A quick retirement calculation for a reader query who has a good amount of corpus already saved for retirement.
Disclaimer: The purpose of this Case Study article is solely to demonstrate, as a reference guide, how an investor can use the Arthgyaan goal-based investing tool to invest in a do-it-yourself (DIY) manner. This article is not investment advice and does not solicit buying or selling of any security, stock or mutual fund. Furthermore, the individual names and numbers in the case study are hypothetical and any resemblance to actual persons, living or dead, is purely coincidental.
My age is 39 and want to retire by 58. My sonās age is 7 and have a home EMI running (just started). Monthly expense is 50,000. Have invested in MF and debt also. Have a corpus of 40 lakh invested. How much money per month needed to be invested for retirement
(all numbers have been changed to protect privacy)
Existing assets and investments
Current assets in equity, debt (like PF) and cash: ā¹40L
Home loan: ā¹25L loan at 8.8% for 15y whose EMI is ā¹25,000
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Pre-requisites before you start investing
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
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.
A minimum of 6 times total monthly expenses and EMI, which is ā¹75k x 6 = ā¹4.5 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.
As expenses increase or the emergency fund is used up, the current monthās investments should be diverted until the fund is rebuilt.
Term insurance
Given the value of their goals today, they need at least ā¹3 crores of insurance (the model shows ā¹2.96cr) between them. Any existing medical conditions must be declared at the time of taking the policies and there must be a physical medical test.
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:
accidental death
temporary or permanent partial disability
temporary or permanent total disability
The family should therefore take a ā¹1.5 crore personal accident insurance cover each for both spouses
Pay off high-interest loans
If there are any high-interest loans like credit cards or personal loans, they should be paid off before investing.
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:
mandatory: rent/EMI, food, school fees, electricity/mobile bills etc.
save-to-spend: these are used for the sinking fund that is used to pay for hefty annual expenses like insurance premiums, festival gifts and travel by saving for them every month
In this example, the family has a ā¹50,000/month expenses. We have added a ā¹25,000/month home loan EMI to this along with a sinking fund. In retirement, EMI and child-related expenses are not there and the total monthly expenses drop to ā¹45,000/month or ā¹5.4L/year. This figure becomes the money that will be spent, after adjusting for inflation, in the first year of retirement as explained here: Low-stress retirement planning calculations: worked out example.
Model output
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 get access to video tutorials in the howto tab.
SIP amounts and split between goals
(click to open in a new tab)
Where to invest?
For most investors, this is the most critical question. It is a variation of finding the ābestā of everything: the best mutual fund, PMS service, insurance policy etc. However, suppose you have followed the process until now. In that case, you will realise that coming to this stage, at 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.
Debt asset class: Apart from the NPS and provident fund investments already in place, the family can explore debt mutual funds: How to choose a debt mutual fund?
Cash asset class: For goals within three years and the emergency fund, a savings bank with sweep FD or a regular FD/RD is sufficient. For purposes beyond three years, please use the same debt funds as per the debt allocation above
Additional investment in Provident fund: Apart from the mandatory investments via EPF, the family should refrain from additional investment in VPF. Given the long time horizon of the goals, a high allocation to equity is critical
Insurance mixed with investment: ULIP, endowment and related mixed products should be avoided due to high commissions, opaque structure, low returns and lock-ins
current prices of goals change, or new goals are added/old goals removed
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?
Rebalancing plan
(click to open in a new tab)
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.
However, this plan is not complete as we will explain below.
Is this plan complete? What about childrenās goals and the EMI?
The family has a 7-year old child for whom goal-based investing has to be followed to reach the goals of the child.
We will add a 20L (5L/year) goal for the childās college education from the age of 18 as well as 20L for their PG. We strongly believe that children should buy a house once they start their first job. We have added goals for those as well.
monthly SIP amount increases to almost ā¹1 lakh/month. This amount includes the ā¹25,000 EMI
term insurance cover increases to ā¹4 crore+
the asset allocation of the portfolio adjusts to move additional assets to safer options to adjust for the home loan balance
the SIP amount for retirement now goes up since more of the current assets move to the home loan and childās goals since they are closer than retirement
How does the numbers change for an older investor?
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This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.
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This post titled How much money does this 39 year old investor need to invest per month to retire at 58? first appeared on 27 Sep 2023 at https://arthgyaan.com
