Making provisions for a regular and stable monthly income is among the most common requests dealt with by Personalfn's team of financial planners.
Our team recently interacted with a 50-year-old gentleman who wanted to plan for a monthly income starting 5 years hence, i.e. at the age of 55 years. This gave him an investment tenure of 5 years. Also the client had an appetite for high risk investment avenues.
Our target was to help the client build a corpus that would provide for his monthly expenses which amount to Rs 10,000 at present. In other words, we were required to create an investment plan, which would help the client earn Rs 10,000 per month and thereby ensure that he can maintain the present lifestyle, 5 years from now.
Providing for monthly income
| Monthly income required (Rs) | 10,000 |
| Time available (years) | 5 |
| Inflation (%) | 5 |
| Adjusted monthly income (Rs) | 12,763 |
| Expected return from corpus (%) | 5 |
| Corpus required (Rs) | 3,063,076 |
To begin with, we need to compute how much Mr. Kumar (the name has been changed to guard the client's privacy), will need every month to meet his regular expenses. Assuming an inflation rate of 5% per annum, Rs 10,000 now would be worth Rs 12,763 at the end of 5 years. This will be Kumar's monthly outflow.
Furthermore, it is pertinent that the savings be treated as sacrosanct and hence, they should not be exposed to high risk levels. In result, we shall assume that Kumar's funds will be invested in a low-risk investment avenue that fetches a return of 5% per annum.
Given the specifications, Kumar would need a corpus of Rs 3,063,076 in lump sum and has a time period of 5 years to achieve this target.
Investing to build a corpus
| Sum to be accumulated (Rs) | 3,063,076 |
| Time to build the sum (years) | 5 |
| Expected return on investments (%) | 15 |
| Annual investment (Rs) | 454,302 |
| Monthly investment (Rs) | 35,481 |
Since Kumar has an appetite for high risk investment avenues, his portfolio can be composed of pre-dominantly equity-oriented investments like diversified equity funds.
Assuming that they earn a return of 15% per annum over the next 5 years, his annual investment would work out to Rs 454,302 i.e. an investment of approximately Rs 35,481 every month.
However, this plan has a fundamental flaw. It fails to take into account the change in Mr. Kumar's risk profile over the investment tenure. The plan assumes that Mr. Kumar can take on the same degree of risk even when he is nearing the target date.
This may not be the case; in fact, as the corpus grows over a period of time, it would be prudent to expose the savings to a lower degree of risk. Hence we shall incorporate an element of debt in the portfolio. The debt component will account for 50% and 75% of the investments in years 4 and 5 respectively.
Considering that the debt portfolio is likely to yield a return of around 7% per annum, the investment amount will have to be revised. In line with the new investment plan, the monthly investment will increase from the earlier sum of Rs 35,481 to Rs 57,297.
As in most cases, our view was that the investment process would have been easier (read lower investment) for Kumar, had he approached us earlier, i.e. if he had more time on hand.
A similar investment process can also be undertaken for individuals who wish to plan for their post-retirement needs. As stated earlier, the degree of ease with which the targets are achieved will largely be determined by the time available.
It is possible for individuals to ensure that they have a stable income stream even after their working life. All it takes is sound planning and a disciplined investment approach; a good financial planner will help you achieve both the aforementioned.
If you haven't employed the services of a financial planner as yet, now is the time to do it!
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