We covered a retirement planning case recently based on a reader query:
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
After that article, I was curious to crunch the numbers for a hypothetical investor who is 10 years older but does not have a proportionately large amount saved as a retirement corpus. Alternatively, there are many investors who have mostly invested in debt assets like EPF, because it is compulsory, and not much outside such safe options like EPF and FD.
Existing assets and investments
Investor’s age is 48, and retirement will start at 60
Current assets in EPF and cash: ₹50L
Monthly expenses: ₹50,000
The investor is expected to increase their investments by at least 6% a year: if they are to invest ₹10 lakhs this year, then next year they must invest at least ₹10.6 lakhs
We assume that the investor will live until 90 i.e. they will spend 30 years in retirement
Readers should note that the EPF invests 15% of contributions in the stock market via the SBI Nifty 50 ETF and therefore we have assumed that 10% of the portfolio, i.e. ₹5 lakhs is in equity assets. We will now apply the standard goal-based investing approach to derive the amount that needs to be invested a month for retirement
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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, which is ₹50k x 6 = ₹3 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.
Term insurance
Given the value of their goals today, they need at least ₹2.5 crores of insurance (the model shows ₹2.3cr) 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 ₹2 crore personal accident insurance cover for the primary earning member.
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
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 ‘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.
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.
Understanding the results
Investment needed per month vs current expenses
This point is the crux of the article. The amount that needs to be invested is more than double of the expense that they are supposed to support in retirement. If we bring forward the result from the 39-year old investor from this article, we see that with the same asset base of ₹40 lakhs and the same monthly expenses of ₹45-50,000 in retirement
The investor needs to reach a large corpus in a short period of time
The retirement corpus that needs to be reached is ₹3.75 crores in 12 years. This is a daunting target with a starting base of ₹40 lakhs and therefore the investor should get started immediately.
Can retirement be achieved via safer options like EPF and FD?
(click to open in a new tab)
We have covered this topic before as well. If the investor chooses only safer options, their target corpus, which they can cross check by setting the equity return to the same value as the debt return, jumps from ₹3.75cr to ₹6.31cr. Their SIP/month jumps ₹1.11 lakhs from to ₹2.15 lakhs.
Taking extra risk via equity investing does not guarantee higher returns and therefore lower target corpus for retirement. However, if equity markets give even slightly inflation-beating returns, as they have given in the past, then the goal will be met. Choosing conservative options instead guarantees that you need to invest double and chase a much higher corpus.
The model recommends that the portfolio be rebalanced immediately to 55% in equity and 45% in debt. However, given that most of the assets are sitting in EPF, this is difficult to do. Therefore, the next best alternative is to start a SIP only in an equity mutual fund like this: What are the best index funds for new investors in India?.
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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 Late to plan retirement: how much money does this 48 year old investor need to invest per month to retire at 60? first appeared on 01 Oct 2023 at https://arthgyaan.com
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