Equity as your child

I remember reading this perspective from someone recently, and I kind of liked the way the author put this forward. Let me re-iterate what I read.

If you have two kids, as a parent you would try to make sure that you provide for the need of both your kids in most fair manner. Now consider equity as your third child, and make sure that all the expenses that you make for your kids are simply divided by 3 and the third poriton goes to equity. Note that you must treat this as expense and not investment.

Now, when you are 60 and your children are busy with their families and may and may not have time and willingness to provide you support, your third child will always be by your side and if you have been fair to him, he would have more than enough to provide for later years.

Isn't this an interesting analogy to bring home the necessity of retirement goal.

An individual may have many goals in life, however the top priority and number one goal in everyone's list should be retirement goal. This is the only mandatory goal one should have, others are really optional. And the key idea behind it is that if you don't provide for yourself who else will.

Ponder upon, if you havn't so far. 

How to reach your Retirement Goal

You have understood your Networth and your cashflow statement by now, and you have also gone to the future date and really understood how much money that you would possibly want when you retire. [if not, read earlier blogs]

• What's your Networth
• What's your cashflow statement
• Fast Forward to your retirement

Now, that you are done with where you stand and where you want to go, let's figure out what do you need to do to reach your destination in time and with right quantum on money.

In simple terms your retirement corpus is the Future Value of your Investments today, which typically are: PPF, EPF, Properties, Land Holdings, Fixed Deposits, Mutual Funds, Equity Holdings, Graturity, Annuity, NPS savings etc.

Let's say you had invested in PPF, and you have it for self, your spouse and kid. And here are the holdings

Similarly, you have Mutual Fund Investments - In the form of emergency liquid funds, your current equity holdings and your planned SIPs. Say they value as follows

And you do have say two properties as well, which value something like below. I am assuming really a low rate of return on properties of around 3-4%. Also, i am assuming you stay with your family in one and have lent out the other one which gives you a rental income  of say 30k per month as on today (grows 5% per year)

And say you both work and your EPF lumpsums today and future earnings on EPF would be increasing 5% per year. 

With all these you would end up having a retirement corpus of 8.8 Cr (but observe that you have also taken immovable assets like properties in to account, which needs to be liquidated if you need their woth to be in banks and withdrawable for usage)

I am repeating, but i am never tired of stating this "Always make conservative estimates for the benefits and generous estimates of your liabilities"

Fast Forward to your Retirement

You have understood your Networth and your cashflow statement by now [if not, read earlier blogs]

• What's your Networth
• What's your cashflow statement

Now that you are done,

Let's make few assumptions as on today 

• You are at the Age of 35
• You wish to retire when you are 50
• Your monthly expenses today is around 75,000
• You assume to have an annual inflation of around 6%
• You assume to build a retirement corpus of around say 7 Crore (Big Number, or is it?

Let's fast forward now to the date of your retirement. 

• You are 50 now
• Your monthly expenses are 1,79,741 (Future value of 50000 considering inflation)
• You have 7 Crores 
• Now you expect to earn 5% post tax return on 7 Crore (beleive me it's an optimistic number as after retirement you would only be putting most of your money in FDs)

Given the facts above, now let's assume you start withdrawing your expenses (growing at 6% each year coz of inflation) from this retirement corpus (grows at 5% each year), your whole 7 Crores would be exhauseted by 2066 when you are 83. 

Now, ofcourse there are lots of variables and factors that I have used to arrive at this number. However, this is just to illustrate some facts and give you an idea there is a way to put numbers for your retirement corpus. 

I would suggest you to sit down and start making your own assumptions about the variables mentioned above and get your retirement corpus you are comfortable with.  

The calculations for the above assumptions are as follows 

Cashflow statament, Income equals savings plus emi plus expenses

Well, keep in mind that retirement goal is typically one of your goals, but is the most important goal that you should save for, why? coz no one else will do that for you. 

And again, remember the golden rule, while making assumptions in finance "Always make conservative estimates of figures that benefits you, and generous estimates of figures that are basically against you". This will avoid you from boundary conditions :)