Goal based investing #4 – A case study

In this post we will deal with a case study for goal based investing. Note that I have deliberately taken a person who is just starting out in his career at the age of 25 and expecting to work till 60. This can vary for individuals, but is by far the most common situation in India till date. In this case, the person assumes he will get married between 28 and 30, have 2 children probably at 32 and 35. The goals are largely revolving around buying a car, house, children and retirement.

So with the base year as 2015 when the person is 25 years old the following goals can be projected:-

  1. Buying a car in 2020 worth 6 lacs today. Goal value is 8.81 lacs.
  2. Buying a house in 2022 with down payment of 20 lacs. Goal value is 34.27 lacs.
  3. First child’s college expenses in 2040, current cost 20 lacs. Goal value is 2.16 crores.
  4. Second child’s college expenses in 2043, current cost 20 lacs. Goal value is 2.88 crores.
  5. Retirement corpus needed in 2050, current cost 1.5 crores. Goal value is 22.17 crores.

I have taken inflation at 8 % and education inflation at 10 % to be conservative. However, the way we seem to be going currently, this may well be the case. Also, I have not taken children’s marriages or post graduation as part of the goals here. I believe the former should be based on what you can afford and the latter funded through education loans taken by children.

With the above let us now see how the strategies outlined in the earlier posts work out:-

  • PF will amount to 4.82 crores assuming there are no withdrawals in between.
  • PPF for X will work out to 3.28 crores at regular contributions and current interest rates. If X’s spouse contributes for the same amount of time another 3.28 crores can be obtained.
  • You can see from here that the shortfall purely in terms of retirement corpus is 12 crores.

Does that sound scary? Not really, as this is where the rest of the strategy will kick in. We assume that X starts to put 10000 Rs per month in MF from day 1 of his career. In today’s salaries this should be possible even after he maxes his PPF. This can be increased by 10000 Rs per month after 5 years and the same amount after 10 years. From an age of 40 years he starts putting 40000 per year and stabilizes at that level. In effect X will have:-

  • SIP of 10000 Rs per month for 5 years.
  • SIP of 20000 Rs per month for 5 years.
  • SIP of 30000 Rs per month for 5 years.
  • SIP of 40000 Rs per month for 20 years.

At a return of 12 % this will amount to 12 crores over the entire time frame. But we are still meeting just the retirement goal, never mind the other ones. How are we going to get these done?

This is where the stock portfolio will come in. In the beginning X may not have enough money to fund his stock purchases. Let us assume that for the first 10 years, he will be able to put an average amount of only 60000 per year. At 35 years onward he may be able to increase this value to 120000 Rs due to his growing income. At 45 he has got over his home loan etc and can therefore increase this to 4 lacs per year. At 50 with his children’s education well underway, he can increase this to 6 lacs per year and continue till he retires. So, in effect his stock investments are :-

  • 60000 Rs per year for 10 years.
  • 120000 Rs per year for next 10 years.
  • 400000 Rs per year for next 5 years.
  • 600000 Rs per year for next 10 years.

At a 12 % return this will yield a total of 5.36 crores by the time X is 60 years. So you can see that even a goal amount as formidable as 22 plus crores can easily be achieved if you follow the principles outlined earlier.

I will stop here as this has already been a long post. In the next few posts I will deal with asset allocation, redemption strategies and what rules you should follow for asset re-balancing.

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12 thoughts on “Goal based investing #4 – A case study

  1. so you are assuming he will start investing 3.3 Lakhs per annum from year 1 onwards till year 5 ? 1.2L in MF, 1.5L in PPF & 60K in stocks and then gradually increase his investments…

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    • Yes, that will not be difficult for a 25 year old of today, who probably earns more than 6 lacs a year. For people earning less, they can scale down appropriately but the principle remains the same.

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      • If you assuming his income to be 6 lakhs and saving of 3.30 lakhs….then his total expenses should be 2.70 lakhs and a monthly expenses of 22500. If this amount is inflated for 35 years…the amount would come to approx..332670 pm….and if we assume real return of 3% pa approx post retirement assuming inflation to be 5% and ROI to be 8%….then the corpus required to retire then would be around 8 Cr….could you please explain how the retirwment corpus would be 22cr.

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      • Pradeep the expenses will not stay at 2.7 lacs per year for the person. It will increase once he marries, has children, builds assets etc. For a person at 50 years age we can project his current expenses at retirement but not for a person at 25 as most of his significant occurring in life are yet to take place.

        The right way to look at it is this. If a person from similar social and financial background is retiring today, how much corpus will be needed by him. I have taken this to be 1.5 crores which is reasonable. So if you project this 1.5 crores over the next 35 years this will give you the required corpus. Calculate this and you will get 22 crores.

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  2. 1.50 cr today would me an annual income approx 12 lakhs pa assuming a ROI of just 8% with capital intact. Dont you think 1 lakh pm is very high amount?? Today, 50-70 k should be more than sufficient….i feel so….different ppl differwnt thoughts…..you view on it please

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    • Pradeep it does not work in that way. You need 1.5 crores as the retirement period will also have inflation. Yes, 50 to 70 K will be sufficient today but this figure will double in 9 years with 8 % inflation. Look at some retirement calculators to understand it better.

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  3. Yes Mr Roy, I agree with you. Assuming ROI to be 9% and Inflation to be 8%, the real return would be little less than 1% pa. With this real rate of return, one can easily withdraw 1 lakh every month for next 20 years i.e., 240 months starting from today with a corpus of 2.20 Crore approx.

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