A young and
charming couple Ankit and Anchal, aged 27 years came to us for financial
planning. Anchal works with a pharmaceutical company as an Analyst and Ankit
work as Product Manager in an E-commerce company. They asked us several questions, one of them
was, ‘We want to retire at 40, Is it
possible?’ Post 40, Anchal wants to teach French and Ankit wants to start an
NGO.
Both, Ankit and
Anchal is 27 years old and planning for a baby at around 33. They are
planning to pursue their interest in respective fields till the age of 60 years
and later want to enjoy retirement. Till 40, the couple is expecting to
increase their salary by 7% p.a.
Ankit has a shop
in his hometown, where he earns Rs 10,000 per month. They didn’t want to include
it in their retirement plan. So, we linked this monthly amount with their financial
goals related to their child’s education and marriage.
We worked on a bucket
strategy for ensuring happy retirement at the age of 40.
In this
financial planning calculation, we have represented values on an annual basis.
However, we suggested them to execute the plan on a monthly basis.
Bucket A: Age 28 to 40 years
Surplus amount
[Gross Income – Gross Expense] was suggested by us to be invested for 13 years.
Hence, the surplus investment made at the age of 28 would be useful to take care of
expenses at the age of 41. Thus, expenses would be taken care of, till 53.
Bucket B: Age 41 to 53 years
Surplus saving
at the age of 41 years [Rs. 28,50,449] would again be invested for a period of 13
years, which would take care of the expenses at 54 years. However, expenses are
rising at 6% inflation rate.
The couple
expects to receive a combined income of Rs 1,50,000 per month from the NGO, dance
and French classes. This amount which they would receive till the age of 60 would
be utilized in Bucket D.
Bucket C: Age 54 to 63 years
Surplus saving
at the age of 41 [Rs. 28,50,449] would become Rs 1,56,55,838 at the age of 54.
And hence, the corpus is more than enough to meet the expenses at the age of 54.
Corpus
accumulated at the age of 61 was due to the investment made at the 48th
year from surplus saving. This amount is more than enough to meet expenses at
the age of 63.
Bucket D: Age 64 to 80 years
After full-time
retirement at the age of 60, the couple also expects to reduce unnecessary
expenses. We create basket D at the age of 64 because the surplus saving at the
age of 51 is not enough to meet expenses at the age of 64.
So, we decided
to use the corpus which has been built since age 41 from the combined income of Rs
1,50,000 per month.
However, the interesting thing is that corpus accumulated since age 41 from the combined income
of Rs 1,50,000 per month would be sufficient to take care of expenses tillage
80.
Apart from the retirement plan at 40, Ankit and Anchal also have
surplus to save for their foreign trips after 40. Proper allocation of funds
can accumulate enough amount of corpus for the couple to arrange four foreign
tours any time after age 40.
For a child’s education, the couple would have sufficient time to build
the corpus. However, we suggest the couple to set a target of Rs 1,70,00,000
[Education inflation cost at 7% p.a].
To reach the goal, we suggest the couple contribute Rs 5,000 every month to Equity Mutual
Funds. Mutual Fund SIP amount would be arranged from their shop’s rent.
For their child’ marriage, which might be approximately 34 years
later, the couple would have had an advantage of compounding. However, we
suggest the couple to set a target of Rs 1,40,00,000 [Inflation cost increases
at 5% p.a].
For achieving this
goal, the couple needs to allocate only Rs. 2,500 in the form of monthly SIP
for the next 34 years.
The couple would
successfully be able to allocate funds towards their child’s future goals
because of the right decision at an early stage. If the couple delays the
financial planning for their child’s education till the time his/her schooling starts,
then the couple would be left with only 20 years to invest. Now, in the same
situation, the couple needs to start Mutual Fund SIP of Rs 15,000 instead of Rs
5,000 currently. This makes all the difference.
This plan works
for most of the couples who are focussed regarding their plans. However, above
all, they have proper guidance to allocate funds at the age of 28.
One should not wait
for a certain age to start saving or channel funds, rather, start early to get
the benefit of compounding.
NOTE: Current and Future Cost are not mentioned in the blog.
