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How do you get SIP amount for complete portfolio: Part 5

07 Jun 2021 - Contact Sayan Sircar
5 mins read

Walk-through: Get SIP amount for all goals together

Calculation of SIP amount

We have already covered

We will now combine all of these together to cover all goals together in the family.

Table of Contents

Assumptions made for calculations

  • when does retirement start
  • what is the rate at which the cost of goods and services increase with time i.e. inflation rate
  • how long does the retirement corpus last
  • what is the annual expenses in the first year of retirement if retirement happened today. Estimation of the expenses in retirement is covered in more detail here
  • each cash requirement in the future is modelled as a single goal with its own asset allocation and rebalancing plan. This is not a unified portfolio
  • risk profile is assumed the same for all goals: this is reflected in having the same asset allocation and rebalancing plan for all goals

Length of retirement

Typically for married couples, this is the life expectancy of the younger spouse and could be as 100 years nowadays. We need to adjust the duration of the retirement accordingly. The longer the duration (assumed 40 years in the Excel example), the more savings are needed every month.

Here each year of retirement is modelled as a separate goal. Naturally, once the retirement period ends, there is no money expected to be left for any heirs. If that is needed, please create a separate goal for that using this method.

Expenses estimation and inflation rate

One of the important assumptions will be the expenses in the first year of retirement (22 years from now in the example) assuming the retirement starts immediately. This needs to include expenses like housing, health insurance and travel and will assume no income. If pension or other income is present, then the expenses will be assumed beyond this income.

The model deals with a 36-year-old salaried individual with retirement at age 58 (22 years from now) who is also targeting retiring 5 years earlier. We will assume a figure for annual expenses if traditional retirement happened today (5 lakhs in the example), model it forward by 22 years of inflation (at 7%) and then use the figure to save for each year of early retirement.

Calculation of SIP amount for multiple goals

These calculations are explained in this Google Sheets workbook.

How to use the sheet

Portfolio over time

  • All figures in red are assumptions and can be modified as per requirement
  • Allocate the corpus figures for all goals in column I (this is the total amount of investments you have)
  • Enter the current corpus figures in the Current asset allocation section for equity holdings and cash in the bank in savings / FD
  • Ensure that you have enough term insurance. The sheet shows you the minimum coverage amount keeping in mind the present value of goals yet to be saved and lifestyle expenses based on retirement levels for the period income will be present

Increasing SIP every year

A very important part of planning for a long term goal is increasing the monthly SIP amount as income increases. In the example, the increase is assumed to be 10%/year. The model handles rebalancing automatically by showing the amounts to be Invested and Redeemed and over time reduces the amount of equity exposure for each goal so that risk can be managed.

After one year of running the SIP

The following needs to be done in this order:

  • find the new corpus which is the sum of the current value equity and debt fund values
  • review the goal parameters (new horizon is 1 year less, review the current cost of the goals to adjust for actual market inflation etc.)
  • re-balance between the equity and debt fund values as shown in the model

See this detailed post for the process for reviewing.

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A note on having the pre-requisites in place

At all times ensure that you have the following in place

  • an emergency fund with 6-12 months of expenses
  • a term insurance policy (unless you are retired with no income). The sheet will also show you your minimum term insurance coverage amount
  • a health insurance policy (separate from the company provided one if any) for 10-15 lakhs as base policy with a 50-100 lakhs super-top up
  • no high-interest debt like credit card or personal loans

All posts in this series

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Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

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