Low-stress retirement planning calculations: worked out example
This article shows a simple retirement and review plan that anyone can follow in a step-by-step manner.
This article shows a simple retirement and review plan that anyone can follow in a step-by-step manner.
ānastiest, hardest problem in finance.ā - 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:
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:
The investor has ā¹30L in assets currently held in a mix of NPS, provident funds 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: childrenās college or marriage, house purchase, vehicles, early retirement etc. We have a series of case studies that cover a few such cases:
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We will use this retirement expense estimation tool to calculate todayās 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 persist in retirement while the rest will reduce or disappear completely. Some of these, like medical expenses or travel, may increase.
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 ā¹8.33 lakhs to ā¹10 lakhs.
Here is a simple way to estimate the retirement corpus: How much money do you need for retirement?
The table shows the SIP amount for the goal. Investors have two approaches to investing:
We use the Arthgyaan Goal-based investing calculator to formulate the investment model with all the above assumptions and goals.
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.
We see that the target retirement corpus is ā¹18.76 crores. This is a huge figure but we need to keep in mind that there are 25 years to go. Time is the investorās friend and as long as these avoidable mistakes are not made, things will be fine.
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.
As time passes, three things happen:
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.
Related:
This article explains what rebalancing is and why you should do it.
Once you create a portfolio using the method described in this article, you can reach surprisingly large values: How big will your portfolio grow in retirement?.
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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