Planning Whiz: March 2023

Plan for retirement

Geojit’s Investment Analyst, Gibin John, helps a client working in a private firm assess his retirement plan. Gibin John analyses the client’s current investments and helps him plan ahead to lead a stress-free retired life. 

My name is Subhash, age 51. I am working for a private firm and planning to retire at the age of 56. My salary is Rs.1.78 lakh per month. I want to know whether the investments being done are enough for my retirement. My living expense is Rs. 60,000. My equity investments are Rs. 19 lakh in mutual funds and Rs. 10 lakh in stocks. Also, I have put Rs. 20 lakh in FD in a NBFC with interest rate of 11.25%. I am doing SIP of Rs. 40,000 per month and depositing Rs.10,000 per month in recurring deposit. Existing accumulated amount in RD is Rs. 2,10,000 and the maturity date is July 2023. I am writing this letter to know how much amount is needed to lead a stress-free post-retirement life.

Gibin John, a Certified Financial Planner replies:

Although you have already made some investments, you haven’t yet made any investments that are specifically focused on retirement. Actually, this is one of the most important goals since a majority of people don’t have any other sources of income during the post-retirement period. In such a situation, it will be challenging to meet ones’ minimum life requirements. Even if you don’t have any savings for other significant goals during your working years, you may still be able to finance those goals by taking a loan, but retirement is the only goal for which one never gets a loan.

Here we assume that all investments mentioned in the letter are for retirement purpose. You are planning to retire at the age of 56 and your current age is 51. Which means you will retire in the next 5 years. Your current living expense is Rs. 60,000. If you need to maintain the same standard of living, you need to consider inflation also. If we assume an inflation of 6% then the living expense will become Rs. 80294 after five years. You must accumulate an inflation adjusted amount of Rs. 2.10 crore to live a stress-free life until age 80.

Your existing investments include Rs. 19 lakh in equity mutual funds, Rs. 10 lakh in direct equity, Rs. 20 lakh in fixed deposit and in Rs. 2.10 lakh recurring deposit. Life is quite unpredictable and uncertain. It can sometimes throw us in adverse situations and circumstances which we may not have expected. So, you have to create a contingency fund. For this purpose, you may utilize your existing and future investments towards the recurring deposit. After the maturity of your recurring deposit, you may shift the 60% of the amount to liquid mutual fund.

Your net monthly income from salary is Rs. 1.78 lakh. After deducting living expense, you have an investable surplus of Rs. 1,18,000. You already have an investment commitment of Rs. 40,000 towards SIP and Rs. 10,000 to recurring deposit. From the balance Rs. 68,000 you may invest Rs. 60,000 in debt mutual fund as SIP for building retirement corpus. If this investment fetches an average return of 7%, then the investment will become Rs. 43 lakh in 5 years. Your existing equity SIP investments and direct equity will become Rs. 61 lakh and Rs. 16 lakh respectively, assuming the return is 10%. After the maturity of the recurring deposit, you may continue investing the sum of Rs. 10,000 in recurring deposit. The accumulated amount of around Rs. 5.50 lakh may be added to the retirement corpus. Thus, the total corpus you may be able to create is Rs. 1.25 crore. But this corpus amount won’t be enough to cover living expenses. If you want to continue the same standard of living you need to accumulate Rs. 2.10 crore as mentioned above. For which you may have to postpone retirement by four years and continue the above-mentioned investments.

After retirement you will not get corporate health insurance cover. So, you should take a health insurance coverage of Rs. 10 lakh with top ups.

Get your financial planning done with the best financial planner, STEPS, the financial planning division of Geojit.

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