Case study: how can this middle-aged investor with two children plan for retirement and children's goals?
This article shows how a single-income middle-aged couple with two small children reach their retirement and children’s goals.
This article shows how a single-income middle-aged couple with two small children reach their retirement and children’s goals.
This article uses the Arthgyaan goal-based investing calculator to understand how much corpus is needed to have a comfortable lifestyle in India.
This article shows how a single-income middle-aged couple with two small children reach their retirement and children’s goals.
This article shows how a double-income couple with a 2-year old reach their FIRE dream at the age of 50.
This article shows how a double-income couple with a newborn child can invest for their future goals of FIRE and real-estate investment.
This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
Did you welcome a bundle of joy in your 40s? This article will discuss ways of planning the child’s (and your’s financial future)
This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.
The total market value of these assets:
To build a house, you need to first build a strong foundation
Goal-based investing requires completing some steps to ensure that the investment plan is seamlessly executed without breaks due to unforeseen circumstances. We will follow the steps described here: I have heard of goal-based investing. What now?
Risk profiling is a mandatory step that should be completed before investing in goals. A portfolio created for a goal has one purpose: to meet the goal. Therefore, we need to balance risky assets that generally appreciate fast (like equity) and slow-growing assets that provide stability (like debt). The tool that is used to determine this mix of investments is risk profiling. Risk profiling, if not done, leads to a high chance of missing the goal. Being invested in the wrong asset class in the wrong proportion (either equity or debt) can lead to either high risk or poor returns or worse both.
We have a risk-profiling tool here that investors should use before getting started: Do not invest in mutual funds before doing this
A minimum of 6 times total monthly expenses and EMI, which is ₹84k x 6 = five lakhs. They should keep ideally this amount in a joint bank account with sweep FD. Both spouses should have debit cards and net banking access to this bank account to get immediate access in terms of need. However, in this case, they have ₹10 lakhs in FD. This amount together with high-value credit cards will easily cover standard emergencies.
As expenses increase or the emergency fund is used up, the current month’s investments should be diverted until the fund is rebuilt.
Karthik has a personal term insurance policy of ₹1.5 crores.
As we will see below, this coverage amount is not enough considering their goals. Given the value of their goals today, they need at least ₹2.7-3 crores of insurance (the model shows ₹2.6cr) between them. Karthik should take another ₹1.5 crore term life policy costing around ₹35,000/year. It will be a good idea to cover Gayathri with a ₹1 crore term policy as well in case she decides to resume working.
Any existing medical conditions must be declared at the time of taking the policies and there must be a physical medical test.
This step should be taken immediately.
Here is a guide regarding purchasing term insurance policies: Term life insurance: what, why, how much to get and from where?.
There should generally be the following policies that a family should have at a minimum:
Here is a guide regarding purchasing health insurance policies: Health insurance: what, why, how much to get and from where?
The purpose of the personal accident (PA) insurance policy is to provide a replacement for your income if you have an accident and cannot work after that. Unlike term insurance, where claims are paid on death, a PA cover is applicable when one of the following is the result of an accident:
The family should therefore take a ₹1 crore personal accident insurance cover for Karthik for around ₹30,000/year
Fortunately, the family has no high-interest loans like credit cards or personal loans.
We will use this retirement expense estimation tool to calculate today’s expenses and determine how much to spend in retirement.
To know how much you can invest for goals (the investible surplus), you need to classify and figure out approximately the major monthly expense heads under the three main buckets below:
Having clear financial goals is the first and vital step before investing. We will use the SMART framework to write down goals:
We will assume that the family can increase its investments by 7% every year via upskilling and improving their human capital: Your human capital, not investment returns, is your biggest wealth creator. Given the importance of human capital, the family should allocate an upskilling line item in the monthly budget. The family can use this for courses, books and other related purposes.
Before going into the details of the goals, if you, dear reader, wish to cover another scenario as a Case Study, click the button below:
The SMART framework is applied like this:
Children’s goals are very precious for a family. However, given the much shorter horizon for purposes like a UG degree, the monthly investment amount can be surprisingly higher.
The table shows the SIP amounts split amongst different goals and the portion of the current corpus allocated to each goal. Investors have two approaches to investing:
We use the Arthgyaan Goal-based investing calculator to formulate the investment model with all the above assumptions and goals. There is a link to download a pre-filled copy of the Google sheet via the button below.
Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.
Once you get your sheet, you can access video tutorials in the howto tab.
For most investors, this is the most critical question. It is a variation of finding the ‘best’ of everything: the best mutual fund, PMS service, insurance policy, etc. However, if you have followed the process until now, you will realise that coming to this stage is the very end of the goal-based investing strategy.
We will keep this simple with some typical investments that the family can follow and should be sufficient for their purpose.
As time passes, three things happen:
These factors will require a portfolio review exercise every 6-12 months. Then, the process goes through the above steps: goal setting, capturing current asset values, and feeding them into the model to recalculate the numbers. The concept is explained here: Are your investments on track for your goals?
This section shows the current and target asset allocations for equity, debt and cash. The action on the investor will be to immediately implement the rebalancing plan as shown in the image.
The plan requires that a good amount of the cash holding be moved to equity today using the Arthgyaan Have-vs-Need framework (image above) whose output we have seen in the rebalancing plan section.
Many investors have a lot of doubts as to the best way of moving a sum from cash to equity. In the bigger scheme of things, any sort of tactical market timing has no impact on future returns solely because once the full amount is invested, it is now exposed fully to market movements: SIP vs. lump sum: what should I choose?. In this case, the Karthik can divert his entire investible surplus into equity until the equity gap is filled.
The family has an in-hand income of ₹2L/month (excluding the rent from the second home) and spends ₹84,000/month (including the sinking fund). These expenses leave them with an investible surplus of ₹1.28L/month which is more than sufficient as per the model output.
There are some common mistakes that investors make which prevent them from benefiting from compounding. We cover this concept in more detail here: 12 mistakes that interrupt compounding: what to do instead.
In this case, the family is doing well in creating and following a goal-based investment process and they should continue it.
We are a big advocate of both
This position is due to our opinion that real-estate investments, after buying the primary residence, should be attempted only after primary goals (retirement / FIRE, children-related etc.) are fully funded vs. market-linked assets like stocks and bonds. We are also seeing a rapid increase in real estate in major metro cities. We have made our case on this topic in detail here: Why parents should invest for the downpayment of their child’s first home?.
This family is currently in a position where their goals are well funded and on track with an extra investible surplus. The family should consider investing the surplus:
This article discusses how to plan early retirement in the face of lifestyle inflation and lack of health insurance for an investor in their 40s.
Published: 8 December 2024
7 MIN READ
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This post titled Case study: how can this middle-aged investor with two children plan for retirement and children's goals? first appeared on 11 Jun 2023 at https://arthgyaan.com