Factor in inflation while deciding retirement corpus4 min read . Updated: 20 Jan 2011, 03:39 PM IST
Factor in inflation while deciding retirement corpus
Factor in inflation while deciding retirement corpus
I am 36 years old and my annual post-tax income is around ₹ 3.5 lakh. My monthly expenses are around ₹ 50,000. I own a self-occupied house worth ₹ 80-85 lakh. I am married and have a four-year-old son. I have a term life cover (sum assured ₹ 55 lakh), a unit-linked insurance plan, or Ulip (sum assured ₹ 5 lakh), Public Provident Fund, or PPF, ( ₹ 10 lakh in my name and ₹ 2.2 lakh in my son’s name), Employees’ Provident Fund, or EPF, ( ₹ 8 lakh), stocks ( ₹ 4 lakh), six mutual funds ( ₹ 15 lakh). I don’t require an emergency fund since my parents are there to support. I have another ₹ 5 lakh to invest. My goals are buying a bigger house worth ₹ 1 crore. The rental income from the present house is about ₹ 20,000- ₹ 22,000. I need a monthly income of ₹ 1 lakh after retirement. At what age can I retire with these investments? Don’t factor salary hikes for the next two-three years.
We need to identify your financial goals. Firstly, you plan to buy a bigger house and rent out the existing one. The new house has been considered at ₹ 1 crore and the plan is to purchase it four years from now. The next need is to plan for your retirement. While you have mentioned the retirement need as ₹ 1 lakh per month (existing expenses are ₹ 50,000), it is difficult to assume that the expenses will only double in 22 years assuming you retire at 58 years of age. Hence we have considered inflation-adjusted expenses with the base figure of ₹ 50,000 per month. Just to share the numbers—the annual retirement expense at the age of 59 will be ₹ 28.44 lakh. We have provided the retirement expense for 22 years after retirement.
We have also considered your child’s education, providing for ₹ 10 lakh when he turns 18. This need along with retirement has been classified under the “trust category" where safety is given the maximum priority, followed by returns and then liquidity. The housing need has been assigned the category of “luxury capital". This is done as this is your second house. Had this been your first house, this would also have been clubbed under trust capital. Under the luxury capital, maximum weightage is given to the returns followed by liquidity and then safety.
Assumptions: Your annual savings has been taken at ₹ 7 lakh.This is considered excluding the insurance premiums. In addition, the savings will increase by the amount of rent from the fourth year onwards.
The savings are expected to increase further from the fourth year by 7% year-on-year. Inflation is also assumed to increase at the same rate, i.e. 7%, and the interest rate is taken at 10%. This is considered as an average rate over the long term. We have taken your working life span as 22 years.
Financial planning: The total net worth (excluding real estate) at 58 years is ₹ 4.81 crore. This amount is available after providing for your new house and son’s education.
The inflation-adjusted new house will cost you ₹ 1.31 crore where we have assumed a loan at 60% of the said value and have considered the average rate of interest at 9.5% for a tenor of 15 years.
The net worth mentioned above is meant for your retirement. You attain the critical mass in the year when the retirement expenses are higher than the interest earnings, at the age of 69. This is the year from when you start withdrawing from your principal corpus.
This corpus will last you till the age of 80. However, if you believe that 85 years is the optimal age, then you need to increase your saving years by one, thereby increase your retirement age in the process by another year.
Another strategy could be targeting an annualized return of 11% against the current target of 10%.
Investment plan: The requirement for a second house is when we need the first tranche of funds. This is followed by the trust capital of the son’s education and retirement. This means we can invest more in equity and gradually shift towards debt as we come closer to the need for education. We can consider having an asset mix of 70% equity and 30% debt. Since you already have exposure to eight funds, it is preferable if we choose from the existing stable. Since you have not disclosed the funds, we are unable to comment on the same. But it is preferable to pick from a combination of large-cap, mid-cap and hybrid equity funds and not have more than five funds in total. In the debt space, PPF and EPF are good options. Any further exposure to debt can be built through hybrid equity schemes.
All investments should be started through regular systematic investment plan.
Insurance: You already have a term cover. You may need to increase the sum assured when you plan to buy the new house. The increase should be equivalent to the loan amount and should be taken in the form of term cover and not a step- down insurance. This is because in future, your insurance needs will increase. Also, review your existing Ulip.
Get yourself and your family a health insurance. This is recommended even if your employer covers you.
Things to watch: You have a PPF account in the name of your son. Make sure the total contribution in both the accounts does not exceed the limit of ₹ 70,000 per year in case you are the guardian of his account. Also, review you stock portfolio. If you are an investor who keeps a regular watch on the markets then you can continue your holdings. Otherwise, you will be better of by switching to mutual funds.