A quick retirement calculation for a reader query who has a good amount of corpus already saved for retirement.
How much money does this 39 year old investor need to invest per month to retire at 58?
Posted on 27 Sep 2023
Author: Sayan Sircar
12 mins read
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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.
📚 Topics covered:
- A reader query on retirement planning
- Existing assets and investments
- Pre-requisites before you start investing
- Expense structuring
- Model output
- SIP amounts and split between goals
- Where to invest?
- Portfolio review
- Rebalancing plan
- Is this plan complete? What about children’s goals and the EMI?
- How does the numbers change for an older investor?
A reader query on retirement planning
A reader writes on email:
My age is 39 and want to retire by 58. My son’s 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
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Existing assets and investments
- Current assets in equity, debt (like PF) and cash: ₹40L
- Home loan: ₹25L loan at 8.8% for 15y whose EMI is ₹25,000
- Monthly expenses: ₹50,000 (without EMI), ₹75,000 (with EMI)
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 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 ₹75k x 6 = ₹4.5 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 month’s investments should be diverted until the fund is rebuilt.
Given the value of their goals today, they need at least ₹3 crores of insurance (the model shows ₹2.96cr) between them. Any existing medical conditions must be declared at the time of taking the policies and there must be a physical medical test.
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:
- corporate group insurance for salaried employees covering all family members
- personal family floater of ₹20 lakhs covering self, spouse and child along with a super top-up plan
- The family needs to increase their base coverage to ₹20L and take an additional ₹80L-1 crore super-top-up health insurance policy
Here is a guide regarding purchasing health insurance policies: Health insurance: what, why, how much to get and from where?
Personal Accident insurance
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 ₹1.5 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.
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:
- mandatory: rent/EMI, food, school fees, electricity/mobile bills etc.
- variable/discretionary: entertainment, transport, clothes, anything discretionary
- 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 ₹50,000/month expenses. We have added a ₹25,000/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 ₹45,000/month or ₹5.4L/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.
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
Where to invest?
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, 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.
- Equity asset class: Index mutual funds. Here is an article that talks about this choice: Which index funds to invest in and why?
- 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
- NPS: The family should not invest any amount in NPS beyond the minimum needed to get a deduction under Section 80CCD, i.e. ₹50,000/year and any amount under Corporate NPS. The logic here is that NPS locks in your money until 60 and requires that you invest 40% of your NPS corpus in an undesirable taxable annuity
- 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
- Other options: Cryptocurrencies, P2P loans, direct stocks and investment real estate/land (except a primary residence) should be avoided
As time passes, three things happen:
- markets move up and down
- you invest or remove money from the portfolio
- 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?
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 children’s 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 child’s 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.
Given that there is an EMI of ₹25,000/month for the home loan, we will add that to the goals as well to de-risk the family in case something untoward happens using this framework: How to include your property with a home loan in your portfolio?.
The model outputs change to these:
- monthly SIP amount increases to almost ₹1 lakh/month. This amount includes the ₹25,000 EMI
- term insurance cover increases to ₹4 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 child’s goals since they are closer than retirement
How does the numbers change for an older investor?
Here is a worked out example for a 48 year old whose monthly investment and target corpus almost doubles if they choose only safe investment options: Late to plan retirement: how much money does this 48 year old investor need to invest per month to retire at 60?.
We have covered this concept in more detail here: What is the danger of starting investments late?.
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Topics you will like:Asset Allocation (20) Basics (8) Behaviour (10) Budgeting (11) Calculator (17) Case Study (6) Children (14) Choosing Investments (40) FAQ (7) FIRE (13) Gold (14) Health Insurance (4) House Purchase (21) Insurance (15) International Investing (10) Life Stages (2) Loans (13) Market Movements (17) Mutual Funds (34) NPS (6) NRI (15) News (10) Pension (8) Portfolio Construction (47) Portfolio Review (27) Reader Questions (6) Real Estate (6) Retirement (38) Review (13) Risk (6) Safe Withdrawal Rate (5) Set Goals (27) Step by step (15) Tax (43)
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.
Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
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