A member of the armed forces writes, ” Hello sir, I am a continuous follower of your financial advice and financial-related methods(YouTube and web).. thankful to you for all these practical and fact-based reviews and advice”.
“Sir all of your retirement corpus planning or savings required for retirement are not mentioned whether they have a govt pension plan(OPS) included or not, I think not, because nowadays most job doesn’t have OPS,( only defence has OPS now). Sir, I want to know how much the retirement planning will change while having an OPS. Please consider my example, I am left with 8 years of service, and my total portfolio investment is 30000/month ( 12500 PF and 17500 MF), and the current value of the portfolio is 24 lac(step-up of investment mostly not possible)”.
“Approx 30000/ month will be my pension after 8 years and will get approx another 15 lac( gratuity+insurance etc, PF excluded) from service after retirement. Please review my portfolio and give your view on people like me can have early retirement or survive on their own after retirement. ( If no income is possible after retirement, as a big chunk of ex-servicemen are facing)… please consider this question for your advice and review, I and we will be thankful to you very much. Waiting for your response”.
We also found that the serviceman has about eight years to retire with about Rs. 35,000 to 40,000 of monthly expenses that will persist in retirement. Usually, we use some assumptions of return and inflation to determine the corpus and investment amount necessary.
In this case, we shall adjust the assumptions to find out what the expected corpus “can do” instead of what it “must do”. We shall use the freefincal robo advisory tool for the calculation.
The availability of a pension can make a big difference to a retirement plan and to the retiree as their basic needs are satisfied. In this case, we shall assume that pension increases at the rate of 3% per year. The robo tool can accommodate three such pension or income sources (from rent etc.)
The goal here will be to adjust the return and inflation assumptions until the total investment required is close to the Rs. 30,000 per month mentioned above. That is we shall try to keep the return expectations as high as (reasonably) possible and inflation expectations as low as (reasonably) possible.
These inputs lead to an investment amount close to what the serviceman is currently managing each month.
- Current age 32
- Age of leaving the service: 40
- Current expenses; Rs. 40,000
- Return expected from equity (post-tax): 11%
- Return expected from tax-free debt: 7%
- Return expected from taxable debt (if any): 6%
- Value of tax-free fixed income (GPF): Rs. 10 Lakhs (approx)
- Value of equity investment: Rs. 15 lakhs (approx)
- Lump-sum benefits expected at retirement: Rs. 15 lakhs
- Pension: Rs. 30,000 per month increasing each year at the rate of 3%
- The rate at which investments increase each month: 0%
- Inflation before and after retirement: 5%
The total corpus required is about Rs. one crore and the total monthly investment required is Rs. 32,000. The future growth of current holdings is also factored here. The equity allocation required is about 60-65%.
So, can the serviceman be financially independent after retirement? “Almost” Yes. He is not in a bad place financially but he is not in a robust position either.
Without the pension, the corpus required will be close to Rs. Two crores! The monthly investment required will be close to Rs. one lakh! The govt. pension is the bedrock of the serviceman’s financial stability after retirement. This is known as income flooring. Also see: Creating the “ideal” retirement plan with income flooring!
In summary, we recommend that the serviceman immediately start planning for his future. The pension will cover his basic needs and his corpus will take care of the remaining expenses for some time in retirement. It is easy for us to say it but it is important to start thinking about a second career asap so there is enough time to plan and prepare mentally (especially since he says income post-retirement is typically hard).
At 40, he has age by his side. He must find a way to use his existing or newly acquired skills and earn an additional source of income. This will ensure the corpus from current investments remains untouched for as long as possible.
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About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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