported to have said to the effect that “the wealth is not yours until you spend it”
Thirdly is the principle of moderation in consumption which is also strongly encouraged in order to prevent Muslims from inculcating greed. Greed could lead man to various other vices. This may include the development of excessive love of wealth that one becomes stingy or even prepared to devour other people’s wealth for vanities. The Holy Quran in Surah 2 verse 188 states, “And do not eat up your property among yourselves for vanities, nor use it as bait for the judges, with intent that ye may eat up wrongfully and knowingly a little of (other) people’s property.” Here the Quran is very specific in outlining one of the dangers of greed which is to use one’s own property for corrupting others – judges or those in authority – so as to obtain some material gain even under the cover and protection of the law. The words “other people’s property” may also mean “public property”.
Fourthly, moderation in consumption also implies that one should not be spendthrift or extravagant in spending. The Quran clearly abhors such habit calling those who over spend as following the foot steps of Satan. The Holy Quran in Surah 17 verse 27 states, “verily spendthrifts are brothers of the Evil Ones; and the Evil One is to his Lord (himself) ungrateful”. In some cases, man deliberately incurs huge amount of expenses to exhibit their wealth. I know of a Minister from some Muslim country who ordered a villa by the beach in Copenhagen to be renovated. The renovation according to his taste cost him not less than one million USD. After the renovation he stayed in the villa for only three weeks to attend an international conference. On top of paying for the renovation cost he even paid an exorbitant rent to the owner. On the contrary, the Holy Prophet Muhammad (saw) even forbids man to wear silk and yellow gold in order not to create an elite class among Muslims who are too different in lifestyle and taste from the masses.
But this does not in any way mean that we should not enjoy the benefits of the abundance of wealth that we have been trusted with. The proper use of wealth is also a means of showing gratitude to Allah for having bestowed such abundance of wealth to us. This is because moderation is not an absolute but a relative concept. Moderation for someone rich may be excessive for a poor man.
Fifthly, we should not accumulate wealth and hoard it thinking that it will help make us last forever. The Holy Quran in Surah 104 verses 1 to 4 states, “Woe to every (kind of) scandal-monger and backbiter, who pileth up wealth and layeth it by, thinking that his wealth would make last for ever. By no means! He will be sure to be thrown into that which breaks to pieces”. Three vices have been condemned here in the strongest terms: (1) scandal-mongering, talking or suggesting evil of men or women by word or innuendo, or behaviour, or mimicry, or sarcasm, or insult; (2) backbiter who speak ill of others behind their backs, even if the things suggested are true, where the motive is evil; (3) piling up wealth, not for use and service to those who need it, but in miserly hoards, as if such hoards can prolong the miser’s life or give him immortality: miserliness is itself a kind of scandal. Those who hoard wealth will only contribute towards shrinking the economy. Wealth should be invested so that it will circulate in the economy. Similarly it should not be allowed to circulate among the rich only. The Holy Quran in Surah 59 verse 7 states, “…in order that it may not (merely) make a circuit between the wealthy among you.” This verse which was revealed in conjunction with the distribution of the spoils of war by the Holy Prophet Muhammad (saw) clearly shows that distribution of wealth should be done widely to spread out the benefits as much as possible.
Sixthly, Islam makes it compulsory on Muslims who have enough wealth and have kept it for a year to pay the compulsory dues or Zakat. Apart from a mechanism to purify one’s wealth Zakat is also a fiscal means of reallocating surplus resources. Those who hoard wealth would certainly suffer erosion of the quantum of their wealth by at least two and half percent of Zakat per annum.
Building $ 1 Million Portfolio
nStarting Age – 25 Years
nRetirement – 55 Years
nTotal Years – 30 Years
nRegular Withdrawals – 5 Years
nTotal – 5 Withdrawals
Uses of Withdrawals
nMarriage – 30 Years of Age
nHome – 35 Years
nLand – 40 Years
nRental Property – 45 Years
nEducation (KIDS)– 50 Years
nMarriage ( KIDS) – 55 Years
How much to Invest
n0-5 Years – 50 KD a month = total 3000 KD
n6-10 Years – 100 KD a month = total 6000 KD
n11-15 Years – 150 KD a month = total 9000 KD
n15-20 Years – 150 KD a month = total 9000 KD
n20- 25 Years – 200 KD a month = total 12000 KD
n25- 30 Years – 200 KD a month = total 12000 KD
n(Think Future – think of Rupee at 30 a Dollar soon)
n5 Years – 3000 KD – Marriage
n10 Years – 6000 KD – Home with rental option
n15 Years – 9000 KD – Land for resale or development
n20 Years – 9000 KD – Rental Property
n25 Years – 12000 KD – Education 5 years plan
n30 Years – 12000 KD – Marriage and other related expenditure.
How much it will be at Retirement
n5 Years – 3000 KD – 96000 KD
n10 Years – 6000 KD – 96000 KD
n15 Years – 9000 KD – 72000 KD
n20 Years – 9000 KD – 36000 KD
n25 Years – 12000 KD – 24000 KD
n30 Years – 12000 KD – 12000 KD
n≈ 325000 KD @ 150 rupees a KD
n≈ 5 Crore
nWith own house and basic facilities all responsibilities paid off.
n@ 1% a month return then monthly pension of 500,000.
Where to Invest
nTakaful Pension Plan – Regular Return/dividend Plan
nGrowth and Return Pension
nMedical + Growth+ Pension
nHome/ Residential Property – Rental Earning
nLand Buy – IJARA/ Diminishing Musharakah/ REIT
nCommercial Rental Property – ISTISNA/ REIT
nIslamic Capital Market
nUnit Trust/ Mutual Fund
nSukuk/ Islamic Bonds
nEquity/ Share Investment
nHigh Risk Assets
nGold, Silver, Precious Metals
nFew Ideas Which has high Potentials
nLive Stock – Goat, Ship, Cow, Buffalo
nAgriculture and Plantations
nSectors of My Choice
nWaste, Water, Food
nAlternative – Health, Energy, Education
nHealth, IT/ITES, Real Estate
Regions of My Choice
nIndia, Indonesia, Saudi Arabia
nMalaysia, GCC, Brazil
nUnder Developed Countries – Algeria, Morocco, Libya, Iran, Sudan, Nigeria, Namibia
nI – 50 %
nII – 30%
nIII – 20%
nI – 50%
nII – 30%
nIII – 20%
Why to Avoid Haram
nThe Punishment for Dealing with Riba (Interest and Usury) - Quran Verse 2:275 (Chapter Al-Baqara)
n “Those who devour usury will not stand except as stand one whom the Evil one by his touch hath driven to madness. That is because they say: “Trade is like usury,” but God hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for God (to judge); but those who repeat (the offence) are companions of the Fire: They will abide therein (for ever).”
nIbn Majah recorded that Abu Hurayrah said that the Messenger of Allah said, (Riba is seventy types, the least of which is equal to one having sexual intercourse with his mother.)
nThe Two Sahihs recorded that the Messenger of Allah said, `Ali and Ibn Mas`ud narrated that the Messenger of Allah said, (May Allah curse whoever consumes Riba, whoever pays Riba, the two who are witnesses to it, and the scribe who records it.)
nAllah Does Not Bless Riba
n(276. Allah will destroy Riba and will give increase for Sadaqat. And Allah likes not the disbelievers, sinners.) (277. Truly, those who believe, and do deeds of righteousness, and perform the Salah and give Zakah, they will have their reward with their Lord. On them shall be no fear, nor shall they grieve.)
nAllah states that He destroys Riba, either by removing this money from those who eat it, or by depriving them of the blessing, and thus the benefit of their money. Because of their Riba, Allah will torment them in this life and punish them for it on the Day of Resurrection. Allah said,
nOn the authority of Abu Huraira (may Allah be pleased with him), who said: The Messenger of Allah said: “Allah the Almighty is good and accepts only that which is good. Allah has commanded the Faithful to do that which He commanded the Messengers, and the Almighty has said: “O ye Messengers! Eat of the good things, and do right..” (Quran 23:51). And Allah the Almighty has said: “O ye who believe! Eat of the good things wherewith We have provided you..” (2:172). Then he mentioned [the case of] a man who, having journeyed far, is disheveled and dusty and who spreads out his hands to the sky [saying]: O Lord! O Lord!-while his food is unlawful, his drink is unlawful, his clothing unlawful, and he is nourished unlawfully, so how can he be answered!” (Muslim).
nGiving Short Measures
nThe community of the Prophet Shu‘ayb (sws) was known for practicing it with impunity. Consequently, they were destroyed for their persistence in deceit and disbelief in Allah and His Messenger. Allah the Almighty has repeatedly commanded exactitude in weights and measures. One of the verses says: And give full measure when you measure, and weigh with a just balance. That is good and better in the end. (17:35)
nAllah Has Destroyed People Who Involved in Haram ( Prohibited)
n (7:4) How many a township We have destroyed! Our scourge fell upon them at night, or when they were taking midday rest.
n (7:5) And when Our scourge fell upon them their only cry was: 'We are indeed transgressors.'
nPeople can learn a lesson from the tragic fate of those nations that spurned God's Guidance, and instead followed the guidance of others; and they became so degenerate that their very existence became an intolerable burden on the earth. Eventually, God's scourge seized them. and the earth was cleansed of their filthy existence.
(7:10) We assuredly established you in the earth and arranged for your livelihood in it. Little do you give thanks.
Effect of Halal
nA morsel of Halaal food
nEating haraam gives rise to every type of infamy. Whereas, the halaal morsel is the cause of every kind of goodness and charity. Numerous traditions praise the acquisition of livelihood through lawful means. For example the Holy Prophet (s.a.w.s.) says, "Worship consists of seventy parts and the best part is earnings by lawful means." (Safinatul Behaar) The Messenger of Allah has also said, "When a man eats halaal food an angel stands over his head and prays for his forgiveness till he finishes eating." (Safinatul Behaar) The Prophet has remarked in a similar vein, "One who strives to earn his livelihood in a lawful manner from morning till night, achieves salvation." (Safinatul Behaar) The Holy Prophet (s.a.w.s.) states that Allah has said:
n"I will not care on the Day of Qiyamat from which door he enters Hell, the person who does not care from which door he earns money in this world." (Behaarul Anwaar) The Prophet of Allah (s.a.w.s.) has also mentioned the following tradition: "One who does nor care from which way he earns wealth in this world will be sent to Hell in Qiyamat and I shall not care from which way he is made to enter it." (Behaarul Anwaar)
n (Surah Nisa 4:2) It should not be that in a hurry to obtain livelihood you obtain it through illegal ways, before Allah provides you with the halaal sustenance that He had decreed for you."
Risk Hedge in Islamic Perspective
n Zakat means growth (nam'a), blessings (barakah), purification (taharah), or appreciation (madh). It is called zakat because one's wealth grows through the blessings of giving part of it and the prayer of those who receive it. Zakat purifies its giver of his/her sins and is clearly ordered by God. The Quran says "Take alms of their wealth and make them pure and clean” (9:103).
nIt is a criterion for the believers and a way to success in this life and the next. Allah says, "Who establishes worship and spend of that we have bestowed upon them, these are the true believers. For them are grades of honor with their Lord, and forgiveness, and a beautiful provision". [8:3-4]
nZakat is also purification from greed and envy. "And human inner selves are swayed by greed". [4:128]. For Allah says, "By no means shall you attain righteousness (and reward) unless you spend of that which you love". [3:92]
nZakat brings forth the good and Allah's Mercy, "And My Mercy embraces all things. That (Mercy) I shall ordain for those who are righteous and give zakat, and those who believe in our verses (and signs)". [7:156]. It spreads tranquility and peace. Zakat is social security for the weak and a protection for the society against disintegration.
nIt purifies wealth. The Prophet (saw), said, "Whenever people refrain from paying the zakat due on their wealth, they will be deprived of rain. If it were not for the sake of their cattle, they would not receive rain". (Ibn Majah and Al-Hakim) Only by paying the right of Allah and the right of the poor from zakat is the wealth purified from decreasing, or from destruction.
Quran and Hadith
nQuran Surah Qalam Ayah 17:33
n Verily, We have tried them as We tried the People of the Garden, when they swore to pluck the fruits in the morning,). Without (saying: "If Allah wills.''). Then there passed over it a Ta'if from your Lord while they were asleep. So by the morning, it became like As-Sarim. Then they called out (one to another as soon) as the morning broke. Saying: "Go to your tilth in the morning, if you would pluck (the fruits). So they departed, and they were whispering. "No poor person shall enter upon you into it today. And they went in the morning with Hard Qadirin. But when they saw it, they said: "Verily, we have gone astray. '"Nay! Indeed we are deprived!. The Awsat among them said; "Did I not tell you, `Why do you not Tusabbihun. They said: "Glory to Our Lord! Verily, we have been wrongdoers.Then they turned one against another, blaming. They said: "Woe to us! Verily, we were Taghin. We hope that our Lord will give us in exchange better than it. Truly, we hope in our Lord. Such is the punishment, but truly, the punishment of the Hereafter is greater if they but knew.
Hadith on Sadaqah
nRasulullah Sallallaho alaihe wasallam has said that once a person in a jungle heard a voice from a cloud above, saying, "Go and supply water to such and such person’s garden". Thereupon the cloud moved in one direction and rained on a piece of stony land. A channel collected the whole of that water which began to flow in a particular direction. He followed it and came to a place where a man stood with a shovel in hand, diverting the water to his garden. The person asked the man his name; and when he told him, it was the very name he had heard from the cloud. The person then asked him why he had asked his name. The person replied that he had heard a voice coming from the cloud saying, "Go and supply water to such and such person’s garden" and it was the same name which he had told him. The person then asked the man, "What he did, for, the cloud to supply water to his garden." The owner replied that now he has to tell the true facts. Whatever produce he got from the garden, he divided it into three equal parts; one part i.e. one third of the produce, he gave away promptly as Sadaqah, the second part he kept for himself and the family; the remaining one third he spent on the garden itself.
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