Investing for retirement when you have never touched equities

By Larissa Fernand |  10-02-20 | 
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Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

In Focus on financial independence, not legacy we looked at the retirement situation of Jairam.

We revisited it again with the feedback of VIPUL SHAH, a fee-based financial planner.

Let’s take a look at Jairam’s situation and see how Vipul has guided him.

Goals

My daughter will be getting married in 5 or 6 years. I foresee the wedding expenses to be Rs 20 lakhs.

When my daughter gets married, I would like to give her a gift of Rs 60 lakhs.

I shall be retiring in 2025.

Finances

On retirement, I should have Rs 1.2 crore in my General Provident Fund, or GPF, and Rs 20 lakhs as gratuity.

I shall be getting a pension of Rs 80,000 per month.

I have zero investments in equity.

My monthly expenditure, including the EMI of my home loan, amounts to Rs 55,000.

Every month, I have Rs 65,000 to save and invest.

- Jairam S

There are two ways in which you can tackle these goals.

One is the time frame. The near-term goals are one-time expenditures: a wedding and a gift to your daughter. The other is a goal that stretches over decades.

The second is the urgency of it; by this I mean, is it a need or a want? Retirement is definitely a need that must be given topmost priority. I can understand your daughter’s wedding expenses too falling into this category. But the gift is definitely a wish, hence we do have flexibility with regards to bringing it to pass.

You have a positive cashflow of Rs 65,000. I suggest that you start a systematic investment plan (SIP) of Rs 25,000 which shall fetch Rs 20 lakhs in 2025 at 11% CAGR.

On the one hand, you have one child who shall inherit your legacy. So there is really no need to gift. But I am not here to advice you on that. Instead, I suggest that if you really want to give your daughter a gift, do not fix the time frame to be around the wedding because you already have such a big expense lined up. Push it by a few years.

Not strictly fixing the number of years to the goal has an advantage as monthly surplus left after contributing towards the marriage goal can be used in an SIP to accumulate Rs 60 lakhs. This will not disturb the existing cashflow. This will also help you increase exposure to the equity market as your entire corpus is in fixed income instruments.

My prime concern is for you not to withdraw money from the GPF towards either of the above goals.

Your expenses of Rs 55,000 per month will decrease by 15% once the home loan is completely cleared. This is in the near future. Let’s look ahead. If we apply rule of 72 with an inflation of 6%, it will take 12 years for expenses to double, which can be taken care by the monthly pension amount of Rs 80,000. The question is what will happen after 12 years, after all retirement is not a short phase.

(The Rule of 72 determines how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.)

Here’s a tentative plan that can help:

Below are the suggestions for portfolio for SIP’s, Rs 1.2 crores GPF and Rs 20 lakhs gratuity to help sustain Jairam’s post-retirement phase till life expectancy of 85 yrs.

  • Invest Rs 25,000 in SIP mode in a low-cost index fund for your daughter’s marriage.
  • Invest Rs 35,000 in a multi-cap fund. Assuming it fetches 12% CAGR in little over seven years, the corpus of Rs 60 lakhs would be available.
  • Invest Rs 1.35 crores in a mix of non-convertible debentures (NCDs), short-term debt funds, Senior Citizen Savings Scheme (SCSS) and fixed deposits.
  • How did I arrive at Rs 1.35 crores? I took the GPF of Rs 1.20 crores and the Gratuity of Rs 20 lakhs. This amounts to Rs 1.40 crores. Few banks provide 6-7% interest on a savings bank account. Around Rs 5 lakhs can be parked as an Emergency Fund here.
  • The idea is to generate a post-tax return of 7% on a corpus of Rs 1.4 crores; which is Rs 9.45 lakhs per annum.
  • In the initial 5 years of post-retirement, I suggest re-investing the interest amount in a lumpsum mode in a multi-cap mutual fund. If we apply Rule of 72, this lumpsum corpus at an 11% CAGR shall double every 6.5 years. It will help him to build a sizeable corpus even if his life expectancy reaches 90 years.

The above recommendations are keeping in mind that you have never invested in equities. By opting for SIP’s now, this will get you accustomed with volatility and gain confidence in this asset class. Later, lumpsum investing would be psychologically easier. 

You can follow Vipul Shah on Twitter.

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