One of the SIPBySIP readers posted this query. Answering here for the benefit of all.
Question:
Dear SIPBySIP, I am a 39 year old IT professional living in Hyderabad. I live with my wife (36) and daughter(10). I have a 28 lakhs balance in my PF account. I have also accumulated 43 lakhs so far in my mutual fund portfolio. I started my investing journey in 2012. Every month I invest 50,000 per month via SIP in various funds. I have my own apartment for which I took a home loan of 30 lakhs in 2010. I pay roughly 31,000 per month EMI on the loan. My loan will be repaid fully in the next couple of years. I would like to retire from my regular job in the next 6 years and plan to pursue my personal passion. I spend about 35,000 per month on our living expenses. I also want to set aside 50 lakhs for my daughter’s graduation and another 50 lakhs for her marriage expenses before I retire. Please suggest if my current savings are enough for both goals.
Dear reader, thank you for writing to us. First of all, congratulations on building a sizeable corpus by starting early and investing regularly through systematic Investment.
Now, let’s delve deep into your specific goals. you have mentioned three goals.
Goal 1: Having 50 lakhs corpus for your daughter’s higher education in 6 years
Goal 2: Need to have a corpus of 50 lakhs in 2029 for your daughter’s marriage expenses.
Goal 3: Having enough retirement corpus by next 6 years that will last for your 35 year retirement period.
Goals 1 & 2 are very clear. You need 1 crore corpus in 2029 to fulfil your goals of your daughters education and marriage.
Goal 3 is very tricky. We need to assume a few things for coming up with the required corpus you need for your retirement.
First and foremost, the retirement period. With the expected advancements in medical technologies and diagnostics, the average life span in India has been increasing consistently. We can expect a reasonable lifespan of 80 years considering the worst case.
Second assumption is the long term inflation rate. Inflation is a silent killer that reduces the value of your money. In other words, if you have to maintain the same lifestyle throughout the retirement period, you have to factor in the inflation in your calculations. For the last 10 years, inflation has been hovering around 3%-7%. Let’s assume an average inflation of 4% throughout the retirement period.
Third is the lifestyle you want to maintain during your retirement. Retirement has a different meaning from person to person. People have different hobbies, different goals and different spending habits during retirement. We need to understand what kind of lifestyle you want to maintain during your retirement. With the given data and for the sake of calculations, we assume you want to maintain the current lifestyle.
below planning is based on the assumption that you will be working for next 6 years. We strongly recommend you to take adequate life cover with a pure term plan. You also need to have sufficient health cover throughout your retirement period.
How much corpus you need to retire?
Currently you are spending 35,000 per month.
Assuming 4% inflation, monthly expenses when you retire 6 years from now are going to be roughly 44,286 per month.
Assuming an average return of 8.6% on your investment during post retirement, you need a corpus of 97.8 LAKHS at the time of your retirement in the year 2029.
What will be your corpus when you retire?
Now, let's see what will be your assets by your retirement time.
Assuming that you continue to work for the next 6 years and continue to invest in the mutual funds and EPF accounts at the same rate as you are doing today.
If you invest 40,000 per month for the next 6 years, assuming a return of 12% p.a, your mutual fund portfolio will be worth 1.26 crore from the current 43 Lakhs
Based on your current monthly expenses and EMIs, I am assuming your monthly net salary is above 1 lakh rupees. Assuming 1 lakh as net salary, your PF contribution along with your employer contribution would be in the range of 15,000 per month to 20,000 per month based on the salary structure. Assuming an average monthly PF contribution of 16,000 per month (Employer + Employee), after 6 years, your PF balance would be roughly 57.7 lakhs
Combining your mutual fund portfolio and PF balance, you will have a corpus of 1,83,99,515
Is it Enough?
After setting aside 50 lakhs for your daughter's education and 50 lakhs for daughter’s marriage, you are left with roughly 84 lakhs corpus for your retirement with a small short fall 15 lakhs for your 35 year retirement corpus (99 lakhs). This shortfall can be easily covered with a small increase in your SIPs for the next 6 years based on your increase in the salary over the next 6 years. For example, if you just increase your monthly SIP amount by an additional 10,000 per month, you will have sufficient funds for your retirement.
Recommendations for managing the retirement fund
It is important to manage your retirement fund in such a way that it yields better returns and at the same time it will not have much volatility or impacts your overall retirement goal. One such strategies is called “THREE BUCKET STRATEGY”.
The goal of this strategy is to divide the retirement corpus into three buckets.
Short, Medium and Long term. In your case, you could divide your retirement corpus of 99 lakhs in the following manner for optimal returns and low volatility.
Short Term Bucket (1st year to 5th year)
This is the first phase of retirement. For this phase, keep the funds needed for the next 2 years in a liquid fund. Liquid funds are very safe investment options for very short periods of time. They give returns in the range of 5% - 6% and provide the same liquidity as a savings account. Keep drawing your monthly pension from this liquid fund using Systematic Withdrawal Plan (SWP). Keep the remaining 3 years funds in a short term debt fund which could return between 6%-8% p.a.
Beginning of every year, move funds needed for the next 1 year into the liquid fund.
For this this first phase, your will need roughly 28 lakhs. 11 lakhs in liquid fund and 17 lakhs in short duration fund.
Medium Term Bucket( 6th year to 15th year)
This phase lasts for 10 years. For this phase,Keep funds in a Balance Advantage Funds. Balanced Advantage Funds are hybrid funds which dynamically allocate between Equity and Debt depending on the market condition. They try to minimize the portfolio volatility by applying various strategies. We can expect returns in the range of 8% p.a to 10% p.a
You will have to allocate roughly 40 lakhs for this phase. Every two years, move the funds needed for the next two year expenses into the short term debt fund (Bucket1). Keep doing this until this corpus is exhausted. Always withdraw from Bucket1.
Long Term Bucket (16th year to 35th year)
This is the last bucket which is not touched for 15 years ( until bucket 1 and bucket 2 funds are exhausted). Since this bucket is for very long time, you have flexibility to invest in better yielding instruments in the long term. you can invest in a Blue chip Fund or a Well balanced Multi Asset Fund. we can expect returns in the range of 12% to 15% p.a. assuming average return of 12%, you need to set aside 29 lakhs for this bucket.
By the time you need to draw from this corpus, it will grow to 1.59 crore approximately. At the same time, your inflation adjusted monthly expenses also grow to 80,000 per month. This fund should be sufficient for the next 20 years.
This way, you can divide your corpus and minimise the volatility while drawing the funds every month throughout your retirement period. Hope, this helps you.
Regards,
Team SIPBySIP
9000175313
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