“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
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 (equity return is 3% above inflation, debt return is 3% below inflation) i.e. the same numbers as this post on lifetime returns for retirement
10% increment of the SIP amount with a yearly review
The investor has ₹30L 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: children’s college or marriage, house purchase, vehicles, early retirement etc. We have a series of case studies that cover a few such cases:
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.
mandatory: rent/EMI, food, school fees, domestic help, 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
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.
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 access video tutorials in the howto tab.
Here are some tutorials on using the tool (click the image below)
We see that the target retirement corpus is ₹18.76 crores. This is a huge figure but we need to keep in mind that there are 25 years to go. Time is the investor’s 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 ‘best’ of everything: the best mutual fund, PMS service, insurance policy, etc. However, if you have followed the process until now, you will realise that coming to this stage is 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.
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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
