Retirement planning brainstorming

Q&A: Questions & Answers Personal Finance Q&A
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The thing is discussing/analyzing each other’s retirement planning gives new perspective to implement them in our own planning. I was entering the retirement data in an Excel based model and was flabbergasted to know the end result.

Here is my the data:

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Logic for few data:

Inflation I have taken as 15%. As per RBI it is 6%, but any family man knows that it is 10% to 12% since last 10 years. Infact for medical, real estate, education it is around 20% and more.

I have taken monthly expense at age of retirement (25 yrs from now) as 7.5 lakhs. This is equal to today’s Rs 40,000 monthly expense compounded with 15%. (Plz dont tell me 40k is big monthly expense amount)

Post retirement, investment portfolio should be of debt so taken 8% return.

What I am really surprised is that inspite of fairly ok savings and considerable amount of SIP every month, I would JUST be able to make the investment corpus enough for my life expectancy of 95 years!! I dont think I have exaggerated myself as one with lavish lifestyle. All the input parameters are of middle class family. And other returns assumptions are also average I think.

Any thoughts/suggestions??

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I know suggestions are easy to make but hard to implement

If your inflation expectation is 15% and you have 24 years to invest then you should try to be better at your return expectations, atleast 3 to 4% more then inflation
(It’s not clear to me every month SIP you r going to do in MF or directly in equity)

20% return goal for 24% years is manageable if you go direct in equity

Please try on Excel sheet
Thanks

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Hello @ashit , thanks for your reply. In my 10 yrs of investing life, my portfolio xirr is 15% (50% in MF, 50% direct equity- but both components are around 15% irr only). So 15% is the best I could generate in long term. I have taken 12% returns so as not to take extreme case scenario.

20% returns consistent through for 25 yrs is now tough, atleast for me as I not able to devote enough time for investments. I understand if my alpha is not 3% - 4% more than inflation than I’ll be getting poorer but with 15% returns is best what I think is achievable.

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Either I am not understanding this data correctly or some gaps…like monthly SIP amount of 5 laks rs looks too high for a person whose monthly expenditure is assumed as 40000 rs. Secondly, even initial lump sum to invest also looks om higher side for same profile person… lastly the final sum at retirement - inflation adjusted amount is lower… couldn’t understand why?

Also if inflation is really 15% plus, it’s impossible to beat it over long term for 99% of well informed investors as well…

Is overall inflation really 15%? For eg. Property prices in many urban cities of India have been stagnant or even decreased over last decade… inflation is negative in this case…

But I agree inflation in medical & education would be 15% or even more…

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Hi I believe inflation at 15% over long term is too high.If returns are 12-14 % inflation at 15 it would become very difficult to meet the goal.

Retirement has 2 factors one is normal inflation and second is lifestyle inflation. Lifestyle inflation will be as per income and cashflow.

What is your requirement as on today ? Monthly need as of today excluding kids expense EMI . During retirement those expense won’t be there.

Best part about your plan is you are saving and investing enough which most people often fail to do.

Goals can be met if consistently invested and incremental cash flow from increment or business income is also invested to meet the goals.

Consistency over intensity is the key.

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Medical inflation should ideally be taken care through mediclaim . Only a small corpus needs to be created for house help or medicine expense if required during older days .

Rest my logic is if you have medical expense your lifestyle expense generally will go down as your travel will reduce . So lifestyle expense will compensate for medical expense.

Rest is important to lead a life as well as save towards a happy retirement

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Health insurance is too costly even at mid age, at old age it’s too high for meagre amount… insurance is for protection and just 5-10-15L insurance would not help to protect in worst case…even cost for such policies too high…would still mediclaim make sense or to create a seperate medical corpus ourselves? Thanks

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It should be a combination of both mediclaim and corpus creation.

Always remember mediclaim can help incase of recurring hospitalization . Corpus is finite . Mediclaim is expensive but consider we buy car and take a policy as it’s mandatory.

At early age I prefer to have higher medical.

In my case I am 33 and I have a cover of 10+10 lacs for whole family individually.

20 lacs of cover at early age is something I feel one should have will also depend on income and kind of hospital you prefer.

Over 50 I agree you cannot have a very high cover but if affordable one should be covered as requirement or usage of health insuranceay be more valid once age goes up.

Post 65 premium you pay is like just 1/3 of cover so financially may not make much sense

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For a person who has surplus saving of 5 lacs per month … Med Insurance of 20 lacs is a big waste . Medical Insurance is for people who have much lower saving potential and one medical emergency can push him/her into big debt …

Patel Bhai

If your monthly expenses are Rs 40000 and saving surplus is Rs 500000 per month you are not enjoying your life … Focus on saving 20% of monthly income in saving and plan to enjoy life with Rest …

Even if you invest in ETFs like NV20 . Midcap 150 you will earn Inflation + 5% ( look at their fact sheet for last 15 odd years ) … You need not so bugged out

Finally as Buffett said " Young Man should not save Sex for old age "

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10

Thank you @kb_snn for your kind reply. That is very comforting.

However, the point I wanted to make is that the “theoretical” inflation published by RBI is very very less than what it is practical. Prices are just getting doubled every 5 years and last 2 yrs were even worse. India is a growing and developing country with record number of youngsters entering workforce in future. All this is going to create more demand based inflation and hence I have higher assumption of 15%. Maybe it would be in range of 10% - 15% but still that is high.

Second point, equities will probably beat inflation, but the alpha generated will less than what it was historically. Also, post 65 yrs of age, one will shift most of his investment in debt instruments. So for around 30 years of retirement life (from 65 years of age till 95 years) one will not be able to generate inflation beating returns. THIS 30 years will eat up the portfolio.

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I have been in your boots 10 years back … and had similar saving - monthly expense ratio …only difference was my Portfolio was compounding much better and by 42/43 my passive income from equity dividend was > 3X annual expenses . and since equity dividend from good business grows faster than inflation … that take of inflation worries …

Looking at your saving to expense ratio - inflation should be least of your worries …
By nature you seem to be frugal so behaviourally you will sail through inflation …
One way to check this is go back in time say 10 years back and check what was your monthly expenses … calc actual impact of inflation on your monthly expenses

My point was youth is great time to enjoy life – Time & memories are more important than money once you cross 50s … so focus on accumulate them …

Better designed ETF like NV20 will beat inflation by large margin in long run … so focus on investing in them and good quality business at fair price

Post 65 there is no reason to shift debt … Keep 3 years of annual expenses in liquid funds and rest let it be in equity . Dividends are always better inflation edge then interests …

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12

For a person whose monthly surplus is 5 lacs, will most probably will be paying income tax at 34% or above rate. Dividends will incur that much tax which is a dampener for me.

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If you get salary above Rs 5 crore you have pay near 47% tax will you refuse a offer …

If no when why worry of tax on dividends or interest or that matter real estate rent …

Imp Logic Reasons

  1. Mutual funds charges 1% to 2% expenses which is equal to dividend yield of most of great companies … Even if you pay 35% tax of dividend … expense ratio for your PF is 0.35% to 0.7% which is below that expense ratio charged by Gr mutual fund and far below charges paid by many people to PMS schemes

  2. Passive income like Dividends / Rent / Interest are insurance against your active income . Normally insurance rates what people pay like for Medical and other is far higher than tax you pay for dividends / Rental income etc …

  3. Finally capital gains income inspite of lower tax has higher correlation to market and cannot be counted as steady income … Dividends from group of good diversified portfolio companies have history of being steady across multiple time frames + beat inflation by large margin …

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14

Wow that’s inspiring! Congratulations for reaching this stage and I would think this is if past and now you are doing much much better … If fine for you, can you share how much X of ur yearly expenses was your portfolio back then and now ?

Can you also share your portfolio or say top 10 holdings? Would be really nice to learn from you and see what businesses do you trust as full time investor with a balanced view…thanks

15

I think better way is to use the best existing resources rather than reinventing the wheel again.
How much is a good retirement corpus? there is no better resource/video than the one below by Varun Malhotra and he has clearly and mathematically made his thesis.
Worthwhile to spend 25 odd minutes watching the video.

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16

Some wrong assumptions in the video :

  1. Bank rate is assumed 8%, while we have seen after this video in 2018, just within 2-3 years, bank rate has dropped to 5.5 to 6 %…So in next 12 years or next 24 years or next 36 years, it may drop to 3% to 2% to 1% also…This will distort the fund requirement horribly.

  2. Bank Rates are taxable. Monthly withdrawal of Interest from bank deposits are taxable. This will also impact the overall cash flow. Tax is not considered at all.

  3. Nifty Index Returns are assumed at 15 %…while actual last 10-15 years returns of nifty index are in the range of 11 to 12%. Also going forward, as the economy matures, this return from Index may go down to 8-9% in next 24 to 36 years. Difference of CAGR 6% will play havoc with the assumed fund values and will turn these calculations upside down. Tax angle is not considered even on this withdrawal. Currently LTCG is 10 % and government is contempling to make it 30%.

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17

Patelbhai, I have run these models so so so many times in the last 25 years that as life changes, economy changes, model changes, and return changes, you will find yourself saying “I am just going to do my best and deal with the massive changewaves that come about”.

I have had AMEX, Merrill, Independent Financial Planner do these plans for me, and then comes 2001, 2008, 2015-18 and now 2022. This changes the scenarios for someone investing in US markets or Indian markets or both drastically.

I am learning to get into Equity Stocks, Equity ETFs, Bond ETFs, Commodities, FDs/CDs, and many many new concepts of Active ETFs that are available globally that offer protection.

Protection of Capital is much more important than anything, and that is from Inflation, Currency Devaluation, Market Erosion, and also from Living Expenses.

Creating a newer better non-correlated-stream of income is the best thing one can do for the portfolio.

Your Rs5L per month of SIP seems high. Your accountability of Taxes need a better plan since it will increase and decrease. Your inflation expectation has to account for 5 decades of averages. Finally run TWO models. One worst case scenario. One best case scenario.

And then see the results and you will like that very much, since no future number is going to work out no matter how many permutation models you will run.

Hope this helps, and hope moderators do not cut this ‘macro vision’ view of Retirement Planning practical thinking.

KKP

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