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Low stress retirement planning calculations: worked out example


03 Aug 2022 - Contact Sayan Sircar
8 mins read

This article shows a simple retirement and review plan that anyone can follow in a step-by-step manner.

Low stress retirement planning calculations: worked out example

Table of Contents

Retirement is the hardest problem in finance

“nastiest, hardest problem in finance.” - William Sharpe, Nobel Prize winner in Economics, regarding the withdrawal stage of retirement

Retirement planning becomes difficult for many people because of the sheer number of assumptions and decisions that go into it:

  • how much to invest (is it 50% of my take home? is 20% enough? am I investing enough? and the variations of the same)
  • how to start investing: sometimes, the first step is the hardest, given the number of assumptions: how long will retirement last, will there be enough money, what about children and their needs etc
  • where to invest: there are 10,000+ mutual funds, 5,000+ stocks and other options like RBI bonds, NCD, ULIPs, provident funds, FD etc. The sheer number of choices is overwhelming
  • once you start investing, how should you check and review your plan to know if you are on track or not

In this article, we will follow up on our previous post: A low-stress step-by-step guide to creating a retirement portfolio, covering the exact sequence of steps to create a retirement portfolio, review it and manage it until retirement.

Using the following numbers, we will use the comprehensive goal-based investing calculator to find out the SIP amount:

  • 25 years to retirement
  • 40 years in retirement
  • 10L/year lifestyle expenses in retirement in today’s money, i.e. approx ₹80,000/month
  • 7% inflation before and after retirement
  • 11% and 4% post-tax equity and debt returns respectively
  • 10% increment of the SIP amount with a yearly review
  • ₹30L in assets currently held in a mix of NPS, provident fund and mutual funds tagged to retirement

In this article we have considered only the retirement goal. In reality you will have multiple goals which you need to do together: children’s college / marriage, house purchase, vehicles, early retirement etc. We have a series of case studies that cover a few such cases:

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Expense structuring

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Case Study 03 Aug 22 Expense Calculation

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. Some of these will will persist in retirement while the rest will reduce or disappear completely. Some of these, like medical expenses or travel, may increase.

  • mandatory: rent/EMI, food, school fees, domestic help, 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

We have assumed that the lifestyle in retirement will be 20% better, as an aspirational value, compared to today. This assumption bumps up the retirement corpus from ₹8.33 lakhs to ₹10 lakhs.

Derivation of investment amounts

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Case Study 03 Aug 22 Model Output

The table shows the SIP amount for the goal. Investors have two approaches to investing:

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 here.

Once you get your sheet, you can get access to video tutorials in the howto tab to understand how to use the sheet.

We see that the target retiremetn corpus is ₹18.76 crores. This is a huge figure but we need to keep in mind that there is 25 years to go. Time is the investor’s friend and as long as these avoidable mistakes are not made, things will be fine.

SIP amount for retirement

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Case Study 03 Aug 22 SIP Output

Our new Goal-based investing tool will help you to create and manage all of your goals in one place. Click the image below to get access:


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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 you can follow and should be sufficient for the purpose.

Allowed investments

  • Equity asset class: Index mutual funds. An article discusses this choice: Which index funds to invest in and why?
  • Debt asset class: Apart from the provident fund investments already in place, the you 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, you should use the same debt funds as per the debt allocation above

Disallowed investments

  • NPS: You should not invest any amount in NPS beyond what is needed for tax benefit under Section 80CCD, i.e. ₹50,000/year or any benefit under corporate NPS. The logic here is that NPS locks in your money 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 you should refrain from additional investment in VPF. Given the long time horizon of the goals, a high allocation to equity is critical.
  • Other options: Cryptocurrencies, P2P loans, direct stocks and investment real estate/land (except a primary residence) should be avoided

Rebalancing plan

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Case Study 03 Aug 22 Rebalancing Plan

This section shows the current and target asset allocations for equity, debt and cash. The action on the investor will immediately implement the rebalancing plan as shown in the image.

Related:
This article explains what rebalancing is and why you should do it.

Portfolio review

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?.

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More: worked out case studies for goal-based investing

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Topics you will like:

Asset Allocation (18) Basics (7) Behaviour (10) Budgeting (9) Calculator (11) Case Study (3) Children (7) Choosing Investments (24) FAQ (2) FIRE (8) Gold (6) Health Insurance (2) House Purchase (11) Insurance (8) Life Stages (2) Loans (10) NPS (4) NRI (3) News (5) Portfolio Construction (30) Portfolio Review (18) Retirement (22) Review (7) Risk (6) Set Goals (24) Step by step (4) Tax (12)

Next steps:

1. Email me with any questions.

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

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This post titled Low stress retirement planning calculations: worked out example first appeared on 03 Aug 2022 at https://arthgyaan.com


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