Partha Sinha | TNN

'How much moneyshould I have when Iretire?' This is one of

the most common questionsthat financial advisors andplanner face whensome-

one new approaches them forhelp with their future finan-cial goals.

There is no easy answer tothis question. The retirementcorpus__the amount of mon-ey one would require to have

a peaceful retiredlife__varies from person

to person, depending ona host of factors, pri-

marily the lifestyleone wants to

maintain postretirement and

hence the re-lated ex-penses,said San-jeev Govila,

founder ofDelhi-based

Hum Fauji Ini-tiatives that

provides fi-nancial serv-ices solu-tions to peo-

ple from thearmed forces.

According to Govila, oneof the accepted rules in finan-cial planning is that while cal-culating post-retirement ex-penses, it is estimated thatsoon after retirement the per-son retiring will need tospend about 70% of his/herexpenses just before retire-ment. By spending this muchthe person should be able tomaintain his pre-retirementlifestyle. From then on, it isalso estimated that every yearhis/her expenses will rise by

the rate of inflation. And thelife expectancy is 85 years. "Soin effect, at the time of retire-ment the person will have tobuild a corpus that will sus-tain him for the next 25 years,post retirement," Govila said.

For example, if a person is35 years old and has a month-ly expense of Rs 70,000, whenhe/she retires at 60, he/shewill require a corpus of near-ly Rs 8 crore to maintain thesame lifestyle that he/she hasnow. The retirement corpuswill jump to Rs 11.3 crore ifthe same person has a currentmonthly expense of Rs 1 lakh.

The retirement corpus, atpresent, looks very large butit's pure calculations based onpractical assumptions. For ex-ample, at 6.5% rate of infla-tion, your monthly expenseswould double in less than 12years. And at 7.5% rate, thiswould take less than 10 yearsto double. So for a 35-year oldperson with a current month-ly expense of Rs 70,000 and amarket rate of inflation at6.5%, it would go up to nearlyRs 3 lakh by the time he/sheretires. That's about Rs 36lakh per annum. To providefor that large an amount, the corpus should also belarge enough, financial advisors say.

So what's the solution? Ac-cording to Govila, if you haveage on your side, that is ifyou start planning for yourretirement early, you shouldinvest more in equities and as

V C S Kenkare replies

After going throughAbhijit Dutta's pro-file and his query, I

understand he has threeshort term goals, needstwo emergency funds at

the earliest and construction of ahouse in five years. Also, his buildinga retirement corpus is one of his longterm goals.

I suggest restructuring some of hiscash flows to realign his financialplans. He requires additional incometo meet his short term goals, he has tobe more conservative and cut some ofhis expenses, or he has to postpone hisshort term goals. His plus points arehe has moderate mediclaim for hismother and himself. He has to createcontingency fund for his father to takecare of any medical expenses.

Currently, he should not worryabout his retirement goal as he couldachieve about Rs 25 lakh through hiscurrent GPF scheme. Also I assume hewould get pension.

He is highly under-covered for life.He should first get a Rs 75-lakh termcover from a good insurer, for a yearlypremium of say Rs 10,000. Subsequent-ly, stop the existing cover, which wouldsave Rs 14,000 annually.

Next, for an emergency fund heshould stop both ELSS SIPs for twoyears and link these SIPs to liquid plusfunds (growth) to create a contingencyfund. He also plans to marry next year.I suggest him to postpone it for a cou-ple of years or go for a very simplemarriage function.

For building a house after five yearshe must create 20% of margin amount,say about Rs 15 lakh. For that, heshould take the following steps: Buildthe house after eight years. After creat-ing the emergency fund, link the SIPsto good, diversified equity funds. Cre-ate/generate additional monthly in-come of Rs 5,000-8,000 from alternatesources. Cut down on monthly expens-es by at least 20%.

These decision will allow him to in-vest at least Rs 15,000 per month inSIPs, assuming the house is built forRs 75 lakh on the existing land.

Incidentally, his tax liability will beless than Rs 1,000 per month. Heshould continue his mediclaim poli-cies. Finally, once the house is built, heshould invest in ELSS of reputed fundhouses the maximum amount possi-ble. Once the tax rebates are exhaust-ed, he should invest in diversified equi-ty funds via SIPs.

V C S Kenkare is a Goa-based IFA

DEMYSTIFIER

CASE STUDY

'Tweak cash flows andrestructure investments'

I am 30 years old, a government employee with a monthly income of Rs31,000 and expenses of Rs 20,000. I live with my parents (65 years and 50years). I have a life insurance policy of Rs 4 lakh with an annual premium ofRs 23,500 (matures in 2026-27). I have individual mediclaim policies for meand my mother of Rs 1.5 lakh each (annual premium Rs 6,100). I have amonthly GPF of Rs 1,000. In May 2016, I started monthly SIPs of Rs 3,000 intwo ELSS. I have a land valued at Rs 10 lakh. I have no liquid cash. I plan tomarry next year and want to build a home in five years. Please advise how Ishould invest to fulfil my goals and also build a large retirement corpus.

- Abhijit Dutta

NEXT EDITIONIn our next edition we will compare various asset classes as per their longterm returns profile. That could be an indication to investors as to where toinvest when they know their investment horizon.

WHAT'S INSOLVENCY & BANKRUPTCYBOARD OF INDIA (IBBI)?Set up under the Insolvency and Bankruptcy Code, Insolvency andBankruptcy Board of India (IBBI) is the regulator for insolvency

professionals, insolvency professionalagencies, insolvency proceedings and

other related parties. The board isresponsible for implementation of the

code in India. Set up in October 2016, IBBIcame into prominence mainly because ofthe growing pile of non-performing assetsin the banking sector, a large part of which

has been referred under the code. IBBI has thepowers to write and enforce rules for

bankruptcy transactions involvingcorporates as well as individuals.

Currently the board has eightmembers with M S Sahoo as its

chairperson.

STEPS TO DOWNLOAD AND SCANA QR CODE● Download QR code app on yourphone ● Run app and scan the QRcode ● Your smartphone will readthe code & navigate to thedestination

Scan this QR code for a greatretired life

A 35-year old, having a Rs 70,000 monthly expense, will need Rs 8 crore at retirement

ILLUSTRATIONS: SACHIN VARADKAR

Investing isn't about beating others at their game.It's about controlling yourself at your own game.

— Benjamin Graham, author and Warren Buffett's teacher

GURU SPEAK

Are you on track for alarge retirement corpus?

you grow older, you shouldshift part of your corpus into debt.

Also during the accumula-tion phase__when you areearning and is able to investfor your future goals__thetrick is to invest through thesystematic investment route,financial planners and advi-sors say. For example, if youinvest Rs 10,000 per month inan equity fund with an ex-pected annual return of 15%,the corpus at the end of 20years will be about Rs 1.5crore. If you increase theamount to Rs 25,000 and in-vest for 25 years, you could expect a Rs 8.2 crore corpus.

So the numbers, althoughthey look astonishing, arevery much achievable, they say.

ANTIDOTE FORLOSS-AVERSIONBIAS: PASSIVEINVESTING?

Yours Behaviourally

PART 2

R Raja

In our previous column, we had discussed themain principles behind loss aversion bias. Inmost experiments, the estimated loss

aversion ratio was between 1.5 and 2.5, with theaverage at 2. This ratio refers to the smallestgain that one needs to balance an equal chanceto lose Rs 100. For many the answer is about Rs 200.

This bias comes to the fore especially inrespect of investments in equities and equitymutual funds. True, over a long term evenpassive investment has given high returns-much higher than the risk-free investmentavenues available for a retail investor. Markethas also done exceedingly well. But thequestion is whether these have translated into'investor returns'? We see the reluctance ofinvestors to stay committed to equityinvestments and prefer fixed incomeinstruments which provide steady but low andtax-inefficient returns.

There is another dimension to loss aversion.An investor chooses to invest in an equity fundin preference to a fixed income instrument.Winning nothing and losing his investmentvalue is a possible outcome of his decision toinvest in an equity fund. After a year if he findshis investment provided double the returns thata fixed income instrument provided, he shouldbe happy. But, if the peer funds have providedmore returns than his fund, there isdisappointment despite getting a decent,absolute return. Like a salary increase that hasbeen promised informally, the performance ofother peer funds sets up a new reference pointand enhances your expectations.Disappointment and the anticipation ofdisappointment are real and are by-products ofloss aversion.

The antidote to 'loss aversion' in investmentis, perhaps investing in an index fund or apassively managed exchange traded fund,where there is no gap between expectation and realisation. A person who is highly risk-averse could invest in an index fund expectingmarket returns and his expectation will berealised and hence no chance of anydisappointment or regret.

Yours Behaviourally is a monthly column onpsychology that impacts our investment decisions.

R Raja is with a leading domestic fund house.

How much money shouldyou have when you retire?

ASSUMPTIONS

INVESTOPEDIA

25 yearsCurrent

age

Legends`14.9crore

Monthlyexpenses`70,000

Monthlyexpenses

`1 lakh

`21.1crore

35 years

`7.9crore

`11.3crore

45 years

`4.2crore

`6.1crore

55 years

`2.3crore

`3.2crore

Rate of inflation: 6.5%Age of retirement: 60yrsLife expectancy: 85yrs

Figures in the circle are

retirementcorpus one

should aim at

Source: Hum Fauji Initiatives

For detailed tablego to:http://www.beswatantra.com/uploads/info-graphics/uti-beswatantra-retirement-corpus-calculation-0235070001504532310.pdf

THE TIMES OF INDIA, MUMBAI TUESDAY, SEPTEMBER 5, 2017 21