Typically, the case studies that we discuss involve individuals whose financial woes are resolved satisfactorily. But then, it is not entirely uncommon to encounter individuals whom we are unable to optimally assist. The reason – they approach us a bit too late in the day i.e. they have little time on their hands. We present a case study that highlights the perils of procrastination, and the importance of investing regularly and having access to quality advice.

Facts of the case

The client, say Mr. Kumar (name changed to protect his privacy) is a 55-Yr old individual, employed with a private sector enterprise. His family comprises of his wife (a homemaker) and a son. Mr. Kumar earns an annual salary of Rs 10,00,000; broadly speaking, his annual expenses amount to Rs 500,000 (Rs 350,000 towards household expenses and Rs 150,000 towards traveling/holidays).

When we met Mr. Kumar, he expressed his desire to retire in 5 years. Also, he wanted to provide for his son’s 2-Yr MBA programme, 7 years down the line. The outlay for the same would be around Rs 500,000 per annum (pa). Finally, with more time on hand, he wanted to travel more frequently, implying additional expenses, around Rs 250,000 pa.

Mr. Kumar holds an investment portfolio which at present is worth nearly Rs 4,000,000. The same is lop-sided in favour of assured return schemes like bonds, fixed deposits and small savings schemes, several of which rank poorly on the liquidity front. Only a minor portion of the portfolio is allocated to equities and mutual funds. Also, he has bought an endowment plan that will offer him a maturity value of Rs 1,000,000 (after taking into account the bonus).

Personalfn’s team of financial planners went about their task of drawing out a retirement plan for Mr. Kumar, working out his post-retirement cash flows and investment plans. The intention being to determine what retirement kitty would be required 5 years hence.

What the numbers suggest…

To begin with, we computed the future value (as on the retirement date) of Mr. Kumar’s present investment portfolio. Assuming an average growth rate of 8% pa, it amounted to a maturity value of around Rs 5,877,000. Then we computed the post-retirement expenses (household expenses, travel costs and the corpus required for the son’s education), after factoring in inflation and assuming a life expectancy of 75 years. And the numbers proved to be eye-openers, to say the least. Over a 5-Yr period, Mr. Kumar needs to accumulate a retirement kitty of approximately Rs 4,900,000, over and above his existing investments to meet all the aforementioned expenses. This in turn, amounts to making a monthly investment of Rs 61,000 or an annual investment of Rs 772,000 (assuming a 12% CAGR).

Given how Mr. Kumar’s finances are placed at present, it would not be possible for him to save and invest the required monies. Even if he were to invest his entire savings from now until retirement (i.e. around Rs 500,000 pa), the target seems unachievable.

What needs to be done…

Mr. Kumar finds himself in a rather unenviable situation. He faces the prospect of having to compromise on his lifestyle. For instance, post-retirement, he can consider holidaying less frequently and/or curtailing his household expenses. Mr. Kumar can consider not retiring at the end of 5 years, given that he is employed with a private sector enterprise. Or maybe post-retirement, he can think of working as a consultant in order to supplement his finances. Finally, he can explore the possibility of asking his son to avail of an education loan to finance his higher education.

Simply put, barring the possibility of receiving an unexpected windfall, Mr. Kumar’s dream of a picture-perfect retirement has certainly gone awry.

As we mentioned earlier, we wanted to use this case study to highlight the downside of not starting the retirement planning process early. On the surface, Mr. Kumar earning a handsome salary and leading a comfortable lifestyle might give the impression of all being in order. But as is often the case, the habit of making investments in a sporadic manner and leaving too much for later, does spell trouble.

In conclusion, providing for retirement need not be a difficult task. All one needs to do is plan methodically and have sufficient time on hand. And the implications of not doing so, should motivate one to get started in earnest, at the earliest.

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