How to create a retirement income plan for 27-year old Amar (Case study)

Published: June 16, 2019 at 10:30 am

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We discuss how to create a retirement income plan with 27-year old Amar as a case study. We shall consider asset allocation for each year of investment before and after investment and how Amar can derive an inflation-protected income and be financially free after retirement. This is step 11 of Re-assemble, a series on the basics of money management aimed at beginners and young earners. The full list of steps with links can be found below.

What is inflation-protected income? A retirement income that increases each year as per the needs of the family. It takes into account inflation in expenses as well as due to lifestyle modifications. Young earners today should not be thinking and be talking about constant income or pension in retirement. They should consider how to consistently beat inflation with an inflation-protected income (also known as inflation-indexed income).

Read more: Generating an inflation-protected income with a lump sum.

What is financial freedom? The ability to generate inflation-protected income for a given number of years, preferably until the death of the youngest dependent.

How to create a retirement income plan

We shall use the freefincal robo advisory template to create a retirement income plan for 27-year old Amar who is married to a 25-year old homemaker. Last week, we had considered a case study for unmarried young earners less than 25: Investment planning case study 1: How to create an investment plan.

Amar is 27 and salaried and hopes to retire by 58. Recommendation: this is okay for a start, but suggest pushing to lower and lower gradually. Less than 30-year olds today must focus on retirement by 50 (20 years of “bound” labor).

Therefore we shall plan for retirement income from the time Amar reaches 58 to the time his wife (younger spouse in general) reaches 90. Therefore, Amar has 31 years to invest (the most precious asset) and needs to plan for inflation-protected retirement income for 34 years.

We shall consider 8% inflation before and after retirement. If this seems low to you, it is because you have bothered to calculate your personal inflation rate and/or have not handled unexpected recurring expenses (my prayers that you don’t have to). Do not take the inflation numbers published by the government seriously, they mean nothing.

Some people talk about “real returns” as if it is some profound concept. It is not. All you need to be clear about is (1) practical inflation in expenses and (2) a practical tax-free rate of return for your entire portfolio. You need to be ready to handle at least 8% inflation. This way, if your actual inflation is less, you would have built yourself a nice corpus to handle medical emergencies.

The video tutorial is linked below. First, an overview is presented.

Why should Amar worry about generating retirement income?

At 8% inflation, in 9 years, his current expenses will double (repeat, just his current expenses. He will have to re-do the retirement calculation once a year). In 18 years, it will 4 times the current expenses.

create retirement income plan: how expenses increase

In 27 years, 8 times and by the times his income stops (aka retirement!), it will be about 11 times current expenses. So Amar should worry, but do so productively – by starting investments as soon as possible.

Why is the corpus needed for inflation-protected retirement income so big?

Hold on to your chairs and take a deep breath. Amar will have to have about 21 Crores, 27 lakhs ready by age 58. He will have to begin investing about 57, 500 immediately increasing at 7% a year, in a portfolio of 60% equity and 40% fixed income. I know people who have lost sleep for days after using my calculators. Amar, however, need not worry even if he is not able to invest that much. He has time on his side and the robo template assumes 8% inflation, only 10% returns from equity – hey we are projecting 31 years into the future. I am not a sales guy to assume 18% returns so that my clients “closes” the deal (and his brains).

So expect the corpus to be high. It is better to aim for the 1st floor even when there is more than ample chance to be able to the 5th. Expect less and you won’t be disappointed! Am I being pessimistic, not really. I have quite optimistically assumed 6-7% returns from fixed income. This is unrealistic over the next 3 decades and it is better to expect less, but let us not be realistic to the point of discouragement.

Variable asset allocation for building the retirement corpus

Starting with 60% equity exposure, Amar can gradually taper down to about 25% at retirement and maintain that.

creating retirement income plan: variable asset allocation

Variable portfolio return due to variable asset allocation

As the portfolios equity exposure decreases, so too does the expected net return from the portfolio. The retirement corpus is so big because this is factored in from day one. Most retirement planning tools (including my early ones) do not consider this crucial aspect. Welcome to the real world!

retirement income plan: how portfolio returns change with time.

Creating retirement income with buckets

The robo template assumes that the corpus will be distributed among the four buckets shown below. The income bucket will be used to generate inflation-protected income for the first 15 years in retirement. During the period, as per market conditions, money can flow from one bucket to another.

retirement income strategy with buckets

Another possibility:

retirement bucket strategy: shifting money among buckets

Please note that such switches cannot be calculated now.

Rebalancing the buckets is a fantastic game and you can try the switching with random market returns to see how well you are doing:

Play The Retirement Bucket Strategy Simulator


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How to create a retirement income plan: video tutorial

Here is step by step walk-through of the robo advisory template filled by Amar. I have considered only the retirement planning section. This is an unrehearsed single take video as my Myasthenia Gravis prevents me from talking too much and too long. I wore out my cheek muscles after this, but hey after 5+ years with the autoimmune condition, I have learned to live with it. If life gives you lemons, you aim to make tequila with it. So please do bear with me as I think on my feet.


This weekend, do explore the videos in freefincal youtube channel. If you are new to Re-assemble, then here is a sample video.

Will Amar be able to retire with financial freedom?

Mr. and Mrs. Amar have time on their side. So I am more than confident that with disciplined investing and disciplined risk management, they will be able to retire comfortably and fight inflation. Let us thank Amar for taking the time to fill out the robo template and wish them all the very best.

Re-Assemble: a recap of the steps

Many of you may be on vacation this week. Now would be a perfect time to work on these steps.

₹e-assemble by is a series on the basics of money management for yougn earnersStep 1: Listing your goals dreams and nightmares

Step 2: Lay the Foundations to Get Rich creating an emergency fund

Step 3: How to buy Term Life Insurance

Step 4: How to choose a suitable health insurance policy

* Apollo Munich Optima Restore Benefit vs Max Bupa Re-fill Benefit 

* Star Health Comprehensive Insurance vs Religare Care Comprehensive Insurance

Building a health insurance comparison chart + Cigna TTK vs Royal Sundaram Health Policies

*  How to buy a Super Top-up Health Insurance policy

How I selected a health insurance policy

Why we all need a corpus for medical expenses and how to build it

Step 5: How to select a credit card for maximum benefit

Step 6: How to track monthly expenses and manage them efficiently

Step 7:  How to close your loans and live debt-free

Step 8:  How to buy a personal accident insurance policy

Step 9: Are you ready to let go and let your money grow?

Step 10: Investment planning case study 1: How to create an investment plan

Step 11: Retirement planning case study 2 (this post)

Download the full re-assemble e-book

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About the Author

Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

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