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How to prioritize goals based on available monthly SIP amount?

05 Jul 2021 - Contact Sayan Sircar
5 mins read

What to do when goals do not proceed on track and not enough surplus is available for investing.

Investing as per budget

When an investment plan is prepared, there are many assumptions that are made regarding future equity and debt returns, salary growth and inflation that may not hold once investments have been running for a few years. Market returns may be different from what was initially available (higher or lower), salary growth may be lower or goals may themselves change. Due to this, a yearly review and rebalance is recommended. This post deals with what to do if the new SIP amount post the review is lower than expected. We will use the plan for all goals together to figure this out.

Table of Contents

Starting point

Calculation of SIP amount for multiple goals

As this shows, there is a SIP of ₹ 1,00,250 that has been started by a family for goals like a car, house down-payment, vacation, children’s education, retirement at 58 and early retirement (if possible) 5 years before 58 who currently have a corpus of ₹ 50 lakhs. Currently, the family is investing the most for children’s education, followed by retirement and FIRE. We will see what happens 10 years later. This is a typical scenario since the children’s education goals are due sooner than retirement and for many families, education goals are at a higher priority than the rest.

10 years later from the start

Calculation of SIP amount 10 years later

We see that the portfolio of ₹ 50 lakhs has grown to ₹ 127 lakhs, the house has been purchased, the child is 13 years old and the previous single goals (car, vacation, school-related goals) have been reached with new car and vacation goals added. The biggest change here is the doubling in annual expenses in retirement from ₹ 5 lakhs/year to ₹ 10 lakhs/year due to inflation. Also as expected, all the other goals like children’s education and marriage have grown due to inflation as well. The new SIP amount is now ₹ 2.74 lakhs. The challenge here is that the family, due to other commitments (maybe a one spouse becoming stay-at-home or the impact of the home loan EMI) can only invest ₹ 1.7 lakhs/month.

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How to revisit the goals?

Goals have three main parameters that lower the amount needed to be saved today:

Pushing out the goal horizon / reducing goal amount

Calculation of SIP amount 10 years later - Iteration 1

Here the car and vacation goals are pushed out for some time which reduces the SIP to ₹ 2.48 lakhs.

Re-prioritize the goals

Calculation of SIP amount 10 years later - Iteration 2

Do you want to save more for retirement vs. college education of children for which loan can be taken?

Here we reduce the PG education target (leaving a token starting amount) considering that they can be funded by loans and scholarships. This reduces the SIP amount to ₹ 2.05 lakhs.

Drop some goals

Calculation of SIP amount 10 years later - Iteration 3

For example, instead of early retirement, do you want to consider a more traditional retirement age or a lower time spent in early retirement? Here three years of early retirement is dropped (early retirement is now targeted at age 56 instead of 53). This drops the SIP requirement to ₹ 1.72 lakhs which is in line with what the family can now invest.

We will now consider the reverse situation 5 more years down the line.

15 years later from the start

Calculation of SIP amount 15 years later - Iteration 1

We see that the portfolio of ₹ 1.27 crores is now ₹ 1.25 crores, the next car has been purchased, the child is now in 2nd year which means admission fees and tuition/hostel and related expenses for 2 years have been paid. The annual expenses in retirement have increased from ₹ 10 lakhs/year to ₹ 14 lakhs/year due to inflation. There is now a ₹ 5 lakhs allocation to the marriage goal which was earlier not possible. The family now has ₹ 3.8 lakhs of SIP amount they can invest every month which is ₹ 29,000 higher than the ₹ 3.51 lakhs shown in the plan.

Calculation of SIP amount 15 years later - Iteration 2

We add back one more year in early retirement that takes the early retirement target to 55 (instead of 56 after 10 years) and this takes the SIP amount to ₹ 3.8 lakhs.

Some don’ts while revisiting goals

  • increase the expected return values from debt and equity: this is risky since if you do not get those returns, then the plan will be in trouble in the future
  • increase the SIP increment value to more than 10%: this pushes a lot of the investments to the future by assuming a higher salary
  • assume lower expenses in retirement: lifestyle inflation is a real concept and assuming lower expenses now may give a temporary lowering of the investment amount but this just pushes the problem to the future
  • assume a lower inflation rate: inflation is different from the official figures. The inflation applicable to you is closely related to your lifestyle and the basket of goods and services you consume. You need to closely track your expenses over some time to get an idea of what inflation applies to you. Until then, assume a high figure
  • increase the proportion of allocation to equity: taking more risk does not guarantee higher returns. If it did, then the risk would have been high and not low
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Next steps:

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