Sample Financial plan #8 – understanding the investment numbers

By this stage in their financial planning process, both Ravi and Madhuri were feeling comfortable with equity as an asset class, given that most of their significant goals were quite some time away. In my discussions with them we agreed on the following model for their investments:-

  1. Ravi will continue to contribute in his PF for the next 20 years. Current contribution is 2 lacs and it can increase @ 5 % every year. The idea is not to touch this unless really needed in an emergency.
  2. Ravi is already having a PPF and he will continue this for the next 20 years. Madhuri will also open a PPF and continue it for the next 20 years. Ideally, money will not be withdrawn from these accounts, but if redeeming equity seems a bad idea at the time of a goal then this money can be used.
  3. Apart from the above 2 contributions to Debt, all other surplus that the couple has will go into equity. This will be both in stocks and Mutual funds. We will discuss the portfolio structure in a future post.

Let us now see how we can work out on the goals with the above inputs. For the sake of being conservative we will assume PF interest rate at 8.5 %, PPF interest rate at 8.7 % and return from both stocks and equity MF at 12 %. Remember that as we have taken all inflation except for Education at 6 %, it will probably make sense to cater for more investment rather than less.

We will start with the consolidated goal amounts for 2035 which is at 6.81 crores. This amount can be funded by the following plan:-

  • Withdrawal of the PF amount = 1.92 crores
  • Withdrawal of PPF amounts = 1.87 crores ( for both Ravi and Madhuri)
  • Shortfall from goal amount in the year = 6.81 – ( 1.92 + 1.87 ) = 3.02 crores
  • Equity portfolio for this year will need to be at 3.02 crores in 20 years with 12 % return
  • Annual Saving Factor with 12 % return in 20 years = 0.0139
  • Annual investment required = 3.02 crores x 0.0175 = 4.2 lacs

Investment needed for the year 2040:-

  • The investment in equity needs to grow into 1.93 crores in 25 years at 12 %
  • Annual Saving Factor with 12 % return for 25 years = 0.0075
  • Annual investment required = 1.93 crores x 0.0075 = 1.45 lacs

Investment needed for the year 2033:-

  • The investment in equity needs to grow into 1.09 crores in 18 years at 12 %
  • Annual Saving Factor with 12 % return for 18 years = 0.0179
  • Annual investment required = 1.09 crores x 0.0179 = 1.95 lacs

Investment needed for year 2032:-

  • The investment in equity needs to grow into 40 lacs  in 17 years at 12 %
  • Annual Saving Factor with 12 % return for 17 years = 0.0205
  • Annual investment required = 40 lacs x 0.0205 = 82000 Rs

Investment needed for the year 2029:-

  • The investment in equity needs to grow into 70.5 lacs in 14 years at 12 %
  • Annual Saving Factor with 12 % return for 14 years = 0.0309
  • Annual investment required = 70.5 lacs x 0.0309 = 2.18 lacs

Following the same method we can estimate the annual investments needed in equity for 2025 as 61000 Rs, in 2021 as 1.05 lacs, in 2020 as 1.47 lacs. I am not taking 2017 into account as that will be partly funded through sale of Ravi’s existing car and also current resources.

A summary of all the above numbers will now give us the following investment plan:-

  • PPF investment for both Ravi and Madhuri to be 3 lacs per year from now till 2035.
  • PF contribution for Ravi to continue and will only be withdrawn when he leaves job in 2035.
  • Starting 2015 an annual investment of 13 lacs to be made in equity.

What this boils down to finally is an investment need of 16 lacs per year apart from the standard PF contribution. Now that we know the numbers for fulfilling all the dreams that the family has, we will need to see if these investments are practically possible. More of this in the next post

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2 thoughts on “Sample Financial plan #8 – understanding the investment numbers

  1. You are doing an amazing job of educating the young souls like me in personal financing. I eagerly wait for your articles everytime. I have a lot to learn. Thanks a lot !!

    Like

  2. While other blogs repeat the same thing over and over about compounding, you are actually very different. More practical…we don’t need articles like how to withdraw money from PF or significance of PAN no. but practical articles like these..Keep up the good work..eagerly waiting for your articles…

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