What would you like to do with Money? Your list of items would be either one or all of these six items listed below.
1. Buying a car
2. Dream home
3. Vacation
4. Starting a new business
5. Fund your child’s education
6. Planning your kid’s marriage
This list sums up the entire needs and aspirations of an average human being. So, when I talk about Retirement Planning, most of them aren't that excited.
The reality is that all 6 of these items can be funded through debt. You can buy a car using a car loan or a home using a home loan. Vacation can be funded through a personal loan. You could start a business with debt funding, send your kids to college using an education loan, and fund a wedding using a personal loan.
The only financial goal that cannot be funded via a loan/debt is your Retirement. Not convinced? Visit a nearby bank and ask the manager for a loan to plan your retirement.
This is the main reason I say retirement planning should be your primary financial goal. All the other goals, like buying a car, a house, or taking a vacation, can be achieved while pursuing retirement.
Retirement does not mean you stop working and do nothing. It means engineering your way out of the rat race so you can spend time and effort on things you love. If you have not set a retirement goal, let me help you do so now. Remember these 6 simple steps:
1. Six months of emergency savings
2. 16x of annual income
3. Invest 20 per cent of annual income
4. Invest for 20 years
5. Handle all other financial goals with debt
6. 1/100 monthly systematic withdrawal plan
Six months of emergency savings: Before investing, we need to make sure your current emergencies are planned. Maintain your 6 months’ income in an ultra-liquid mutual fund that you could redeem in a day. This should cover your medical expenses, accidents, home repairs, car repairs, or even job loss.
16x of annual income: Your retirement corpus should be a multiple of 16 times your annual income. If your annual income is Rs 20 lakh, your required retirement corpus should be 20 x 16 = Rs 3.2 crore. Your target should be to raise Rs 3.2 crore for your happy retirement.
Invest 20 per cent of annual income: Out of Rs 20 lakh annual income, you should be able to invest 20 per cent, i.e., Rs 4 lakh/year at Rs 33,000/month SIP. Make sure you can contribute this amount on a perpetual basis. If you break the cycle, the time compounding may not work its magic.
Invest for 20 years: An average working span is 40 years, i.e., from age 25 to age 65. We are attempting to advance the retirement age from 65 to 45. To achieve that, you need to continually invest for 20 years.
If you invest Rs 33,000/month for 20 years, you would be able to raise 3.3 crores, assuming the mutual fund’s annual returns are 12 per cent.
Handle all other financial goals with debt: All the other financial goals, like buying a car, a house, child’s education, child’s wedding, vacations, and starting a business, can be fully funded via loans. Just make sure the debt stays within 30 to 40 per cent of your annual income. Also, ensure your contributions to retirement planning SIPs are not affected by mounting debt. Trim down debt, or increase income if the debt/income ratio goes above 50 per cent.
1/100 monthly systematic withdrawal plan: Once your corpus is ready, i.e. Rs 3.3 crore, you can choose to exit from the rat race. 1/100 of the amount can be withdrawn each month through a SWP (Systematic Withdrawal Plan).
If you withdraw Rs 3.3 lakh a month for a tenure of 30 years, your portfolio balance will never go to zero, assuming the mutual fund’s annual returns are 12 per cent. This amount could provide you with ample cushion to exit the rat race. From then on, you can spend the remaining years on things you are passionate about.
The author is a research scholar in applied economics, CUSAT and NISM-certified research analyst and investment advisor.
DISCLAIMER: If your mutual fund does not yield 12 per cent or more in a year, your withdrawals may be affected. Once retired, you do not have to continue the SIP of Rs 33,000 a month. Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.