Financial independence #8 – Template of an investment plan

In this post I will outline a template of an investment plan that anyone will be able to use in their journey towards financial independence. For the purposes of this post I will not explain some of the logic behind the suggested actions to keep it simple. I will however, do the explanation in other future posts.

Some assumptions before we outline the plan:-

  1. Early retirement is planned at year X and normal retirement age is Y. Obviously Y > X.
  2. From age X to Y the passive income generated should be adequate for all normal expenditure.
  3. Some goals will be prior to X and there will be normal investment for these. Some will be between X and Y and the rest beyond X. For these the investment will be done till X but withdrawals will be at the years of the goals.
  4. For retirement goal, follow point 3 i.e. investment will be till year X.

Let us now get to the investment plan in general. If you are just starting out then you can make a fresh plan and if you are already having a plan you will need to look at modifying that.

  • You may be already investing in PF and PPF. Continue both of these investments till the year X. If you continue your existing job after that continue further, else contribute only to PPF ( not from passive income).
  • Apart from the above put everything into equity – have a portfolio of stocks and another portfolio of MF. You need to continue this till year X and after that if you are having any active income.
  • Make sure that the amount reached in your portfolios at year X and the growth of your portfolios between year X and year Y will be sufficient to cater to the following:-
    • Generation of passive income to cover regular expenses between year X and year Y.
    • All goals that you have planned for any of the time horizon.
    • Retirement corpus at year Y should be sufficient to last for projected lifetime.

Let us take an example of a specific goal to illustrate the point:-

  • Assume X = 50, Y=60 and current age is 30 years.
  • Child’s college education at age 55 was planned to be 1 crore, investment period was 25 years.
  • Annual investment needed at 12 % return was 75000 Rs
  • As we will now only invest till year X therefore the investment period will be 20 years instead of 25.
  • New annual investment needed will be now 1.39 lacs.
  • Assumption here is that the entire 1 crore is available at year X. Obviously we do not need this at Year X but 5 years later. Once you take this into account, the investment needed is only about 80000 Rs.

You can do the above for all the goals and increase your investment amounts. As long as the goals are a fair distance away and you are using equity the differential investment will be manageable. If these conditions are not true then the extra investment needed may not be feasible. This shows we need to plan for FI with time in hand, it will not be something that can be changed quickly in a short time horizon.

I hope with this all will be able to work out the new investment plans for the goals, in the light of FI state being reached. We also need to plan for the passive income to deal with expenses between the years X and Y. I will cover that in the next post.


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