In Focus on financial independence, not legacy, we looked at the financial position plan of Jairam who was to retire in a few years.
This time around, it is quite another scenario. Akhil is in his 20s and wants to retire by 40. Employed by an offshore oil rig company and earning extremely well with no dependents, he is in a very sweet spot. And he has capitalized on it brilliantly.
Currently, his SIPs in 5 equity funds amount to Rs 1,30,000 every month. He also has a fixed deposit of Rs 20 lakh, earning a return of 8.75%. His savings account returns 6.5% and doubles up as his emergency fund. The amount stashed here should take care of his expenses for 12 months. By the earning standards of a 26-year old, such savings, clarity and investment discipline is remarkable.
In my mind, if Akhil continues on this earnings and savings trajectory, he will be a wealthy man. But, here is the clincher. He wants to retire at the age of 40 with a corpus of Rs 6 crore.
I decided to discuss this with Sunil Jhaveri, the founder of Misterbond.in - a B2B Platform for advisers in the mutual fund space.
Emergency Fund
People underestimate the need for an emergency fund, if at all they even consider it. If you have not, I sincerely suggest you read Yes, you need an Emergency Fund.
Normally, I would suggest a bank fixed deposit or liquid fund; or a combination of both. If Akhil has a year’s expenses in the savings account and Rs 20 lakh in a savings deposit, the combination of the two would be pretty substantial. I don’t see the need to have such a huge amount lying in the bank.
Sunil Jhaveri’s views
Akhil has created a text-book corpus as an Emergency Fund. Most investors would allocate expenses of six months to this emergency corpus, so I am impressed with his 1-year allocation. But I sincerely request him to consider changing the parking vehicle.
Emergencies do not occur frequently. As a result, one does not have to dip into this kitty for years at a stretch. Hence, I would advise that these funds be moved from the savings account to a Liquid/Ultra Short Term Bond Fund. The money can generate a better pre-tax and post-tax return as against a savings bank account. Investing in very short duration mutual fund scheme can give the benefit of Indexation as well; thereby further improving the return.
Rs 6 crore corpus
Let’s start with a clean slate. We have no idea how much Akhil has accumulated till date. So let’s ignore that, and his fixed deposit and emergency fund.
To figure out if his monthly SIPs of Rs 1.30 lakh are sufficient to arrive at Rs 6 crore, the key assumption is the rate of return.
If the return from his investment is 13% per annum, then he is on track (Rs 6.13 crore).
If we assume a CAGR of 12%, then over 14 years his corpus will be Rs 5.62 crore. If he can increase it to Rs 1.40 lakh per month, he will arrive at his target of Rs 6.05 crore.
If it drops to 11%, then he needs to up his monthly SIPs to Rs 1.57 lakh. Alternatively, if he cannot invest more than Rs 1.30 lakh per month, he can add another 2 years to his retirement goal.
Sunil Jhaveri agreed with the above and added..
By and large, he is realistic. His investments over this period of 14 years seem to be reasonable to create the corpus he desires.
However, he must monitor this every few years and as his salary increases, maybe increase the SIP amount to reach that level, in case his portfolio is falling short for any reason.
Sunil Jhaveri’s financial plan
Normally people retire at the age of 55, give or take a few years. This is extremely unique – retirement at the age of 40. But my advice would be based on the same assumption as I would advise a senior citizen. The reason being that irrespective of age, the individual will stop earning income from a source of employment – be it a salaried job or a business. This is how I interpret retirement from a financial viewpoint.
This retirement corpus must be safeguarded and deployed to create a cash flow stream without any undue volatility.
Ideally, Akhil should switch from Aggressive to Conservative as soon as he achieves the targeted corpus of Rs 6 crore. If it is achieved say in 10 years’ time instead of 14; the switch must be made to an asset class like Balanced Advantage Fund or Dynamic Equity Fund (Dynamic Asset Allocation Fund – DAAF). However, the SIP of Rs 1.30 lakh must continue for the designated period of 14 years, into the same DAAF schemes instead of equity schemes.
The reason being that even SIPs are known to have generated negative returns over 5-year periods. Hence, post achieving the target corpus, start SIP in DAAF category of schemes.
On retirement, Akhil should start with an SWP of not more than 6-7% per annum. What this means is that for every Rs 1 crore; the investor should do an SWP of Rs 6-7 lakhs to start with. DAAF has in the past delivered returns between 12-15% CAGR. Since the SWP would be of lower than 12% (in this case 6-7%); the underlying corpus will also grow in spite of SWP of 6-7% p.a. This will create a cushion in the core scheme and will help beat future inflationary pressures.
Once some cushion is built into the corpus, the investor can think of increasing the SWP to, say, 8-9% p.a. based on future requirements.
I looked at an actual example of an SWP from a DAAF scheme @8% per annum on an initial investment of Rs 1 crore (amounting to a withdrawal of Rs 67,000 per month). The time period was April 1, 2010 to June 30, 2019.
It was evident that in spite of an SWP of Rs 74 lakh over that period, the corpus grew from Rs 1 crore to Rs 1.55 crore; thereby building cushion for higher SWP in future.
