Category: Financial Planning

Building a corpus for your goals

The basic idea behind having a separate corpus for each goal is to provide a sense of discipline and direction to investments. In the absence of a goal-based investing discipline, one may have the risk of overdrawing funds for the nearest goal, leaving much less for goals still to come. For instance, withdrawing too much for child’s marriage might affect the very critical retirement plan.

Having a separate portfolio for each goal helps in the below mentioned ways.

  • Know how much money is at disposal towards each goal.
  • Know exactly how much additional savings is needed to make the lagging goal back on track.
  • As a goal draws near, having a dedicated portfolio helps to shift the money to safer investment avenues to protect the already accumulated wealth from a sudden market downturn.

  • Having separate portfolio means lower chances of over or under deploying of funds towards a particular goal.

  • To keep track of progress of accumulation against each goal at regular intervals.
  • Specific financial targets helps to answer questions about risk and returns precisely. For example, one needs money for child’s higher education after three years. One may want to buy a house at least five years before retirement or plan to have a vacation plan to Europe after two years. In addition to this Rs 2,00,000 should always be available for emergency fund.

How should we build a corpus for each of our financial goals?

Here are four easy steps on how to plan and achieve the corpus required for our financial goals:

Define the goal

Some common goals are:

  • buying a car
  • buying a home
  • education/marriage of children
  • retirement

All goals can be classified in two categories:

One-time events – events like child birth, marriage, buying a car/home can be classified as one-time events as these require one-time bulk cash

Recurring events – goals such as education of children or retirement can be classified as recurring events as they need a recurring cash flow for years.

Setting a time frame for goals

After defining goals, the timeline for each goal needs to be set.

Timelines in sync with one’s risk appetite would help in deciding on appropriate financial planning.

Goals which need to be realised in less than a year can be termed as immediate-term goals. Goals which need to be realised in a time frame of 1 – 3 years can be termed as short-term goals. Medium term goals have a time frame of 3 – 7 years while goals with a time frame of over 7 years can be termed as long-term goals.

Assess the financial corpus needed for goals

It is a common financial planning practice to assume the corpus needed for goal in today’s value and adjust the value to inflation, also known as time value of money.

After considering the rate of inflation, one should decide the time required to achieve a goal and the type of goal to determine the total corpus needed.

For a one-time goal, such as down payment for a home, which a person wants to achieve in 3 years from now, one should consider the corpus needed for the down payment at current value and adjust it to the inflation rateIn the case of recurring goals, individual cash flows are adjusted to the rate of inflation. For example, consider the goal of saving corpus for a child’s higher education where one needs to pay a fee of Rs 1 lakh every year for 5 years. Let us assume that the child will be starting higher education in 5 years from now. Here, the first year fee is adjusted to inflation considering a time frame of 5 years, and the fee for second year is adjusted to inflation considering a time frame of 6 years and so on.

Prioritise the goal

Prioritising the goals are of utmost importance. Prioritising is done by ranking all goals based on the order of their importance.

Some goals should be given higher priority like child education, buying home etc.

The steps given above form the very core of financial planning. It is advisable to take professional help for a safe and secure financial future.

Building a Corpus for your Sunset years/ Retirement

The earlier a person retires, lower will be the retirement corpus! So planning for early retirement with a low corpus could well be easier than planning for normal retirement with a low corpus. It is always better to start planning early for retirement, especially if one wants to maintain the same standard of living that the person has got accustomed to.

Example of setting up retirement corpus

Mrs Bindra , 50 plans to retire at 55 years. Her current monthly expenses are Rs 40,000 and she wants to maintain the same lifestyle post retirement. Her life expectancy is 85 years. The retirement corpus needed when she retires assuming 8% inflation and 9% rate of return is around Rs 1,84,92,238.

Current age 50
Retirement age 55
Current monthly expenses 40,000
No. of yrs post-retirement 30
Average inflation 8%
Yield from annuity post-retirement 9%
Monthly expenses at retirement 58,773
Real rate of return post-retirement annually 0.93%
Corpus required at retirement 1,84,92,238

What are the smart strategies to invest for Retirement Corpus?

Attaining financial independence after retirement will be an easy task if the steps mentioned below are followed with steady discipline adopting smart investment strategies.

  • Start saving early
  • Retirement should be top priority
  • Creating a Retirement Plan
  • Understanding withdrawal strategies
  • Balancing risk tolerance and investment strategy
  • Diversifying investments & allocating assets carefully

Building a corpus for child education

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Listed below are a few effective steps to build a suitable education corpus for the children:

  1. Getting oneself insured so that one may have adequate health and life insurance coverage and the family’s needs are not compromised in the person’s absence.
  2. Maintaining a separate savings’ bank account for the children for their related  investments and other short-term requirements.
  3. Projecting and planning the corpus required in the future.
  4. Asset Allocation which involves choosing from a basket of products to build the child’s education corpus.
  5. Evaluation of the performance of the various investments (at regular periods like a 3-year or a 5-year period) to find out if they are shaping up as expected, and
  6. Moving the assets to safe debt instruments, when the goal is a couple of years away

so that any falls in the market/economy do not erode the gains made so far.

Debalina Roy Chowdhury

Para Planner Dilzer Consultants Pvt Ltd