How a retirement planning calculation scared me to take action

Last Updated on February 20, 2021 at 10:39 am

Most investors calculate the investment amount required for their retirement and in for a rude shock. Sleepless nights are quite common! Very few investors manage their finances right after such a shock and start investing with focus and conviction. In this episode of ‘reader audit’, we meet Mr Tinker (name withheld on request), who got scared in action after such a retirement planning exercise.

A couple of years ago, readers may recall the account of Sandeep Bondili: We lost sleep after using a retirement calculator! This is how we recovered. If you have not yet sat down and computed what you require for retirement, this is an excellent place to start: How should I invest to get Rs. one lakh a month pension?

Editor’s note: The DIY event Mr Tinker refers to was a series of meets conducted all over the country by Ashal Jauhari (admin of Facebook Group, Asan Ideas for Wealth) and myself. Due to personal commitments, we could not continue the series. You can watch my corporate presentation here: Common sense approach to managing money. Different segments of Ashal’s presentation are available on YouTube.

As regular readers may be aware, we publish a personal financial audit each December – this is the 2020 edition: How my retirement portfolio performed in 2020. This time, we asked regular readers to share how they review their investments and track financial goals.

• First audit: How Suhas tracks his MF investments and reviews financial goals.
• Second audit:  How Avadhoot Joshi evaluates his investment portfolio.
• Third audit: How a single mom is on track to financial freedom
• Fourth audit: How Gowtham started goal-based investing & took control of his money
• Fifth audit: Why my financial independence & early retirement plans were postponed by four years
• Sixth audit:  How Abhisek funded his marriage & is on track to financial freedom.
• Seventh audit: How Rohit’s early struggles defined his investment journey
• Eighth audit: Why my investments are still on track despite job loss and lower-income
• These published audits have had a compounding effect on readers.  If you would like to contribute to the DIY community in this manner, send your audits to freefincal AT Gmail. Now over to Mr Tinker.

I started my financial journey in 2013 at the age of 22. After completing graduation, I moved to tier 1 city from a small town. I met people with lavish lifestyles or lifestyles far better than me, so my immediate goal was to buy a car. We never had a car in our family. So, I started accumulating money in FD/RD to buy a car. After consulting my dad, I used to make decisions, so he never supported my decision to buy a car with a loan. At the age of 24, by looking at colleagues, I started investing in Equity / MF. I used to choose equity on sentiment-based (with little technical indicators) and MF on ratings based. Luckily, both turned in my favour, so at the end of 3 years, I could gather enough corpus to meet my goals with no family responsibilities.

One day, my friend called me and said he enrolled for Pune DIY 2017 meet, but he was unable to attend due to unfortunate reasons. So, he asked me to join the meet. I went there with absolutely no clue and to eat food. It was a turning point in my financial life. That night, I couldn’t sleep because, based on the retirement planning calculator (only retirement) amount I needed to invest per month was three times my monthly earnings (Being an engineer, I keep more safety factors).

In the next few days, with rigorous reading on financial articles (freefincal/ Subramoney, reading solutions given by Mr Ashal on FB and many more). I figured out a few things and decided to note down my goals on paper.

I wrote down my goals on paper (year 2017).Immediate goals:

1. Home (Down payment)
2. Marriage
3. Car (I learned from expert its depreciating asset, so it moved to the last position on my list)

Long term goal (Goals which started after short term goals were finished)

1. Retirement.

Total savings (Excluding mandatory EPF) were = 2.5 x Annual take-home salary.

As I mentioned earlier, my salary was not enough to meet retirement calculator outputs, so I decided to settle for a smaller house instead of buying a big house which I won’t be fully utilised in the initial few years. I was eligible for a higher home loan amount, but still, I chose a normal house where I could easily pay a 25% amount as a down payment (some of my friends/ siblings helped me in terms of soft loans) and remaining as a home loan with slightly lower EMI. I didn’t even utilize full corpus.
Until then I was convinced that I could easily get higher returns than home loan interest rates, so I never rushed to close home loan or repayment and I started moving towards my next goal. Lower EMI helped me reach my next goal a little bit faster, i.e. marriage (2019) and Car (2019).

Goal sheet (Year 2021)

Immediate goals

1. Home (Down payment)
2. Marriage
3. Car (I learned from expert its depreciating asset)

Long term goal

1. Retirement.

Once all short-term goals were met, I moved to retirement planning.

Today I am 30 and expecting to retire at age 50 with a life expectancy of 85 years. My goal is to accumulate a retirement corpus equal to 133 times my annual salary. I have considered maximum expenses, including medical expenses every year and insurances etc. To achieve financial freedom, I need to save at least 2 times my monthly salary per month. So, I am actively looking for alternate sources of income/ growth in my career, which can help me achieve my goal ahead of schedule.

I am aware of the fact with no job security and no post-retirement benefits. I must care for myself.

I try to move the maximum money into savings/ investments. I don’t compromise on living expenses, but I have reduced unwanted weekend outings in the last few years, buying expensive gadgets that I really don’t need etc. I was brought up in a middle-class family, so it never looked difficult to me. Retirement planning exercise was done before COVID (Jan2020) when everything was normal, so the following factors were considered.

Inflation = 8%

Post retirement returns on corpus = 6% 

Annualized returns expected = ~10% (12% Equity and 7% Debt) 

Instruments that I used for investing

Debt : EPF / VPF / PPF
Equity: Stocks (I have started investing in 2015, with multiple setbacks and lessons now, I have screened a few stocks in which I directly invest. I have two SIP’s running, one in Midcap and the other in small cap.

As of now I don’t have any other major long term (3 to 5 years)/ short goals (duration<3 years) so I am not using any other debt instrument. I will use them as and when needed. It’s not like all my financial decisions went correct, but I learnt lessons with my hard-earned money. I never hurried in buying important assets. I took the time to screen those assets. My interest in personal finance helped in eliminating a lot of mistakes. As I am moving forward, I look at capital protection instead of chasing returns.

Are the basics covered?

• Emergency corpus: Three months expenses (Including EMI, Insurance (car+ personal) and SIP) in fixed deposits. I am a systematic credit card user for the last 7 years, so the current limit is 6 times my monthly salary, considering it as an emergency backup (Except Job loss situation).
• Life cover: I have term insurance which is equal to 11 times my annual salary. (At the time of purchase, it was 20 times salary) I purchased it in a hurry because my colleagues were buying it. Future action: As I am married now, I will increase cover to 20 times the annual salary once we plan our family.
• Health insurance. Being single, I never cared about buying personal health insurance. I was covered under the corporate health plan. Future actions: I will be buying personal health insurance in the next few days.