May 18, 2000
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Getting ready for retirement
Earlier: Getting started
Rohit Sarin
In the previous piece we saw that identifying goals is a first step in financial planning. Taking that as a lead, we have taken case studies of three individuals of varying ages: 25, 30 and 35. One common criteria being their goals:
- House purchase at the age of 40
- Finance of child's education at 45
- Finance their child's marriage at 55 years
- Retirement at 55 years
With the assumption that all of them share a balanced risk profile, here is how they should plan for their retirement.
CASE IAssumptions in the case of the 25 year-old....................
- Current Monthly Expenses: Rs 10, 000
- Monthly contribution to PF: Rs 1,500
- Annual estimated increment: 10 per cent
- Annual return on PF: 11 per cent
- Annual return on debt funds: 12 per cent
- Annual return on equity funds: 20 per cent
- Annual rate of inflation: 8 per cent
Which lead to....................................
- A recommended debt to equity ratio of 40:60. For this, a mix of debt and equity based funds should be selected.
- Estimated current value of monthly expenses of Rs 10, 000 would inflate to Rs 100, 627 on retirement after 30 years.
- To generate such an amount of regular income Rs 12,075,188 would need to be invested in financial instruments giving a steady annual return of 10 per cent.
- A major chunk (86 per cent) of this would be financed through accumulated PF balance which would have grown to Rs 1, 03, 71, 655.
- Therefore, the balance amount of Rs 17, 03, 534 would need to be saved over a period of 30 years.
- With a debt to equity mix of 40:60,, the person needs to begin with a total monthly of only Rs 143. This monthly saving/contribution would could keep on increasing every year.
In figures, the complete 30-year plan translates to..............
Year
Year |
No. |
Equity
Fund
(Rs) |
Debt
Fund
(Rs) |
Total |
Yearly |
Income |
Cumm.
Balance** |
2000 |
1 |
86 |
57 |
143 |
1,713 |
133 |
1,846 |
2001 |
2 |
94 |
63 |
157 |
1,884 |
417 |
4,147 |
2002 |
3 |
104 |
69 |
173 |
2,073 |
768 |
6,988 |
2003 |
4 |
114 |
76 |
190 |
2,280 |
1,200 |
10,468 |
2004 |
5 |
125 |
84 |
209 |
2,508 |
1,727 |
14,703 |
2005 |
6 |
138 |
92 |
230 |
2,759 |
2,367 |
19,829 |
2006 |
7 |
152 |
101 |
253 |
3,035 |
3,139 |
26,002 |
2007 |
8 |
167 |
111 |
278 |
3,336 |
4,066 |
33,404 |
2008 |
9 |
184 |
122 |
306 |
3,672 |
5,175 |
42,251 |
2009 |
10 |
202 |
135 |
337 |
4,044 |
6,500 |
52,795 |
2010 |
11 |
222 |
148 |
370 |
4,440 |
8,074 |
65,308 |
2011 |
12 |
244 |
163 |
407 |
4,884 |
9,940 |
80,133 |
2012 |
13 |
269 |
179 |
448 |
5,376 |
12,149 |
97,658 |
2013 |
14 |
296 |
197 |
493 |
5,916 |
14,756 |
118,330 |
2014 |
15 |
325 |
217 |
542 |
6,504 |
17,829 |
142,663 |
2015 |
16 |
358 |
238 |
596 |
7,152 |
21,441 |
171,256 |
2016 |
17 |
394 |
262 |
656 |
7,872 |
25,683 |
204,811 |
2017 |
18 |
433 |
289 |
722 |
8,664 |
30,657 |
244,132 |
2018 |
19 |
476 |
318 |
794 |
9,528 |
36,481 |
290,140 |
2019 |
20 |
524 |
349 |
873 |
10,476 |
43,290 |
343,906 |
2020 |
21 |
576 |
384 |
960 |
11,520 |
51,242 |
406,669 |
2021 |
22 |
634 |
422 |
1,056 |
12,672 |
60,520 |
479,861 |
2022 |
23 |
697 |
465 |
1,162 |
13,944 |
71,334 |
565,139 |
2023 |
24 |
767 |
511 |
1,278 |
15,336 |
83,927 |
664,402 |
2024 |
25 |
844 |
562 |
1,406 |
16,872 |
98,579 |
779,853 |
2025 |
26 |
928 |
619 |
1,547 |
18,564 |
115,612 |
914,029 |
2026 |
27 |
1,021 |
680 |
1,701 |
20,412 |
135,399 |
1,069,839 |
2027 |
28 |
1,123 |
748 |
1,871 |
22,452 |
158,368 |
1,250,659 |
2028 |
29 |
1,235 |
824 |
2,059 |
24,708 |
185,015 |
1,460,382 |
2029 |
30 |
1,358 |
906 |
2,264 |
27,168 |
215,909 |
1,703,460 |
CASE IIAssumptions in the case of the 30 year-old....................
- Current Monthly Expenses: Rs 20, 000
- Monthly contribution to PF: Rs 2,000
- Annual estimated increment: 10 per cent
- Annual return on PF: 11 per cent
- Existing PF balance: Rs 100,000
- Annual return on debt funds: 12 per cent
- Annual return on equity funds: 20 per cent
- Annual rate of inflation: 8 per cent
Which lead to....................................
- Recommended debt to equity ratio of 50:50. For this, a mix of debt and equity based funds should be selected.
- Estimated current value of monthly expenses of Rs 20, 000 would inflate to Rs 136, 970 per month on retirement after 25 years.
- To generate such an amount of regular income Rs 1, 64, 36, 340 would need to be invested in financial instruments giving a steady annual return of 10 per cent.
- About 50 per cent of this would be financed through accumulated PF balance which would have grown to Rs 76, 73, 755.
- Therefore, the balance amount of Rs 87, 62, 586/- would need to be saved over a period of 25 years.
- With a debt to equity mix of 50:50, the person needs to begin with a total monthly of Rs 1,740. This monthly saving/contribution could keep increasing every year.
In figures, the complete 25-year plan translates to...................
Year |
No. |
Equity
Fund |
Debt
Fund |
Total |
Yearly |
Income |
Cumm.
Balance** |
2000 |
1 |
870 |
870 |
1,740 |
20,878 |
1,552 |
22,429 |
2001 |
2 |
957 |
957 |
1,914 |
22,965 |
4,847 |
50,241 |
2002 |
3 |
1,053 |
1,053 |
2,105 |
25,262 |
8,911 |
84,414 |
2003 |
4 |
1,158 |
1,158 |
2,316 |
27,788 |
13,883 |
126,085 |
2004 |
5 |
1,274 |
1,274 |
2,547 |
30,567 |
19,923 |
176,575 |
2005 |
6 |
1,401 |
1,401 |
2,802 |
33,623 |
27,219 |
237,418 |
2006 |
7 |
1,541 |
1,541 |
3,082 |
36,986 |
35,987 |
310,391 |
2007 |
8 |
1,695 |
1,695 |
3,390 |
40,680 |
46,478 |
397,549 |
2008 |
9 |
1,865 |
1,865 |
3,729 |
44,748 |
58,982 |
501,279 |
2009 |
10 |
2,051 |
2,051 |
4,102 |
49,224 |
73,837 |
624,340 |
2010 |
11 |
2,257 |
2,257 |
4,513 |
54,156 |
91,432 |
769,929 |
2011 |
12 |
2,482 |
2,482 |
4,964 |
59,568 |
112,217 |
941,713 |
2012 |
13 |
2,730 |
2,730 |
5,460 |
65,520 |
136,709 |
1,143,943 |
2013 |
14 |
3,003 |
3,003 |
6,006 |
72,072 |
165,508 |
1,381,523 |
2014 |
15 |
3,304 |
3,304 |
6,607 |
79,284 |
199,305 |
1,660,112 |
2015 |
16 |
3,634 |
3,634 |
7,268 |
87,216 |
238,897 |
1,986,225 |
2016 |
17 |
3,997 |
3,997 |
7,994 |
95,928 |
285,200 |
2,367,353 |
2017 |
18 |
4,397 |
4,397 |
8,794 |
105,528 |
339,272 |
2,812,153 |
2018 |
19 |
4,837 |
4,837 |
9,673 |
116,076 |
402,328 |
3,330,557 |
2019 |
20 |
5,320 |
5,320 |
10,640 |
127,680 |
475,767 |
3,934,004 |
2020 |
21 |
5,852 |
5,852 |
11,704 |
140,448 |
561,198 |
4,635,650 |
2021 |
22 |
6,438 |
6,438 |
12,875 |
154,500 |
660,473 |
5,450,622 |
2022 |
23 |
7,081 |
7,081 |
14,162 |
169,944 |
775,717 |
6,396,283 |
2023 |
24 |
7,790 |
7,790 |
15,579 |
186,948 |
909,373 |
7,492,604 |
2024 |
25 |
8,568 |
8,568 |
17,136 |
205,632 |
1,064,246 |
8,762,482 |
CASE III
Assumptions in the case of the 35 year-old....................
- Current Monthly Expenses: Rs 30,000
- Monthly contribution to PF: Rs 2,500
- Annual estimated increment: 10 per cent
- Annual return on PF: 11 per cent
- Existing PF balance: Rs 300,000
- Annual return on debt funds: 12 per cent
- Annual return on equity funds: 20 per cent
- Annual rate of inflation: 8 per cent
Which lead to....................................
- Recommended debt to equity ratio of 50:50. For this, a mix of debt and equity based funds should be selected.
- Estimated current value of monthly expenses of Rs 30, 000 would inflate to Rs 139,829 per month on retirement after 20 years.
- To generate such an amount of regular income Rs 1, 67, 79, 446 would need to be invested in financial instruments giving a steady annual return of 10 per cent.
- About a third of this would be financed through accumulated PF balance which would have grown to Rs 56, 37, 516.
- Therefore, the balance amount of Rs 111,41, 930 would need to be saved over a period of 20 years.
- With a debt to equity mix of 50:50, the person needs to begin with a total monthly of Rs 4,927. This monthly saving/contribution could keep increasing every year.
In figures, the complete 20-year plan translates to...................
Year |
No. |
Equity
Fund |
Debt
Fund |
Total |
Yearly |
Income |
Cumm.
Balance** |
2000 |
1 |
2,464 |
2,464 |
4,927 |
59,129 |
4,394 |
63,523 |
2001 |
2 |
2,710 |
2,710 |
5,420 |
65,042 |
13,727 |
142,292 |
2002 |
3 |
2,981 |
2,981 |
5,962 |
71,546 |
25,238 |
239,075 |
2003 |
4 |
3,279 |
3,279 |
6,558 |
78,701 |
39,319 |
357,095 |
2004 |
5 |
3,607 |
3,607 |
7,214 |
86,571 |
56,427 |
500,093 |
2005 |
6 |
3,968 |
3,968 |
7,936 |
95,228 |
77,090 |
672,410 |
2006 |
7 |
4,365 |
4,365 |
8,729 |
104,750 |
101,922 |
879,083 |
2007 |
8 |
4,801 |
4,801 |
9,602 |
115,224 |
131,635 |
1,125,941 |
2008 |
9 |
5,281 |
5,281 |
10,562 |
126,744 |
167,051 |
1,419,736 |
2009 |
10 |
5,810 |
5,810 |
11,619 |
139,428 |
209,125 |
1,768,289 |
2010 |
11 |
6,390 |
6,390 |
12,780 |
153,360 |
258,957 |
2,180,606 |
2011 |
12 |
7,029 |
7,029 |
14,058 |
168,696 |
317,822 |
2,667,124 |
2012 |
13 |
7,732 |
7,732 |
15,464 |
185,568 |
387,188 |
3,239,880 |
2013 |
14 |
8,506 |
8,506 |
17,011 |
204,132 |
468,753 |
3,912,765 |
2014 |
15 |
9,356 |
9,356 |
18,712 |
224,544 |
564,474 |
4,701,783 |
2015 |
16 |
10,292 |
10,292 |
20,583 |
246,996 |
676,605 |
5,625,384 |
2016 |
17 |
11,321 |
11,321 |
22,641 |
271,692 |
807,745 |
6,704,821 |
2017 |
18 |
12,453 |
12,453 |
24,905 |
298,860 |
960,885 |
7,964,566 |
2018 |
19 |
13,698 |
13,698 |
27,396 |
328,752 |
1,139,471 |
9,432,789 |
2019 |
20 |
15,068 |
15,068 |
30,136 |
361,632 |
1,347,465 |
11,141,886 |
Next: Saving for a home
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