Rangarajan, aged 55, approached us seeking clarity on his retirement readiness. He wanted to check if he could retire in five years.
He had accumulated sizeable wealth over his working life and was unsure if that was sufficient for a comfortable retired life. He had some financial commitments as well. He was well informed and had sufficient knowledge of personal finance, but wanted to seek professional help — a sensible decision on his part. His assets are well diversified, indicating a wise approach.
Assets | Rs |
|---|---|
Self-occupied house | 90,00,000 |
Rental property in Hyderabad | 75,00,000 |
Provident fund | 65,00,000 |
NPS | 25,00,000 |
PPF | 40,00,000 |
Fixed deposits | 35,00,000 |
Equity mutual funds | 60,00,000 |
Debt mutual funds | 30,00,000 |
Direct equity | 75,00,000 |
Gold investments | 45,00,000 |
Car | 6,00,000 |
Total | 5,46,00,000 |
Cash flows
Income | Rs per annum |
|---|---|
Salary | 36,00,000 |
Rental income | 2,16,000 |
Dividend | 2,25,000 |
Total | 40,41,000 |
Expenses | Rs per annum |
Living expenses | 7,20,000 |
Vacation | 1,00,000 |
Daughter's expenses | 2,00,000 |
Total | 10,20,000 |
Surplus | 30,21,000 |
Regular savings | Rs per annum |
|---|---|
Mutual funds | 12,00,000 |
Direct equity | 2,25,000 |
Fixed deposits | 6,00,000 |
Gold | 4,00,000 |
PPF | 1,50,000 |
NPS | 1,50,000 |
Total | 27,25,000 |
PF (both employer’ contribution and his) | 2,76,000 |
Risk profiling
Upon risk profiling, Rangarajan was found to be ‘growth oriented’ and comfortable with an asset allocation of 60 per cent in equities and the balance in debt. But this does not necessarily mean that he should opt for such an allocation.
The ratio would depend on many factors, and risk profiling is one factor while arriving at asset allocation. It is just a guide which needs to be probed further during discussions. The goals and state of finances, current and expected, are among other the factors to be taken into account.
Goals
Rangarajan wanted to retire at 60 with a corpus of ₹3 crore. He wanted to allocate ₹25 lakh for his daughter’s wedding, planned for 2021. If the expenses were contained within the planned amount, he would gift the balance to his daughter. He had already bought gold jewellery for her, which is not accounted for in his gold kitty.
He also wanted to purchase a car at retirement or two years prior to that, at a cost of ₹10 lakh. He also wanted adequate health insurance for himself and his wife. Another goal that came up for discussion was regular charity post retirement.
We prioritised goals in the following way: First, he should keep aside an emergency fund of ₹7,20,000. Next, Rangarajan should get health insurance of ₹5,00,000 immediately as base cover for himself and his wife plus additional top-up cover for a sum insured of ₹20,00,000. He should also get health insurance for his daughter for sum insured of ₹3,00,000. He should get property insurance to cover all his residential properties, basically to cover the structure of the buildings against natural calamities and other risks.
With estimated retirement expense of ₹50,000 per month (current levels), Rangarajan should have a corpus of ₹3.3 crore at age 60 to meet his post-retirement expenses. His estimated expenses at the time of retirement at 7 per cent inflation will be about ₹70,200 per month.
He was hesitant about exposure to risky investments to get extra returns at this life stage. He wanted 7.5 per cent post-tax return for the corpus over the years. Based on his family history, we suggested that he plan with a life expectancy of age 100 for himself and his wife. His expected return on his investments were reasonable for sufficient withdrawal during retirement.
Rangarajan’s wife Anjana, aged 52, desired to go on an annual vacation at a cost of ₹1,00,000, and this was expected to continue post retirement as well. We estimated the corpus for annual vacation post-retirement as about ₹27,00,000, assuming that they would go on 20 vacations.
Based on their family history and the couple’s present health condition, we arrived at a corpus requirement of ₹75,00,000 towards health needs. This is in addition to his health insurance. It is worth noting that all expenses are not reimbursed or taken care of by health insurance. The risk of not getting health insurance cover at old age at affordable premiums is also a challenge in the longer run. Expenses such as nursing care at home for the elderly or prescription costs are often not covered by medical insurance in India. Only a sufficient ‘health corpus’ in hand could de-risk a family from such exclusions.
Rangarajan wanted to gift his rental property in Hyderabad to his daughter if she was inclined to settle in India after her wedding. Taking this into account, his rental income from this property was excluded from his income generating asset during retirement.
The family was currently donating ₹1,00,000 every year towards a specific cause and wanted to continue with this after retirement. A corpus of ₹50,00,000 towards this goal would be needed at retirement.
Review, recommendations
Rangarajan is currently maintaining his investments in the ratio of 39:49:12 in equity, debt and gold respectively. Though his risk profile allowed him to invest more in equity, we advised him to maintain the same ratio for two reasons. His requirements could be achieved with this ratio of investments; and, he is close to his retirement. His expected return over the years is reasonable and the rebalanced portfolio would be adequate to meet this. The expected portfolio at the time of retirement would have an asset allocation of 41:47:12 in equity, debt and gold respectively.
Ratio of financial assets currently
Assets | Amount (Rs) | Allocation |
|---|---|---|
Equity | 1,47,50,000 | 39% |
Debt | 1,82,50,000 | 49% |
Gold | 45,00,000 | 12% |
Total | 3,75,00,000 |
Ratio of financial assets, expected at retirement
Assets | Amount (Rs) | Allocation |
|---|---|---|
Equity | 2,74,17,964 | 41% |
Debt | 3,15,29,057 | 47% |
Gold | 82,76,852 | 12% |
Total | 6,72,23,873 |
Goals at retirement
Major Goals | Amount (Rs) |
|---|---|
Retirement | 3,30,00,000 |
Health corpus | 75,00,000 |
Vacation | 27,00,000 |
Charity | 50,00,000 |
Total | 4,82,00,000 |
Observations
While his income kept increasing gradually, Rangarajan maintained his lifestyle at the same level. This was a key factor that helped him build a reasonable surplus every year. He also ensured adequate diversification across asset classes. With his disciplined way of living, he should be in a position to lead a comfortable retirement life.
Rangarajan was willing to work as long as his health permitted him and his attitude of continuous learning and upskilling would help in this aspect. Delayed gratification, disciplined living and seeking advice at right times remained crucial to his successful planning.
Rangarajan’s long-term approach reminds one of a quote by Confucius — “He who does not foresee things far away, exposes himself to close range misery”.
The writer is a SEBI-registered investment advisor at Chamomile Investment Consultants
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Spread your eggs
Adequate diversification across asset classes is a wise thing to do.