dynamic and so are our finances and our financial lives and journeys that we
embark on. Situations are bound to arise due to this dynamicity which calls for
having alternatives in place.
Planning (FP) process through its inbuilt scenario analysis does just that for
the financial situations that may arise in your lives. Since the whole FP
Process involves assumptions, forecasts and projections, it becomes pertinent
to practically see through the analysis and develop solutions around the
varying situations that may arise.
particular expense pattern that you may be following in your work life, the
amount of expenses post retirement can be easily deduced provided this exercise
of current expense distribution has been done diligently and broken down to
expenses post retirement will in no way fall short of current expenses as most
of us believe they will and in fact will either remain steady (increasing at
the rate of inflation) or will rise marginally and this is how it should be.
The aim is to make the retirement years the golden years of one’s life and one
must plan well towards it.
hereby illustrate a retirement case study and how planning towards one’s
retirement changes in different probabilistic scenarios.
Sharma, 45 & Mrs. Dhrati Sharma, 43 came forth with specific financial
goals that they were seeking advice about. The couple also have a daughter,
Ananya who is 3 and has been the centre of their lives since she is born. The
two have started various investment plans to be able to fund her education, marriage
and even create a nest egg for her so that she doesn’t have to worry about
were interested in planning their own retirement as they did not want to depend
on Ananya for anything. The two were worried about the state of their finances
and if they would be able to provide for their retirement years comfortably.
Despite about a year’s gap, the couple wanted to retire at the same time when
Dev turned 55 and wanted their retirement planning done keeping this is mind. Their
asset liability statement was as follows:
Family’s cash flow situation that they shared
with us looked something like this –
net worth and cash flow situation and also assessing their risk profile which
was moderately aggressive, we asked them about how they picture their
retirement to be like and when do they intend to retire. Dev did not want to
work beyond 55 but if need be, was ok to stretch till 58. Dhrati wanted to
retire exactly the same time as Dev so that they can cover up on the time they
had missed spending with each other.
to be conservative on their expenses post retirement in the sense they wanted
to plan for retirement expenses at a value of 20% less than the current
expenses in today’s value. These expenses that they shared with us had to be
inflated too to arrive at expenses post retirement.
We advised them
to be realistic as the expense heads might change but the expenses do not
really reduce post retirement and so it made sense to plan keeping the total
current expenses in mind to be more realistic and fair.
premise, we planned for his retirement with annual expenses of Rs. 25 lakh. His
spouse, Dhrati was 2 years younger to him and so we planned for 27 years in
retirement taking life expectancy of 80 years for both.
step in preparing their retirement plan was the understanding of their risk
profile. As we took them through the risk analysis questionnaire, we realized
that while Dev was moderately aggressive, Dhrati fell in the balanced category.
Since there has to be consonance in the family risk profile for plan
preparation, we assumed a balanced investment category for them as a unit with
greater part of satellite portfolio allocated to Dev which could be parked in
higher growth avenues.
The net portfolio
return assumed for their retirement plan was 8% with an allocation of 55% debt
and 45% equity. Basis this expected portfolio return, time horizon of 27 years,
inflation of 5% and annual expenses of Rs. 25 lakh (in present value) and Rs. 40.72
lakh (in future value), the corpus required as on Dev’s retirement came to
around Rs. 7.80 crore.
this, they had another Rs. 35 lakh invested across a mix of stocks & mutual
funds. They had been investing in these to build up a parallel retirement
logical step was to assess the gap in what was required and what was funded
from the existing investment portfolio that Dev & Dhrati held.
allocated specifically to retirement included Dev & Dhrati’s current EPF
balances as well as the ongoing contributions till they retire. Apart from
this, they also allocated their PPF (along with ongoing contribution of Rs. 50,000
each for both of them) and Dev’s & Dhrati’s National pension account (NPS)
along with Rs. 50,000 annual contribution to NPS for their retirement funding
So, when we calculate all these investments
separately, following are the end values they grow to –
All of the above investments when summed up
came to an amount of Rs. 2.068 crores. During the tenure of their investments,
we assumed an average interest on EPF to be 7% (which is 8.5% currently but
over the next 10 years, it is expected to average out to 7%), NPS returns at
10% and PPF returns at 6.5% (currently at 7.1% but again expected to revised
downwards over time).
We also grew their stock & fund portfolio
mapped to retirement by an annualized 12% and so the expected portfolio value
came to Rs. 1.087 crores by the time they would retire. It is pertinent to
mention that reviewing this market linked part of retirement savings gains more
prominence. We advised a quarterly portfolio review and an annual rebalancing
if required to stay on track towards their retirement funding.
The gap in corpus required against amount
funded thus came to around Rs. 4.645 crores and so of course, Dev &
Dhrati’s anxiousness was not baseless as to accumulate this amount, they had to
save at least Rs. 1.90 lakh per month towards accumulating the required corpus.
While this amount could still be adjusted in
their existing cash flow by managing their expenses a bit, they did not want to
compromise on their goals for Ananya for which they had earmarked Rs. 60,000
per month across suitable investment avenues to be able to fund these goals
This left them with about Rs. 1.04 lakh per
month as against the required amount of Rs. 1.90 lakh. This when we assumed an
expected portfolio return of 15% per annum and so managing portfolio actively
gained further prominence.
Taking in consonance their whole situation, the
final financial plan advice that we rendered them was as follows:
Dev & Dhrati could move their retirement forward by 3 more years that would
give them scope to bridge the shortfall
By postponing their retirement by 3 years, the
corpus they would need at retirement would be Rs. 8.34 crores. All their
retirement savings including their EPF, PPF, NPS and mutual fund portfolio is
expected to grow and become Rs. 4.33 crores leaving a shortfall of Rs. 4.01
crores. Assuming an annualized return of 15% on their investment portfolio that
they build on from here, they would need to save Rs. 97,000 per month towards
funding their retirement goal. This recommended amount is well within their
discretionary cash flow range which makes the retirement planning goal
achievable. While the above expected return may seem aggressive, even at an
expected return of 12% per annum, their retirement planning goal is still
a 15% expense reduction from the current level would leave them with a larger
disposable surplus that could be duly employed towards creating the needed
By reducing their expenses by 15% and
simultaneously increasing their savings and investment by the same percentage
year on year, Dev & Dhrati can achieve their retirement planning goal
efficiently. The recommended asset allocation for their retirement planning is
aggressive in tune with their risk profile but even with rebalancing
investments to safer and stable havens, they will be able to accumulate the
required corpus to be able to live off their retirement years with ease.
The sum of all ending values in the table above
is Rs. 4.05 crores which is the required corpus for their retirement. If you
study the chart closely, we have switched their investments to a more debt
oriented portfolio earning a return of 7% per annum from the time Dev turns 53.
This part of portfolio rebalancing attains higher importance as the family
goals draw nearer.
up their annual savings by about 14% every year for next 3 years, by 10% for
next 5 years and by 8% for the last 2 years could help them bridge the gap
conveniently and they could both retire at their desired age.
The sum of all ending values here is Rs. 4.02
crores which equals the corpus required on retirement.
As can be seen above, every financial plan is based
on some assumptions and even when these are profound, reviewing the plan
annually plays a very crucial role in you inching fast towards your goal
achievement and makes the whole planning exercise more realistic and hence
It is important to take in consideration the different scenarios that a plan offers to be able to stick to the one that the client can most relate to.
Scenario analysis is a highly important aspect
of the financial planning exercise and, as can be seen above, is also greatly
solution oriented. It is important that you take in consideration the different
scenarios that your plan offers you to be able to stick to the one that you can
most relate to. With all its dynamics, it is only the comprehensive financial
planning that can get you to the solution you are looking for and solve the
financial jigsaw for you in the most efficient manner.
Arti is a SEBI Registered Investment Adviser as well as Head-Financial Planning for Meet Plutus.