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Ramalingam Kalirajan |7015 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jul 15, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Asked by Anonymous - Jul 07, 2024Hindi

Abhishek Asked on - Jun 26, 2024 Hi I am 43 Year old Software engineer having 1.6 Cr in Mutual Funds, 30L in FD and 13 L in NPS , 30 L in EPF and also have my own house with ground floor on rent, , currently earning Rs 1L a month. I have a 13 year old son, I am planning to retire by 45 , will it be possible or do I need to actively work for at least 7 more years, I have Term life insurance of 75L and health insurance as well. My needs are mostly modest with 50K - 60K needed for monthly expenditure in a tier 3 city (Indore)

Ans: I appreciate your thoughtful approach to your retirement planning. It’s clear you’ve made some solid financial decisions. Let’s delve into your current financial standing and evaluate whether you can achieve your retirement goal by age 45 or if you need to work longer.

You have Rs 1.6 crore in mutual funds, Rs 30 lakh in fixed deposits (FDs), Rs 13 lakh in the National Pension System (NPS), and Rs 30 lakh in the Employees’ Provident Fund (EPF). Additionally, you own a house with rental income from the ground floor. You’re earning Rs 1 lakh per month and have a term life insurance of Rs 75 lakh and health insurance in place. Your monthly expenses are modest, at Rs 50,000 to Rs 60,000, given you live in a tier 3 city.

Retirement Corpus Estimation
To determine whether you can retire at 45, we need to estimate the corpus required to sustain your post-retirement lifestyle. Your estimated monthly expenses are Rs 50,000 to Rs 60,000. Let’s take the higher end, Rs 60,000, for a more conservative estimate. Annually, this amounts to Rs 7.2 lakh.

Considering inflation, which typically ranges between 6-7% in India, your expenses will increase over time. Assuming you plan to retire in two years at 45 and live for another 35 years, you need to ensure your corpus can sustain this duration.

Existing Investments and Returns
Let’s analyze the potential growth of your current investments:

Mutual Funds: With Rs 1.6 crore in mutual funds, if we assume an average annual return of 12%, your corpus will continue to grow substantially.

Fixed Deposits: Your Rs 30 lakh in FDs, assuming an average return of 6-7%, will provide moderate growth.

NPS: With Rs 13 lakh in NPS, assuming an average return of 8-10%, this will also grow, though it’s more beneficial post-retirement due to tax benefits.

EPF: Your Rs 30 lakh in EPF, assuming an average return of 8%, will grow steadily.

Rental Income and Other Sources
The rental income from your ground floor adds a stable income stream, reducing the reliance on your investment corpus. This is a valuable asset as it offers a regular income, helping cover part of your monthly expenses.

Assessing Your Insurance Coverage
Your term life insurance of Rs 75 lakh is a good safety net for your family. Health insurance is crucial, especially post-retirement, to manage medical emergencies without dipping into your savings. Ensure your health coverage is adequate and review it periodically.

Evaluating the Need for Active Work Beyond 45
Given your current financial standing and the growth potential of your investments, let’s assess whether you need to work beyond 45.

Investment Growth: If your investments grow as estimated, they should provide a significant corpus. However, early retirement means relying on your investments for a longer period, increasing the impact of market volatility and inflation.

Expense Management: Your modest expenses are an advantage. However, consider potential increases due to health-related costs or lifestyle changes. Ensuring you have a buffer in your corpus for unexpected expenses is prudent.

Income Streams: The rental income adds a layer of financial security. If this income is reliable, it will significantly reduce the burden on your investment corpus.

Benefits of Actively Managed Funds
Since you already have a substantial investment in mutual funds, let’s discuss why actively managed funds might be more suitable than index funds. Actively managed funds have the potential to outperform the market, especially in volatile conditions. Skilled fund managers can make strategic decisions to maximize returns, which is crucial for early retirees relying on investment growth.

Regular vs. Direct Mutual Funds
Investing through a Mutual Fund Distributor (MFD) with a Certified Financial Planner (CFP) credential can provide several advantages. Regular funds, although they come with a slightly higher expense ratio, offer valuable advisory services. A CFP can help you navigate market fluctuations, rebalance your portfolio, and ensure your investments align with your retirement goals.

Preparing for Medical and Other Emergencies
Post-retirement, having a robust health insurance plan is vital. Ensure your health insurance covers a wide range of medical conditions and includes a high sum insured. Consider a family floater policy if it’s cost-effective. Review your policy annually and increase coverage if necessary.

Final Insights
Retiring at 45 is an ambitious goal, but with careful planning, it’s within reach. Here’s a summary of the steps to take:

Estimate Corpus: Ensure your retirement corpus can sustain your estimated expenses, factoring in inflation and longevity.

Investment Growth: Regularly review and rebalance your investment portfolio to optimize returns and manage risks.

Insurance Coverage: Maintain adequate health and life insurance to protect against unforeseen events.

Diversify Income: Ensure multiple income streams post-retirement, including rental income and investment returns.

Professional Advice: Consider engaging a Certified Financial Planner to guide you through complex financial decisions and optimize your investment strategy.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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