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How should you invest for goals after your retirement or FIRE?

Posted on 27 Jul 2021
Author: Sayan Sircar

Tags: Retirement ; Children ; FIRE

6 mins read
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This post shows how to reach a goal without saving throughout the time horizon of the goal

Creating a crore of corpus

📚 Topics covered:

Introduction
How to invest in Phase 1
How to manage the portfolio risk in Phase 2
Risk of falling short in the post SIP phase 2
- Dealing with an insufficient corpus
- Dealing with market risk

Introduction

As we showed in our article of creating a corpus of 1 crore in 10 years, you can reach that goal by investing in debt and equity assets every year, and performing a review/rebalancing throughout the journey. There is another case where you can invest only for a limited period which less than the goal horizon and this post deals with such cases.

Some examples are:

children’s education or marriage goals post-retirement
having any lump sum goal after FIRE when there is a conscious choice to retire early

In FIRE, you will not have regular income to save for any goals beyond the FIRE date. Unless you are able to fund these goals before you FIRE, you cannot take early retirement.

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In such goals, there are two distinct phases,

Phase 1: accumulation phase where you invest via SIP
Phase 2: post SIP phase where no additional capital is added from outside

When the tipping point comes, enough corpus must be reached so that the goal can be achieved within the return expectations in the next phase since, after this, the corpus needs to grow without additional contributions. There is a risk here that is discussed below.

We show a situation where a target corpus of ₹ 1 crore needs to be reached in 15 years for a child’s education goal which is expected to occur 7 years after the parent’s retirement. Investments are happening for only the first 8 years in this goal.

How to invest in Phase 1

This is a fairly straightforward process as described in the standard single goal investing process:

define the goal amount
define the SIP amount and invest yearly
every year manage risk by review and rebalancing

1 crore in 15 years

In this case, we start saving ₹ 56,198 as a monthly SIP (60% in equity, 40% in debt) and increase that by 5% a year. We expect to invest ₹64 lakhs of capital over the next 8 years and stop investing after that.

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Also read
How much returns should you estimate for your goals?

How to manage the portfolio risk in Phase 2

We need proper risk management in phase 2 by slowly reducing the equity component over time. In the example at the point when phase 2 begins, the corpus has 12% in equity which is reduced to 0% in the next 2 years so that when 5 years are left, the corpus is fully in debt assets that maximize the chances of hitting the 1 crore goal by shifting to safe debt instruments like bank FD or suitable debt mutual funds.

Risk of falling short in the post SIP phase 2

As mentioned earlier, there are two risks when the second phase starts:

there is insufficient corpus already accumulated
adverse market movement which impacts the risky i.e. equity part of the corpus

Dealing with an insufficient corpus

In the example above, the corpus needs to be ₹80 lakhs after 8 years of investing to reach the 1 crore target in another 7 years. If the corpus is lower, then additional money has to be brought in at this stage or the goal amount will not be reached. If there is excess corpus, it can be repurposed for other goals.

On the other hand, if your income increases steadily or there is a windfall gain, say from a rich relative or sale of real-estate, you might reach a stage where there is no need to invest more. At this point, the corpus you have is enough to grow on its own to reach the target value on its own. This is the concept of CoastFIRE.

Dealing with market risk

1 crore in 15 years with lower risk

Depending on the asset allocation at the point when SIP stops there could be a risk of falling short in case of a fall in equity markets. This is the same as the standard sequence of returns risk where you need to leave a corpus exposed to market movements without the ability to add additional capital.

To mitigate this risk you need to

try to lower the time in the post SIP phase
switch to a fully conservative (debt only) asset allocation when the SIP stops

In both cases, more investments are needed and it is the only way to mitigate the sequence of return risk. The lower return in the more conservative second phase is compensated by investing a bit more in the accumulation phase.

Using the same example as before, we start at a higher SIP amount than before i.e. ₹ 57,010 and target reaching a higher corpus of ₹ 81.08 lakhs in 8 years. Once we reach this point, the entire corpus is shifted to safe debt instruments like bank FD or suitable debt mutual funds so that reaching the target 1 crore corpus is most likely. In the Excel sheet, we toggle the “Risk reduction” flag to TRUE to achieve this change in phase 2 asset allocation.

This is the Excel workbook used to create the examples.

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