How increasing SIP can help you to achieve your financial goals

Suresh is 31 years old and earning a decent salary. Suresh`s wife is 3 years younger to him and they have a 1 year old son. Suresh wants to create a financial plan for himself. The only problem he is facing is that he is not able to invest the amount as per the advice from his financial planner. His financial planner has asked him to invest Rs. 40,000 per month while Suresh is able to invest only Rs. 25,000 per month.

In this type of scenario, what are the options for Suresh? There can be 2 options

1. Either to reduce the amount of goal.
2. Or to increase the SIP every year by small percentage

Let us check the case for Suresh

Let us assume, Suresh does not have any other investments other than the current accumulation in his PF account which is 5 Lakhs. His monthly contribution in PF account is Rs. 6000 per month and his basic pay increases by 5% every year.

His Goals are as follow

1. Child Education Amount– 15 Lakhs (in today`s cost)
2. Child Education Tenure – After 16 years
3. Retirement Age – 60 years
4. Life Expectancy – 85 Years
5. Retirement Expenses – Rs. 40,000 per month

He does not want to spend anything on his son`s marriage. So, the major goals are child education and retirement planning. I am assuming that his basics like term insurance, health insurance and emergency funds etc. are covered.

Also Read : Asset Allocation by Age, Returns or CRATON

Child Education Goal

Child Education Amount– 15 Lakhs (in today`s cost)

Assuming inflation of 8%, the amount required will be 51 Lakhs after 16 years at the time of his son`s higher education.

The monthly SIP required assuming 9% returns would be Rs. 12,000 per month.

Retirement Goal

1. Suresh Age – 31 Years
2. His wife`s age – 28 Years
3. Retirement Age – 60 years
4. Life Expectancy – 85 Years
5. Retirement Expenses – Rs. 40,000 per month

Value of 40,000 would be around 2.2 Lakhs after 29 years at the time of his retirement assuming an inflation of 6%.

This has to continue till age 85 of his wife, around 28 years (Assuming longevity of 85 for this calculation).

Assumed investment return post retirement period is 1% above inflation.

The Corpus required for this will be around 6.5 Crores

He will get around 126 Lakhs from PF at age 60 assuming an annual increase of 5% in PF contribution and an interest rate of 6% throughout.

The balance required is 524 Lakhs. Assuming a 10% returns over long term, the SIP required is 28,000 per month.

Now, the total investment required is 40,000 per month (12,000 +28,000) for these 2 goals. But Suresh is able to invest 25,000 per month. Coming back to the options, should Suresh reduce his goals to half?

Also Read: How Super Top Up Policy can reduce your health insurance premium

Increasing SIP

His financial advisor asked him to increase the SIP every year. Now, let us check, what would be the monthly SIP amount if Suresh increases it by 5% every year.

Child Education Amount– 15 Lakhs (in today`s cost)

Future Value – 51 Lakhs (after 16 years)

The monthly SIP required assuming 9% returns would be Rs. 9,000 per month which will increase by 5% every year.

Retirement

As shown above, in normal scenario, Suresh need to invest 28,000 per month to achieve a corpus of 524 Lakhs in 29 years.

But if Suresh invests 16,000 per month now and increase the SIP by 5% every year, he would be able to achieve the same corpus i.e. 524 Lakhs in a span of 29 years.

Now Suresh is happy that he can achieve both of his financial goals with 25,000 per month.

Point of Caution

Though everything seems to be rosy here, there is a point of caution. If you have the monthly amount which can be invested to achieve your financial goals, do not go for increasing SIP. It looks easy in the initial years, but the SIP amount becomes huge in the later stage. You can refer the table to check:

Keep Investing and Happy Investing!