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Retirement Planning for Entrepreneurs in changing times

On: Thursday, 6 December 2012 by Pradip Chakrabarty | Retirement Planning
Retirement Planning in Advisorkhoj - Retirement Planning for Entrepreneurs in changing times

In the last issue we discussed how important it is to have a financial plan, what is the amount required, and we arrived at a figure of Rs. 2.33 Crores. This is how much you (the entrepreneur) need to accumulate to maintain the same lifestyle till you’re 75, assuming you started your journey at 30 and retired at 50! That basically means you have only 20 years to accumulate all your money. Sounds scary, doesn’t it

A quick recap: There are many avenues to SAVE and INVEST

  • SAVING PRODUCTS – Bank Fixed Deposits, PPF (Public Provident Fund) Account, Debt Funds of Mutual Fund, NPS (National Pension Scheme), Post office Savings Schemes, and son on – these investment would typically fetch you a return of around 8%

  • INVESTMENT PRODUCTS – Mutual funds (Equity schemes) and Shares – these have potential to fetch you a return of at least 15%-18% if invested for a long term. Since we are planning to invest for next 20 years its’ already Long term.

How much should you SAVE and/or INVEST – Frankly speaking, there are no thumb rules. But, with age your exposure to equity investing should reduce. An old investing formula suggests – 100 minus your age.For Example – When you are starting at Age 30 your equity exposure should be around 70%, at Age 35 – 65%, at age 40 – 60%, at age 45 – 55% and at Age 50 – only 50%. Since this is no thumb rule, let’s assume you are Saving/Investing at a ratio of 50:50.

Solution (At a Ratio of 50:50)

  • Put the 50% (Rs.500,000) out of your Total Savings Corpus of Rs.1,000,000 in a Savings/Fixed deposit/ Debt Product and invest the rest 50% (Rs.500,000) in one or more Mutual Fund Equity Scheme/s.

  • Start a Mutual Fund Monthly SIP (Systematic Investment Plan) for Rs. 14,500/- in a Balanced Fund (Having 50% Debt and 50% Equity) for 20 years – assuming return of 11.50% CAGR

(CAGR means Compounded Annual Growth Rate)

Final Corpus Figures

Saving / Investing DetailsAmount after 20 Years
Rs. 500,000 in a Fixed Deposit for 20 yearsRs.   2,330,478
Rs. 500,000 in a Mutual Fund Scheme or EquityRs.   8,183,268
Rs. 14,500 Monthly SIP in a Mutual Fund for 20 Years – assuming return of 11.50%Rs. 13,413,965
Total Retirement Corpus at Age 50Rs. 23,927,711

Therefore, simply speaking you need to invest ONLY RS. 14,500/- per month for next 20 Years! Small Money? Yes, really small – but, remember you need to invest month after month for next 20 years. But how that is possible? The answer is POWER OF COMPOUNDING and DISCIPLINED INVESTING!

Please look at the chart below to find out how a small amount can turn into a magical figure through power of compounding and disciplined investing.

Monthly Investment15% return per annum
 5 years5 years10 years10 years15 years15 years20 years20 years
 (Investment)(Total Return)(Investment)(Total Return)(Investment)(Total Return)(Investment)(Total Return)
2,0001.20 Lacs1.79 Lacs2.40 Lacs5.57 Lacs3.60 Lacs13.53 Lacs4.80 lacs30.31 Lacs
5,0003.00 Lacs4.48 Lacs6.00 Lacs13.93 Lacs9.00 Lacs33.84 Lacs12.00 Lacs75.79 Lacs
7,0004.20 Lacs6.27 Lacs8.40 Lacs19.50 Lacs12.60 lacs47.38 Lacs16.80 Lacs1.06 Crore
10,0006.00 Lacs8.96 Lacs12.00 Lacs27.86 Lacs18.00 Lacs67.68 Lacs24.00 Lacs1.51 Crore
15,0009.00 Lacs13.45 Lacs18.00 Lacs41.79 Lacs27.00 lacs1.01 Crore36.00 Lacs2.27 Crore
20,00012.00 Lacs17.93 Lacs24.00 Lacs55.73 Lacs36.00 Lacs1.35 Crore48.00 Lacs3.03 Crore
25,00015.00 Lacs22.42 Lacs30.00 Lacs69.66 Lacs45.00 Lacs1.69 Crore60.00 Lacs3.78 Crore
50,00030.00 Lacs44.84 Lacs60.00 Lacs1.39 Crore90.00 lacs3.38 Crore1.20 Crore7.57 Crore
Monthly Investment18% return per annum
 5 years5 years10 years10 years15 years15 years20 years20 years
 (Investment)(Total Return)(Investment)(Total Return)(Investment)(Total Return)(Investment)(Total Return)
2,0001.20 Lacs1.95 Lacs2.40 Lacs6.72 Lacs3.60 Lacs18.38 Lacs4.80 lacs46.86 Lacs
5,0003.00 Lacs4.88 Lacs6.00 Lacs16.81 Lacs9.00 Lacs45.96 Lacs12.00 Lacs1.17 Crore
7,0004.20 Lacs6.83 Lacs8.40 Lacs23.53 Lacs12.60 lacs64.34 Lacs16.80 Lacs1.64 Crore
10,0006.00 Lacs8.96 Lacs12.00 Lacs27.86 Lacs18.00 Lacs67.68 Lacs24.00 Lacs1.51 Crore
15,00012.00 Lacs14.64 Lacs24.00 Lacs50.43 Lacs36.00 Lacs1.37 Crore48.00 Lacs3.51 Crore
20,00015.00 Lacs19.53 Lacs30.00 Lacs67.25 Lacs45.00 Lacs1.83 Crore60.00 Lacs4.68 Crore
25,0009.00 Lacs24.41 Lacs18.00 Lacs84.06 Lacs27.00 lacs2.29 Crore36.00 Lacs5.85 Crore
50,00030.00 Lacs48.82 Lacs60.00 Lacs1.68 Crore90.00 lacs4.59 Crore1.20 Crore11.71 Crore
Monthly Investment20% return per annum
 5 years5 years10 years10 years15 years15 years20 years20 years
 (Investment)(Total Return)(Investment)(Total Return)(Investment)(Total Return)(Investment)(Total Return)
2,0001.20 Lacs2.06 Lacs2.40 Lacs7.64 Lacs3.60 Lacs22.68 Lacs4.80 lacs63.22 Lacs
5,0003.00 Lacs5.17 Lacs6.00 Lacs19.11 Lacs9.00 Lacs56.71 Lacs12.00 Lacs1.58 Crore
7,0006.00 Lacs7.24 Lacs12.00 Lacs26.76 Lacs18.00 Lacs79.40 Lacs24.00 Lacs2.21 Crore
10,0004.20 Lacs10.34 Lacs8.40 Lacs38.23 Lacs12.60 lacs1.13 Crore16.80 Lacs3.16 Crore
15,00012.00 Lacs15.51 Lacs24.00 Lacs57.35 Lacs36.00 Lacs1.70 Crore48.00 Lacs4.74 Crore
20,00015.00 Lacs20.69 Lacs30.00 Lacs76.47 Lacs45.00 Lacs2.26 Crore60.00 Lacs6.32 Crore
25,0009.00 Lacs25.86 Lacs18.00 Lacs95.59 Lacs27.00 lacs2.83 Crore36.00 Lacs7.90 Crore
50,00030.00 Lacs51.72 Lacs60.00 Lacs1.91 Crore90.00 lacs5.67 Crore1.20 Crore15.80 Crore

(The above calculations are approximates and may vary a little bit. You may also calculate with free calculators available on various financial websites).

Remember, even though the solution looks simple we fail to maintain the discipline and thus end up into some financial crisis or the other. You also need to know and understand the following during your journey of entrepreneurship –

  • The above is just a glimpse of your Retirement Planning. But to have an exhaustive Financial Plan you must take help of a professional Financial Planner and might have to pay a small fee.

  • Apart from Retirement planning you should also focus on planning your child’s Higher education as with times it is going to be very expensive and demanding. Also, what about planning your children’s marriage?

  • How about planning your and your family’s health? Do you have a Mediclaim policy? Domestic as well as overseas (if you are travelling to abroad frequently). These days, Family Floater Policy is very popular as one policy covers the entire family!

  • What about planning Holidays that you have dreamt of during these 20 years? Have a plan for that too!

  • Now, most importantly, what happens to your family when you are not around? Something happens to you? Remember, they will need the same amount of money which you needed. Here the solution is simple – you should take a TERM PLAN INSURANCE. Term plans typically offer higher Life Coverage at a very low premium and generally not suggested by Insurance Agents as commission on these policies are very low. You should compare various Term Plans offered by Insurance Companies on the web – online buying is also possible. In the context to this article I suggest taking a Term Plan of At least a Crore – Annual premium would be around Rs. 8000 – 10,000 for a Life cover of I Crore till age 75!

  • Document all your investments and keep copy of all the receipts/ Bonds and Statements in one file, record the details in an excel file, scan the documents and keep them stored in your computer.

  • Most importantly, you should review all your investments once every year with your financial planner.

Friends, as we start our journey as an Entrepreneur we write the Story Board/ Draw a Business Plan and prepare a Financial Plan. We also seek guidance of a Mentor. But, most of the times we fail to draw a plan for our own life cycle. We feel nothing will happen to us and focus on things other than our own life. We never take professional Financial advice.. This could turn into a horror story… A recent incident really shook me. A Techie whose wife is a Chartered Accountant died recently in a road accident. Wife did know that her husband kept changing the password of his laptop where all his investments were recorded.. He never shared the password with his wife. Imagine the situation… Wife has no clue about his husband’s investments? What happened to her? How to handle and take care of situations like these?I will try writing an entire piece on this next time and try offering a solution!

Happy Retirement Planning! Or should I say Happy Financial Planning?

*(Disclaimer: Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Scheme will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on the factors and forces affecting the capital markets. Past performance of the Sponsor/AMC/Mutual Fund is not indicative of the future performance of the Scheme. Please read the Statement of Additional Information and Scheme Information Document carefully before investing. Insurance is the subject matter of the solicitation. Contact a qualified Investment Advisor before investing)

This article was also published in "Chatterpiller", the newsletter by Carma Connect https://carmaconnect.in/newsletters/2012/08/17/finger-food-2/

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