This article discusses a retirement plan for a 30-year-old who wishes to retire by age 50. We shall use the robo-advisory tool to create this retirement plan.
Let us outline the inputs and assumptions employed in this analysis. Kindly note that all the inputs and outputs in this research pertain to a situation (of a reader who wanted help, see numbers below) and should not be replicated by others.
- Current monthly expenses that will persist in retirement Rs. 40,000
- Annual expenses that will persist in retirement Rs. 80,000
- Your age at the end of the current year: 30
- Age you wish to retire 50
- Years to retirement 20
- Total average monthly expenses (annual/12) Rs. 46,667
- Percentage by which your monthly investments can increase each year (until you have accumulated enough for retirement) 10%
- Post-tax return expected from equity investments % 10
- Rate of return expected from current tax-free fixed income % 7
- Value of current equity investments ( stocks and equity mutual funds) Rs. 2,00,000
- Total Value of current tax-free fixed-income investments (PPF + EPF etc.) Rs. 5,00,000
The tool can include lump sum retirement benefits and up to three monthly incomes (pension, rent) after retirement. However, as retirement is still 20 years away for the couple, we will not include any lump sum benefits now. This calculation must be revised each year with fresh inputs. The user can modify all assumptions and inputs in the tool.
- Inflation before retirement (%) 8
- The assumed life expectancy of the younger spouse is 90
- Inflation during retirement (%) 6
- Years to retirement 20
- Monthly expenses in the first year of retirement 2,17,511
- Years in retirement (until younger spouse reaches age 90) 42
- Retirement corpus required at retirement (assuming the money will be invested in different buckets. This is after accounting for the future value of current investments, post-retirement benefits, and any post-retirement income specified) Rs. 8,27,25,934
- Initial monthly investment required, including EPF/NPS contributions (scroll down to see investment schedule) Rs. 58,229
- The percentage by which your monthly investments can increase each year (until you have accumulated enough for retirement) is 10%. The cash flow schedule is tabulated below.
| Age | Monthly investment in equity | Monthly investment in fixed income, including total EPF/NPS contribution. |
| 31 | 34,937 | 23,291 |
| 32 | 38,431 | 25,621 |
| 33 | 42,274 | 28,183 |
| 34 | 46,501 | 31,001 |
| 35 | 51,152 | 34,101 |
| 36 | 56,267 | 37,511 |
| 37 | 61,893 | 41,262 |
| 38 | 68,083 | 45,388 |
| 39 | 70,901 | 53,918 |
| 40 | 73,601 | 63,699 |
| 41 | 76,133 | 74,897 |
| 42 | 78,435 | 87,698 |
| 43 | 80,436 | 1,02,311 |
| 44 | 82,053 | 1,18,968 |
| 45 | 83,189 | 1,37,935 |
| 46 | 83,731 | 1,59,504 |
| 47 | 83,551 | 1,84,009 |
| 48 | 82,497 | 2,11,819 |
| 49 | 80,396 | 2,43,351 |
| 50 | 77,050 | 2,79,071 |
The suggested asset allocation and assumed portfolio return are shown as a screenshot from the robo-advisory tool. The couple should maintain an asset allocation with about 60% equity for at least the next ten years and gradually decrease it to about 20% upon retirement.
The retirement corpus is assumed to be invested in five buckets.
- An emergency bucket to handle unexpected expenses.
- The income bucket provides guaranteed income for the first 15 years of retirement. During this time, investments are made in the following three buckets.
- Corpus from a low-Risk bucket that provides retirement income from year 16 to year 26. To provide this income, the low-risk bucket will have an asset allocation of 30% equity and 70% debt during the investment period (years 1 to 15 of retirement).
- Corpus from a medium risk bucket will provide income from year 27 to 34 in retirement. To provide this income, this bucket shall have an asset allocation of 50% equity and 50% debt during the investment period (year 1 to year 26)
- Corpus from a high-risk bucket will provide income from year 35 to 42 in retirement. To provide this income, this bucket shall have an asset allocation of 70% equity and 30% debt during the investment period (year 1 to year 34)
That is, the retirement corpus will be divided into five parts.
- 5% in an emergency bucket
- 47% in an income bucket will provide guaranteed risk-free inflation-protected income for the first 15 years. The rest of the parts will be invested in three buckets: low-risk (26%), medium-risk (12%) and high-risk (9%) in the asset allocations indicated above. During this investment period, the buckets will be actively managed to reduce risk: rebalancing and shifting from one bucket to another. To understand how this works, try The Retirement Bucket Strategy Simulator.
- After 15 years, the low-risk bucket will be turned into 100% debt and provide income for about 11 years. After that, the other buckets will also be progressively used.
The couple should focus on
- investing as close to the amount indicated above as possible (Rs. 58,229)
- They should increase this amount by at least 10% each year.
- They should increase their equity allocation to 60% as quickly as possible.
- They can use index funds or aggressive hybrid funds. Fund recommendations are available here: Handpicked List of Mutual Funds Apr-Jun 2021 (PlumbLine)
You might ask, why bother with retirement buckets now? Why not do a rough estimate of the retirement corpus as done by many calculators online? Rough estimates would underestimate or overestimate the corpus. They do not educate the user about the nature of retirement planning.
Most calculators assume some post-retirement return, but there is a lot more to it than that. Understanding the bucket strategy process is crucial to beating inflation in retirement. In addition, the robo-advisory tool takes into account pension or rental income as applicable and further reduces the retirement corpus. It also helps plan recurring and non-recurring goals in independent or unified portfolios. Over 1000 users (investors and financial advisors) are utilizing the tool.
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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 ten 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 promoting unbiased, commission-free investment advice.
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