Common Sense Living’s

TOOLKIT
The Must-Have Resouces You Need To Start
Your Retirement Plan Right Now
 Common Sense Living’s

RETIRE Rich

The Must-Have Resouces You Need To Start

Your Retirement Plan Right Now

© Common Sense Living Private Limited

All rights reserved. Any act of copying, reproducing or distributing this guide whether wholly or in part, for any purpose
without the permission of Common Sense is strictly prohibited and shall be deemed to be copyright infringement.

Disclaimer: Common Sense Living Private Limited (hereinafter referred as ‘Common Sense’) is an initiative that brings
you straightforward lifestyle and wealth-building ideas from wealth coach Mark Ford. Content and information is
sourced from Quantum Information Services Pvt. Ltd (hereinafter referred as ‘PersonalFN’), an associate of Common
Sense. Tools/calculators (‘Calculators’) are sourced and developed by PersonalFN. The calculators are based on certain
assumptions including hypothetical data input by the subscriber. These calculators are provided to CSL subscribers as
a part of their subscription to “Retire Rich” service. All the tables in this guide are for illustration purposes only and
sourced from PersonalFN unless otherwise stated. Information is provided on ‘As Is’ and to be used at one’s own risk.
This is not an offer to sell or solicitation to buy any securities and Common Sense, PersonalFN, or its associates will not
be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided
herein. Information contained herein does not constitute a personal recommendation or take into account the particular
investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation,
subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent
professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such
use or access is unlawful or which may subject Common Sense or its affiliates to any registration or licensing requirement.
Information herein is believed to be reliable but Common Sense, PersonalFN or its associates does not warrant its
completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied.
This information herein is for your personal use and you shall not resell, copy, or redistribute this or any part of it, or use
it for any commercial purpose. As a condition to accessing Common Sense content and website, you agree to our Terms
and Conditions of Use, available on our website.

Cover image sourced from: Moomsabuy/Shutterstock

Retire Rich Toolkit | 2

 Foreword

What Can You Find In This Guide?

In the Retire Rich guide we walked you through the essential steps to plan
for your dream retirement, explaining to you at each step in great detail
exactly what you need to know about retirement planning.

Here we give you shortcuts through the guide. This planner takes you
through the steps briefly, helping you to plan as you go, giving you exercises
to complete, numbers to calculate.

Grab a calculator and your bank statements to sit down and fill in the
worksheets, and as you work your way through this planner, with each step
you will have more clarity on where you are in your retirement planning
process and what you need to do from now on.

To illustrate some of the ideas we are talking about, we have also included
three case studies that will help you visualize how you should react to your
own financial situation.

Finally, we have linked the five financial calculators that will make your life
just so much easier at the end.

By the time you are done with your seven steps you will know:

• what your magic retirement number is;

• how far you are from reaching that number;
• and, how you must allocate your investments to live comfortably in
retirement.

But that is not all.

3 | What Can You Find In This Guide?

 This is merely the beginning of your planning process.

And we will not leave you here.

After you plan, you need to make some financial decisions that can lead up
to the retirement of your dreams.

What kind of life do you want to live today? Do you want to scrimp and save
to plan for tomorrow, or do you want to enjoy both today and tomorrow?

To enjoy both today and tomorrow, you need to do two things – live a richer
life today without spending more, and make more money today to put away
for tomorrow.

To help you do both of these we are also giving you two more priceless tools:

• Ideas for living a richer life without spending like a millionaire.

• And ideas for making extra income anytime, anywhere.

With these books, our guide to insurance, PersonalFN’s top 5 retirement-

friendly mutual funds recommendation, and the worksheets below, we are
giving you every resource you need for a perfect retirement plan.

So scroll down and take your first step now... good luck.

To your rich retirement,

Anisa Virji,
Managing Editor, Common Sense Living

Retire Rich Toolkit | 4

TABLE OF CONTENTS
Page

What Can You Find In This Guide? 2

Worksheet 1: Start Early, and Retire Peacefully 6

Worksheet 2: 10 Questions to Assess your Financial Situation 8

Worksheet 3: Determine your Retirement Number 12

Worksheet 4: 5 Habits to a Healthy Retirement Corpus 16

Worksheet 5: Know Where Your Money Goes 18

Worksheet 6: Evaluate Your Risk Profile 20

Worksheet 7: Define Your Asset Allocation 22

Worksheet 8: Your Ideal Portfolio 24

Worksheet 9: A Suitable Insurance Policy 25

Table 1: Calculate Retirement Lifestyle Burn Rate 14

Table 2: The Inflation Multiplier 15

Case Study 1: How Does Your Cash Flow? 26

Case Study 2: Budgeting Brings out Hidden Riches 30

Case Study 3: What an Ideal Asset Allocation Looks Like 32

Calculators 35

5 | Retire Rich Toolkit

 Worksheet 1
Start Early, and Retire Peacefully

If you hear yourself saying “I have enough time to go before I retire, so why rush?”
stop now.

Procrastination is our biggest enemy when it comes to making retirement plans.

We all tend to procrastinate – it is not just you. Our decisions are often made by
our need for instant gratification (sitting on a couch today) over delayed rewards (a
happy retirement somewhere in the future).

But we can’t say this enough: Starting early and ensuring that you have enough
time on your side is the key to successful retirement planning.

So take a deep breath, and start planning by doing the following...

Put it in your calendar now

Override your own tendency to procrastinate by forcing yourself to do the less
desirable thing. If you set aside time for planning on your calendar, chances are you
will sit down to do it, even if it just means starting with one step.

Retirement Planning Time for Myself

Date: _______________________________

Time: _______________________________

Place: _______________________________

Start Early, and Retire Peacefully | 6

Make a date with your partner

You might think ‘I am responsible for my family’s financial future, I should handle this
hassle myself.’

That is a mistake. Your partner has as much role to play in your family’s future,
whether they are an earner or not.

So get them on board – carve out dedicated time when the two of you (and others
from your family) can get together and discuss the questions in the next step.

Retirement Planning Time with My Partner

Date: _______________________________

Time: _______________________________

Place: _______________________________

7 | Retire Rich Toolkit

 Worksheet 2
10 Questions to Assess your
Financial Situation

In step 2 of the guide, we outlined ten questions to help you figure out where you
are financially and the explanation behind them. In the worksheet below, we’re
asking you to fill in your own answers so you can personalise it to get a better sense
of what your financial goals are. In step 1 you hopefully set a planning date with
your partner, and this is where the two (or more) of you can start together. You do
not need to answer all these at one go, later worksheets will help you with some of
these questions.

1. When do I/we want to retire?

2. How long will I/we live?

(Note: Life expectancy is increasing and that must be accounted for)

10 Questions to Assess your Financial Situation | 8

3. What is my/our current monthly expenditure?

4. What will be the cost of my/our expenses in the future?

(Note: At this point assuming inflation at 8% per year)

5. Do I/we have enough of a contingency corpus?

(Note: We recommend at least 6 to 24 months of living expenses set aside)

6. How much should I allocate for my health care and medical needs?
(Note: Another hard fact to remember, age brings greater need for medical attention)

9 | Retire Rich Toolkit

7. Do I have adequate life insurance cover?
(Note: Use PersonalFN’s Human Life Value (HLV) calculator to help you find out, and
read the insurance guide.)

8. What do I own?

Assets Liabilities
Self-Occupied House N.A. N.A.
Second House
Housing Loan
Stocks / Mutual Funds
Fixed Deposits / Bonds / PPF
Credit Card Dues
Gold Bars / Jewellery
Borrowed from Friends
Ancestral Property / Land

10 Questions to Assess your Financial Situation | 10

9. Can I generate cash inflows during my retirement?
(Note: We believe you should never completely stop working, instead read our book
Retire Rich Income… )

10. What do I dream of doing in my retirement?

(Note: Travel the world? Paint a masterpiece? Write a book? Your life after you’ve left
the rat race is the reason you are undertaking this planning exercise. Use this space
to write out your dream…)

11 | Retire Rich Toolkit

 Worksheet 4
Determine your Retirement Number

Unless you know where you are headed, it is very difficult to get there.

In retirement planning, as in anything, it is important to have a target in mind

which you wish to achieve, to live life comfortably in the second innings of your
life.

The absolute most important rule for retirement planning – know your magic
number!

Your Magic Number is how much you need to replace your active income and pay
for your expenses... after you’ve quit your 9-5 job. Below are Mark Ford’s 5 numbers
to calculate your number.

1. LIFESTYLE BURN RATE (LBR): how much money your current lifestyle requires
annually:

LBR = ___________________________________________

2. RETIREMENT LIFESTYLE BURN RATE (RLBR): Adjust your LBR to account for
any changes in spending patterns that will be a part of your retirement lifestyle, and
add annual inflation (can assume at 8% per year)

RLBR = ___________________________________________

3. NET RETIREMENT LIFESTYLE BURN RATE (NRLBR): Adjust your RLBR to

Determine your Retirement Number | 12

account for any additional sources of income you expect in retirement
(Note: Remember we said you should never completely stop working? Look at our book
Retire Rich Income for ideas to make extra income)

NRLBR = ___________________________________________

4. Determine the RATE OF RETURN you expect to get on your savings

(Note: We assume stocks will return an average of 15% and bonds an average of 9%
which gives us a rate of return of 12% - we are being conservative – you should come up
with your own number depending on your investment habits)

RATE OF RETURN: ________________%

5. MAGIC NUMBER: Divide your NRLBR by the expected Rate of Return to get
your magic number. Once you amass this number, you can invest it at the expected
rate, and live your dream retirement!

MAGIC NUMBER = _______________________________________!

Click here to get the Retirement Number Calculator

13 | Retire Rich Toolkit

 Table 1
Calculate Retirement Lifestyle Burn Rate

Fill in the first column with what you are now spending annually to live. Then fill
in the inflation multiplier (you can find it in Table 2 on the next page).

Multiplying column 1 by column 2 will give you an idea of the income you will
need during your first year of retirement.

Totals You Inflation Future Budget at Time of

Expense Category Spend Now Factor Retirement in ____ years
Housing Rs Rs
Household operation and
Rs Rs
maintenance

Automobile and
Rs Rs
transportation

Food Rs Rs
Clothing Rs Rs
Education Rs Rs
Medical and health Rs Rs
Personal needs, including
Rs Rs
entertainment

Donations Rs Rs
Taxes and Insurance Rs Rs
Irregular expenses (i.e.
Rs Rs
gifts, holiday spending, etc.)

Savings, investments Rs Rs

ANNUAL TOTAL Rs Rs

Determine your Retirement Number | 14

 Table 2
The Inflation Multiplier
Annual Inflation Rate
Years to
Retirement
7% 8% 9% 10% 11%

1 1.07 1.08 1.09 1.1 1.11

2 1.15 1.17 1.19 1.21 1.23

3 1.23 1.26 1.3 1.33 1.37

4 1.31 1.36 1.41 1.46 1.52

5 1.4 1.47 1.54 1.61 1.69

6 1.5 1.59 1.68 1.77 1.87

7 1.61 1.71 1.83 1.95 2.08

8 1.72 1.85 1.99 2.14 2.3

9 1.84 2 2.17 2.36 2.56

10 1.97 2.16 2.37 2.59 2.84

11 2.11 2.33 2.58 2.85 3.15

12 2.25 2.52 2.81 3.14 3.5

13 2.41 2.72 3.07 3.45 3.88

14 2.58 2.94 3.34 3.8 4.31

15 2.76 3.17 3.64 4.18 4.78

16 2.95 3.43 3.97 4.6 5.31

17 3.16 3.7 4.33 5.05 5.9

18 3.38 4 4.72 5.56 6.54

19 3.62 4.32 5.14 6.12 7.26

20 4.66 5.6 6.73 8.06 3.87

15 | Retire Rich Toolkit

 Worksheet 4
5 Habits to a
Healthy Retirement Corpus

Familiarize yourself with and start practicing these 5 principles to incorporate

them into your financial habits to begin building up to your magic number, and
subsequently your dream retirement.

1. Start early. Better yet, start now!

Hopefully, by this point you’ve begun thinking about the amount you will need
to retire. Taking into consideration inflation and interest rates, we hope you start
planning how you want to live. Make strategic decisions about...

How you will save more?

How you will invest more?
How you will earn more?

2. Spend wisely.
We don’t recommend that you scrimp and scrounge to achieve your financial goals
(for more information on that, read our Retire Rich Life book) but we do recommend
you be wise when it comes to what you choose to spend your money on. Another
thing you must discuss with your family and partner on a regular basis.

3. Create an ideal investment portfolio.

With the help of your risk profile and the age group you currently represent, you
should aim to create a healthy balance between equity, debt, gold and real estate.
This is not only to ensure growth of your wealth, but to ensure security. When times

5 Habits to a Healthy Retirement Corpus | 16

are rough, and markets are unpredictable and the economy is rocky, a good asset
allocation will ensure you stay afloat.

4. Invest regularly. As much as you can.

Whether it’s a bonus at work or you recently came into your inheritance, investing as
much as you can while still maintaining a comfortable lifestyle, is crucial for future
retirement planning. But not just in stocks, invest outside the stock market as well
– opportunities abound in business, real estate, etc. Think of your investment as a
gift you give yourself and your family – a gift of a happy future.

5. If already retired, create opportunities for regular cash flow.

The idea of retiring completely is wonderful! It is also impractical if you have yet to
achieve your financial goals. As an added benefit, you’ll be keeping yourself busy as
you get older by doing something small on the side. It doesn’t necessarily need to be
anything intensive but rather a side venture that you enjoy to keep you in the pink
financially. This is why we share ideas with you of extra income you can generate
part time, from home. You can read about these in our book, Retire Rich Income.

17 | Retire Rich Toolkit

 Worksheet 5
Know Where Your Money Goes

Here, we’ve given you several tables for you to keep track of your cash inflows and
outflows to help you get a better sense of where your money is going and how to
economize sensibly.

Cash Inflows

Income Monthly Annual

Net Income from Salary
Annual Average Income from Business
Income from Dividend and Interest
Bonus/Incentive/Windfall
Other Income
(consulting, real estate rent, etc)

Total Income

Cash Outflows

Estimated Expenses
Basic Needs
Essentials
Investments
EMI’s
Luxuries
Total Expenses

Know Where Your Money Goes | 18

Allocating Your Expenses

Example Real Monthly Annual

Income -
Basic 35%
Essentials 10%
EMIs 30%
Investments 20%

Luxuries 5%

Click here to get PersonalFN’s Cash Flow and Expense Tracker

19 | Retire Rich Toolkit

 Worksheet 6
Evaluate Your Risk Profile

Your risk profile reflects your risk tolerance and risk appetite. While we have
extensively defined both for you and outlined steps to analyse your risk profile, we
also love this great little trick.

To discover your own personal risk profile in a fraction of a second, play this simple
game.

Imagine...

You enter a bet with a friend. Your friend will flip a coin.

- If the coin comes up heads, you win Rs. 500.

- If it comes up tails, you win nothing.

- And if you choose not to flip the coin, your friend will simply give you Rs.
250 and the game is over.

The expected outcome in each of these scenarios is an average of Rs. 250. But
depending on which option you choose, you know what broad type of investor you
can be.

What would you choose?

If you choose not to play the game, and to just take the Rs. 250, or would take
even less than Rs. 250 as long as there was no risk attached; you are risk averse
or conservative. Seeing your equity portfolio fall is most likely going to make you
uncomfortable.

Evaluate Your Risk Profile | 20

If you are neutral between playing the game and winning Rs. 500, and not playing
the game and winning Rs. 250; you are risk neutral or moderate risk taker.

If you would rather take the gamble, and in fact would take it even for any amount
more than Rs. 250; you are a risk seeker or aggressive.

Your Risk Profile: ________________________________________

Once you know your risk profile, you can go on to the next step and figure out what
investment strategy suits you.

Click here to get PersonalFN’s Risk Assessment Calculator

 

21 | Retire Rich Toolkit

 Worksheet 7
Define Your Asset Allocation

Wise old adage – the wisest where investments are concerned – don’t put all your
eggs in one basket. Invest in different asset classes when you are building your
retirement portfolio, to safeguard the wealth you are building.

The different asset classes (equity, debt, gold) have different attributes which will
help you to maintain the required balance in your retirement portfolio. Higher risk
equals higher return, and the converse is true as well.

The below graph depicts the correlation of asset classes with risk and return.

Invest in each asset class, based upon your risk appetite and the number of years

Define Your Asset Allocation | 22

left for goal realisation. Follow these simple rules depending on your time frame:

Short-Term Rule: If your retirement goal is 3 to 5 years away, try and avoid expos-
ing your money to equity market risk, as far as possible. You should have predom-
inant exposure towards fixed income / debt instruments and liquid funds to keep
the corpus safe.

Medium-Term Rule: If you have a medium term horizon for your goals, i.e. if your
goal is 5 to 10 years away, you can invest partly in equity, debt and gold. You can opt
for up to 60% exposure to equity, 30% to debt and upto 10% in gold.

Long-Term Rule: If your goals are long term (i.e. more than 10 years away), you can
opt for an increased equity exposure of 70% to 80%, with around 10% exposure to
gold and upto 20% exposure in debt.

Number of Years You Have Left Till Retirement:________________________Years

23 | Retire Rich Toolkit

 Worksheet 8
Your Ideal Portfolio

So, in this worksheet we’re giving you an empty pie chart for you to fill in the
percentage of Equity, Debt, and Gold that you currently have, and another one for
you to outline where you want to be. This exercise is so you know how far or how
near you are to your financial goals for retirement. The last chapter of the Retire
Rich guide will help you identify your ideal portfolio.

Your Current Asset Allocation Your Ideal Asset Allocation

___% ___% ___% ___%

___% ___%

Your Ideal Portfolio | 24

 Worksheet 9
A Suitable Insurance Policy

As you are earning and have financial goals in mind which include your family, it
is imperative that you have optimal life insurance cover, because an event such
as death could impact your family finances and subsequently affect your financial
goals.

You also need optimal health insurance cover in today’s stressful life which may have
consequences on health. Also you grow older, the possibility of physical ailments
naturally increases. Plan for this well, so your retirement plan remains unaffected.
And our guide to insurance can help answer your insurance questions.

Your Life Insurance Policy: _________________________________________

Your Health Insurance Policy: _________________________________________

Note below the important details of your health insurance plan.

Sub-limits on Room Rent: _________________________________

Pre-Existing Diseases: _____________________________________

Co-payment: _____________________________________

Network Hospital: _____________________________________

Pre & Post Hospitalization Expenses: _____________________________________

No-Claim Bonus: _____________________________________

Exclusions: _____________________________________

Premium: _____________________________________

25 | A Suitable Insurance Policy

 Case Study 1
How Does Your Cash Flow?

In the business of financial planning we often meet people who do not have an even
flow of income and whose cash flows are erratic.

People in business or self-employed professionals such as doctors, lawyers, char-

tered accountants, consultants etc. whose source of income is variable especially
face this issue.

Some salaried people whose income mainly comprises of regular incentives/bo-

nuses are also a part of this club.

When Shyam came to us with an interesting problem where his monthly expenses
were more than his monthly fixed income, and yet his annual income could easily
cover in annual expenses, we decided to illustrate his story here to help you un-
derstand what to do if you experience a similar cash flow pattern.

Personal Details
Name Shyam (Name changed to protect privacy)
Age 35 years
Marital Status Married
Income (Fixed) Rs 75,000 per month.
Income (Variable) Rs 400,000 in September and March every year.
Liabilities Outstanding Personal Loan of Rs 2.43 lacs @ 15% p.a.
Expenses Rs 90,000 per month (including EMI of Rs 10,000 p.m.)
Cash in Bank Rs 250,000 (approx.)

How Does Your Cash Flow? | 26

35-year old Shyam earns Rs 75,000 per month as a fixed salary. Every year he
also gets Rs 4 lacs as half- yearly incentive i.e. every 6 months in September and
March. His monthly expenses were Rs 90,000 which included personal loan EMI
of Rs 10,000. His only outstanding liability was a personal loan which had an out-
standing balance of Rs 2.43 lacs at a rate of interest of 15% per annum. He also
had some cash in the bank amounting to Rs 2.5 lacs.

Here was Shyam’s concern...

Even though his annual salary of Rs 17 lacs was sufficient to meet his annual
expenses of Rs 10.80 lacs, on a monthly basis he was still left with a deficit of Rs
15,000 (Rs 75,000 income - Rs 90,000 Expenses) to meet his regular expenses. He
wanted to know how to manage his uneven cash flows and also start investing for
his financial goals.

We advised him to take three crucial steps to streamline his financial situation:

1. Contingency Reserve: We asked him to create a contingency reserve,

we generally advise people build a reserve of around 6 months. Shyam
specifically required higher amount of contingency reserve so as to fund his
monthly deficit and to make sure that his investments towards his financial
goals can continue without a break.,

2. Prepay Personal Loan: Interest on his personal loan was commanding a

rate of 15% per year, which was very high. Since there were no foreclosure
charges on the loan, we advised him to prepay the remaining balance amount
of Rs 2 lacs in October 2014 out of the incentives of Rs 4 lacs which he will
receive in September 2014.

3. Investment for Financial Goals: We also advised him to start investments

worth Rs 35,000 per month from October 2014 onwards rather than from
April 2014, as we had to make sure that he doesn’t run out of funds for his
monthly expenses.

27 | Retire Rich Toolkit

We created the following Cash Flow chart for him to get a detailed analysis of his
monthly cash in bank balance:

Cash Flow for Financial Year 2014-15

Inflows Outflows

Cash in Monthly Prepayment

Monthly Invesmentfor
Bank Salary Incentive of Personal
Expenses Goals
Loan
14-Apr 250,000 75,000 - 90,000 - -
14-May 235,000 75,000 - 90,000 - -
14-Jun 220,000 75,000 - 90,000 - -
14-Jul 205,000 75,000 - 90,000 - -
14-Aug 190,000 75,000 - 90,000 - -
14-Sep 175,000 75,000 400,000 90,000 - -
14-Oct 560,000 75,000 - 80,000 200,000 35,000
14-Nov 320,000 75,000 - 80,000 - 35,000
14-Dec 280,000 75,000 - 80,000 - 35,000
15-Jan 240,000 75,000 - 80,000 - 35,000
15-Feb 200,000 75,000 - 80,000 - 35,000
15-Mar 160,000 75,000 400,000 80,000 - 35,000
15-Apr 5,20,000 - - - - -

How Does Your Cash Flow? | 28

Here is what Shyam will achieve by taking these steps

1. He will be able to create a contingency reserve of Rs 5.20 lacs by the end of

April 2015. It will be sufficient to meet around 6 months of regular expenses,
so as to save him from the worry of funding his monthly deficit.

2. The personal loan on which he was paying a hefty interest rate of 15% per
annum can be paid off. His monthly expenses will be reduced to Rs 80,000
per month from October 2014.

3. He will also be able to start a monthly investment of Rs 35,000 which will

continue into the future without any break.

29 | Retire Rich Toolkit

 Case Study 2
Budgeting Brings out Hidden Riches

We recently conducted a cash flow awareness exercise for one of our clients, Suresh
Shah (name changed to protect privacy). It was a simple exercise but we found that
it illustrated clearly some of the misconceptions people hold about their cash flows.

Before the exercise, Mr. Shah was under the impression that the majority of his
expenses were household, fuel and utility related. After tracking his expenses dil-
igently for a month, he was surprised to learn that he was spending nearly 25%
(roughly Rs 35,000 every month) of his monthly take-home salary on family din-
ners at fancy restaurants, gifts and other such entertainment.

This high level of discretionary expenditure left him with a comparatively low in-
vestible surplus each month, so he could only contribute Rs 15,000 per month to
investments towards his family’s life goals.

He had no idea that most of this money could be saved – he assumed they were
necessary to keep the lifestyle his family was living.

After the exercise, Mr. Shah implemented a well though-out budget.

He allocated reasonable expense figures to each of his categories, keeping in mind

his family’s regular necessities and comforts, and set an upper limit on discretion-
ary spending.

On a daily basis, he recorded his expense figures and asked his spouse to do the
same. He implemented several savings strategies including taking advantage of
sales and deals, postponing non-essential purchases, and so forth.

In just 3 months, after diligent tracking and cutting back, Mr. Shah was able to bring

Budgeting Brings out Hidden Riches | 30

down his discretionary expenses to Rs 15,000, while maintaining a similar lifestyle.

Now he is able to invest Rs. 35,000 each month towards his family’s life goals i.e.
children’s educations, a new car next year and his own retirement.

Our Financial Planning team at PersonalFN has designed a downloadable Cash

Flow and Expense Tracker for you. This calculator can help you quickly prepare
your cash flows and compare it with your actual spending.

Click here to get PersonalFN’s Cash Flow and Expense Tracker.

31 | Retire Rich Toolkit

 Case Study 3
What an Ideal Asset
Allocation Looks Like

This case study illustrates how your own asset allocation exercise should work.

Let’s take the case of Ram Mohan (name changed to protect privacy) below to
find a suitable asset allocation for his financial goal:

Personal Details
35 year old Ram Mohan wanted to plan for his retirement with his spouse at the
age of 60 years. He had a decent monthly income of Rs 130,000 and his expenses
were just Rs 50,000 per month. So he could easily have a monthly surplus of Rs
80,000. Moreover, he had a long term time horizon of 25 years for his retirement
goal. Now let us have a look at his assets.

Assets
First, you assess your assets and liabilities. In Ram Mohan’s case he has a huge
advantage in that he has no liabilities. His biggest asset is the flat he lives in worth
Rs 1 crore, which he has inherited from his father. Because of his conservative na-
ture, he was holding his second big investment of Rs 50 lacs in fixed deposits. His
other small investments were Equity Mutual Funds, PPF and Gold Mutual Funds.
He also maintained Rs 3 lacs as cash in bank for any unforeseen contingencies.

Then, you take a look at how your assets are currently allocated. Let us take a
close look at Ram Mohan’s current Asset Allocation...

What an Ideal Asset Allocation Looks Like | 32

Current Asset Allocation
Since he is living in his flat, this will not be available for investment. Also, as the
cash in the bank is kept aside for contingencies, we have not included it as a part
of his current asset allocation. Considering his other assets worth around Rs 60
lacs are meant for investment, his current asset allocation in Equity is approx.
4.6%, Debt is 93.7% and Gold is 1.7%.

Ram Mohan’s challenges…

Next, look at what your goals are. Even though he had 25 years left until his re-
tirement, Ram Mohan was worried he did not have enough savings to fund his
post-retirement expenses. Also, he wondered if his investments could help him
achieve a hassle free retirement...

To understand what you will need to reach your goals, you then need to calculate
your retirement number, as we did for Ram Mohan below.

Retirement Corpus Required

Ram Mohan had current total expenses of Rs 50,000 per month and wanted to
maintain the same lifestyle after retirement as well. Assuming a life expectancy of
85 years, inflation of 10% p.a. and post retirement return of 8% p.a., he required
a retirement corpus of Rs 20.8 crores. (PersonalFN’s Retirement Calculator can
help you calculate your retirement corpus)

Finally, you need to assess your asset allocation to see if they are appropriate to
meet your goals. When we assessed Ram Mohan’s asset allocation, we found...

Inappropriate Current Allocation

Considering Ram Mohan’s long term time horizon of 25 years to retirement and
adequate monthly surplus of Rs 80,000, he had high risk taking capability on his
investments. His current allocation of 94% in debt was inappropriate, it was much
too conservative to accumulate the funds required for his retirement. He should
instead invest a higher allocation in equity that has potential to deliver higher
return over a longer time period.

33 | Retire Rich Toolkit

Deficit in Retirement Corpus
If Ram Mohan continues with his current asset allocation and invests his monthly
surplus heavily in debt rather than equity because of his conservative nature, he
will be able to accumulate only Rs 6.96 crores. (Assuming 15% return on Equity,
6.50% return on debt and 7% return on gold). He will fall short of his retirement
corpus by 13.85 crores.

Now, figure out what needs to change. In Ram Mohan’s case, his investments
need to be redistributed...
Recommended Asset Allocation
After taking into consideration his time horizon, risk appetite and the importance
of his retirement goal, we recommended an asset allocation of 75% equity, 20%
debt and 5% in gold. This allocation would help him comfortably achieve his re-
tirement goal. Let us see how.

Surplus in Retirement Corpus

If Ram Mohan follows the recommended asset allocation and invests his monthly
surplus accordingly, he will be able to accumulate Rs 21.20 crores and can easily
achieve his retirement goal. (Assuming equity delivers returns @ 15% p.a., debt
investments offer returns of 6.50% p.a. and the value of gold grows @ 7% p.a.).
He will in fact have a surplus of Rs 42 lacs.

The Conclusion
Increasing the investment amount would not have been possible for. Ram Mohan
as his income was limited. So without increasing his investment amount, he could
achieve his retirement corpus by just changing his asset allocation.

In your own case, you might have thought you can achieve your financial goals
only by increasing your investment. That is not necessarily the case. Just changing
your asset allocation can also help a great deal.

Hopefully Ram Mohan’s case has helped you to understand the importance of as-
set allocation and how it can help you to achieve your financial goals by investing
the same amount which you might be currently investing. Moreover Ram Mohan
had a long term time horizon which helped him increase his exposure towards
risky assets. This also indicates that starting early and planning prudently and in a
timely manner may help one achieve his key life goals.

What an Ideal Asset Allocation Looks Like | 34

 Calculators

These calculators have been created by PersonalFN to make financial planning a

breeze. At every step these will help you get a better sense of your numbers and the
direction you need to take in your financial planning process.

Click here to get the Cash Flow and Expense Tracker.

Click here to get Human Life Value Calculator

Click here to get Retirement Number Calculator

Click here to get Real Return Calculator

Click here to get Risk Assessment Calculator

35 | Calculators