SEBI registered Investment advisor (RIA) with Registration number – INA 000000342.
Retirement Planning in Modern Times-Part-2

We have seen in the previous article, the accumulation required at the age of 55, to retire and maintain the same standard of living upto age 75 is Rs. 1.9 Crore. Now, we will discuss, how to accumulate this amount?

You have 20 Years left in your service to accumulate this amount. If you can identify  investments  which gives 12% CAGR, the monthly savings required to accumulate the corpus will be Rs. 20000/-.

(* If you are aged 25, you can achieve the same standard of living by saving Rs. 11000/-pm for 30 years! See the power of compounding).

If you want to pass on some amount other than your home to the next generation, you have to plan for it separately. The calculation here is based on the assumption that you can withdraw Rs.96000/- pm in the first year of retirement, which you can increase by 6% every year to offset inflation. This allows you to maintain the same standard of living utilizing the accumulation made. At the age of 75, the balance will be zero.

Don’t worry, if you are living beyond 75, then you have the new concept of Reverse Mortgage to your rescue. This works exactly opposite to a housing Loan. You can pledge your house to a financial institution and they will pay you a monthly amount. You can stay in the house also as long as either of you are alive.  You need not pay any interest during your life time. After that, the financial institution will get back their money either from your legal heirs or by selling the house.

If you have accumulation in EPF, PPF, gratuity, leave encashment etc., you can reduce the total of all these from Rs. 1.9Cr. Other liquid investments available/maturing at that time also can be considered. Accordingly, your monthly savings required also will come down from Rs. 20,000/-.

But you should have a clear idea as to what is required, so that you can plan accordingly.

Now, the next big question?? Where to invest this amount monthly to ensure 12% CAGR for next 20 years?

Investment is an art and requires lot of patience and analysis if you are managing by yourself. In the current situation, the approximate long term returns from various asset classes are as given below:

Shares/ Diversified Equity Mutual Funds – 18%, Post office Savings/PPF/PF/Bank Deposits/Debt mutual Funds – 8%, Endowment/Money back policies – 5-6 %, ULIPs – Depending on the asset allocation between equity and debt, but on the net amount invested after charges.

It is a known and accepted fact that we cannot invest entire amount in one product. We should plan it depending on the age, risk appetite, term to retire etc. At young age, you can have a good exposure to equities either through good blue-chip stocks or through good Mutual Funds. It is better to adopt the MF route to spread the risk and avail the benefit of professional fund management. You can have a mix of Index funds, Diversified Mutual Funds, ULIPs, PPF, EPF, Postal Schemes and bank deposits in various combinations depending on your age. This is called asset allocation. We have to adjust the allocation if required, after review atleast once in a year. This is called rebalancing. We can have more allocation to equities at younger age and more towards debt, as you nearer retirement. Deciding the correct asset allocation and rebalancing it periodically will help you in reaching your goals easily.

Let us imagine an asset allocation of 80% in equity and 20% in debt. This will generate a CAGR of around (80*18%+20*8%) =(14.4+1.6)=16%. At young ages say upto 40 years, we can have this asset allocation and slowly reduce the equity component. Between the ages 41 -45, we can have around 70% in equity and 30 % in debt, which  can be modified as 60% in equity and 40 % in debt during the age group 46-50. Once you cross 50, you can think of around 20% in equities and 80% in debt for the next 2 years and the last 3 years prior to retirement, you can have 100% in debt to shield the capital, in case of any market volatility. This pattern will generate an average return of 12%  and you will have an accumulation of 1.9 Crores. Please see the below chart to see, how your investment of 20,000 per month grow to reach 1.9 Crores.

How you reach your goal of 1.9 Crores

Age upto40 41-45 46-50 51-52 53-55
Equity allocation 80 70 60 20 0
Debt Allocation 20 30 40 80 100
Combined CAGR(Equity -18%, Debt-8%) 16 15 14 10 8
Approx. Accumulation at the end of phase 17.9Lakhs 53.5Lakhs 1.2 Cr 1.5 Cr 1.9Cr

The other issues related to retirement planning are:

  • How to identify good financial products to invest?
  • How to shield yourself from misselling of agents?
  • How to reduce tax-before and after retirement?
  • Where to invest your retirement corpus to generate optimum returns?
  • Can we try the option of reverse mortgage to increase our income after retirement?

Even if you are saving Rs. 20,000/- pm, but if the investments are in wrong products, there are all chances, you may fall short of your retirement target. We will cover all these topics in the next mail.

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