« How to become a crorepati in 10 years? How to choose debt instruments for retirement? »

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
📢Join 3600+ readers on WhatsApp and get new post notifications!

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.

CLICK TO TWEET

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.

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

Also read
Does ICICI Lombard Elevate really offer unlimited health insurance?

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.

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

For resident Indians 🇮🇳:

For NRIs 🇺🇸🇬🇧🇪🇺🇦🇺🇦🇪🇸🇬:

Share on WhatsApp:

To understand how this article can help you:

If you have a comment or question about this article

The following button will open a form with the link of this page populated for context:

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Discover an article from the archives

Previous and next articles:

<p>This post shows how to reach a goal like 1 crore in 10 years or any such amount in any time you want</p>

Set Goals Calculator

How to become a crorepati in 10 years?

This post shows how to reach a goal like 1 crore in 10 years or any such amount in any time you want

Published: 23 July 2021

5 MIN READ

<p>This post describes suitable debt instruments for both pre and post-retirement investing: Provident fund, PPF, Sukanya Samriddhi, FD/RD, NCD, pension plans, RBI bonds, post office and SCSS.</p>

Retirement Choosing Investments Pension

How to choose debt instruments for retirement?

This post describes suitable debt instruments for both pre and post-retirement investing: Provident fund, PPF, Sukanya Samriddhi, FD/RD, NCD, pension plans, RBI bonds, post office and SCSS.

Published: 29 July 2021

8 MIN READ

Latest articles:

<p>This blog completes its fourth year with 100+ new posts in 12 months. Here’s looking back.</p>

Review

The 2024 Arthgyaan Year in Review

This blog completes its fourth year with 100+ new posts in 12 months. Here’s looking back.

Published: 29 December 2024

4 MIN READ

<p>This article debunks common myths about SIPs and SWPs, showing how unpredictable returns impact wealth creation and retirement planning since you will never get fixed steady or average returns.</p>

Portfolio Review

Stock Markets do not give Fixed Return like FD: What to do instead?

This article debunks common myths about SIPs and SWPs, showing how unpredictable returns impact wealth creation and retirement planning since you will never get fixed steady or average returns.

Published: 25 December 2024

3 MIN READ

Topics you will like:

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.

Arthgyaan

Supporting everyone's personal finance journey