Last Updated on April 22, 2016 at 8:02 pm
Nandish Desai and Manish Chauhan run Jagoadvisor – a portal for financial advisors. Recently, they posed the following retirement planning challenge,
Scenario: ‘You meet a 55 year old with a corpus of Rs. 70 lakhs. The person seeks financial independence in retirement and expects an annual inflation of about 8-9%. He would like to invest the corpus in a financial product that will give 8-10% return over the long term. His present expenses are about Rs. 25,000 per month.’
Task: Write a 1-2 page report that will provide some projections on how long his corpus would last and convince the person to become your client!
Retirement planning is one of the most exciting and challenging tasks in personal finance: how do you make a corpus last the lifetime of a retiree while ensuring financial independence? By financial independence I am referring to a retirement income (call it pension or annuity, if you must) that matches inflation.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
The other aspect to this challenge is the tone of the letter. How should a planner pitch it? How should/will a client interpret it?
Both aspects are of interest to the investor and financial planner alike.
In the hope you will agree that this challenge is interesting food for thought for everyone, I share below my response to the challenge.
~~~~~~~~~~~~~~~~~~~~~
Dear intelligent investor,
In our last meeting, you had indicated your return expectation on your corpus and the kind of inflationary increase on your expenses.
In this report, I would like to answer an important question in your mind,
‘which financial product should I invest in so that I can be financial independent at least until the time-frame I have mind?’
First, let us consider some simplistic projections on how 
long you can remain financially independent. Alternatively, to put it crudely, ‘how long your money would last’!
These results were obtained with a ‘how long will my money last? calculator
Do not let these numbers bother you too much. The bottom line is, the more the inflation, the more risk you need to take while investing.
I call these results simplistic because, while we would like to assume inflation as 8%, the real inflation on certain products can be much, much more. Similarly, returns may not meet our expectations.
Therefore, I hope you agree with me that a retirement plan should be flexible.
First, I would request you to think about the ideal time-frame that you would like the corpus to last. To do this, please consider how long your elders lived, your health condition, family history etc. If you have a spouse, you will need to worry about her financial health if you pass away early.
Therefore, the ideal time-frame should be the life expectancy of the younger spouse.
I know this is not a pleasant thing to think about. However, to achieve financial independence, I strongly believe one must have to think about unpleasant things in order to be better prepared.
Now, if you have an approximate time-frame in mind, what next?
If you would like to know, ‘which financial product should I invest in so that I can be financial independent at least until the time-frame I havemind?’ my answer to that (assuming you are interested in hearing it! J) would be in two parts.
Part 1: As you are well aware, monthly expenses is only one part of a person/families total expense.
a) We will need to account for emergencies like appliances breaking down, AMC charges etc.
b) Health insurance.
c) A fund to handle medical cost not covered by mediclaim.
Part 2:
Once the items listed in part 1 are, covered one should worry about how to manage the corpus to yield a monthly pension.
It is quite possible that a part of your 70 lakh corpus may be needed to account take of your emergency fund, health insurance and medical corpus. After that, you could consider how to invest the rest of the corpus.
I will be happy to discuss ways to take care of these needs with reasonable assumptions. We can also consider other issues like the kind of estate that you would like to leave to your loved ones.
Now we are ready to discuss your question (sorry for the delay, retirement planning is a many-sided problem!)
‘which financial product should I invest in so that I can be financial independent at least until the time-frame I have mind?’
Forgive me for answering your question with a set of questions!
- On an average, do you expect a human beings life to follow a straight line?
- Would you not agree that on an average a human life would have many twists and turns?
- Should not a retirement plan be flexible?
- Should it not adapt, as best as it can, to changes in your lifestyle as you age?For example, sudden surge in inflation, medical expenses etc.
- Should we adopt an inflexible retirement plan by investing in a single product?
- Or should we invest in a basket of investments with vary risk and reward profiles so that we can to pretty much most things life throws us at?
If you see what I mean and agree that this is something worth pondering about, feel free to contact me to set up a meeting with no financial obligation.
In this meeting,
- I will present to you different ways in which a retirement corpus can be invested. Rest assured in all scenarios, I would keep in mind the importance of this corpus to your financial independence.
- I will explain how by choosing a basket of instruments that range from virtually zero risk to minimal risk, we work your corpus to the maximum extent possible to provide you with financial independence.
- With active monitoring from both of us, I am confident that you will be well prepared for the vicissitudes of retirement life.
- May I urge you appreciate the fallacy of searching for a single retirement product, and consider the investment scenarios that I would like to present to you?
Thank you for your time.
With best regards,
pattu
~~~~~~~~~~~~~~~~~~~~~
How will you respond to this challenge?
How would you allocate the corpus to ensure financial independence?
If you were the prospective client, how will you react to this letter?
If you are a planner, I will be happy to know your impressions.
If you wish to get serious about your retirement, here is a set of retirement planning calculators for all ages.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)