A number of calculators are available on the Securities and Exchange Board of India (Sebi) website to assist you in managing your finances now as well as plan for retirement.
One such tool is called “Financial Goal Planner with Variable Asset Allocation”.
M Pattabiraman, a professor at IIT-Madras and founder of Freefincal, who developed the calculator, shares his insights on why the calculator is better equipped than typical calculators you find online.
Highlight Of The Calculator
The calculator’s main advantage is that it enables you to adjust your asset allocation over your investing tenure. You can allocate your funds in a fixed or variable manner among a mix of asset classes. Market conditions can determine whether the funds are held to certain percentages of asset classes or allows them to go overweight on some asset classes.
Says Pattabiraman: “Almost all calculators we see online can only calculate one return expectation, say, equity return expectations, regardless of whether a portfolio consists primarily of equity securities. In a retirement calculator, the return expectation column ideally should indicate overall portfolio return after tax.”
“The people using financial planning calculators may not hold equity investment for the entire tenure. Someone who wants to retire in twenty years and has a 60 per cent equity allocation and 40 per cent fixed income allocation, will reduce their equity allocation as they approach retirement,” he adds.
The ‘Financial Goal Planner with Variable Asset Allocation’ calculator, which is also available on the Sebi website, allows you to input this change.
“For a 20-year goal, many experts recommend that you hold that 60 per cent equity allocation for 17 years. When we have poor returns, for example, in the last two years, it negatively impacts our portfolio returns. Investors must vary their equity asset allocation much before the goal deadline,” says Pattabiraman.
Functioning Of The Calculator
The planner calculates your net corpus needed by retirement, based on your annual expenses and inflation both before and after your retirement. During this initial step, you can enter the current value of equity and fixed income investments, the realistic increases you can make to these investments, and the lump sum amount you get at retirement.
It shows you the total amount of money required as well as the net amount you have accumulated. In order to reach the target, you can change the overall return expectation and modify the corpus required.
Unlike many calculators, this one lets you input all the determinants manually, such as your retirement age and inflation rate.
Let’s Do The Math
Say, for instance, that at an inflation rate of 7 per cent after retirement, a person who expects a monthly expense of Rs 25,000 after retiring at 50 years will require a total corpus of around Rs 2.62 crore.
Assume that his/her current equity investment value, taxable fixed income investment value, tax-free fixed income investment value, and monthly contribution to the Employees’ Provident Fund (EPF) are Rs 1 lakh, Rs 3 lakh, and Rs 3 lakh and Rs 8,000, respectively. A five percent increase in all of these contributions annually along with a lump sum benefit of Rs 5 lakh at retirement results in a total corpus of Rs 1.38 crore for him/her.
Note that the calculator allows you to enter the value of all the factors mentioned earlier in the equation. You can also enter other goals and asset allocations made towards those purposes, such as your son’s or daughter’s wedding expenses.
You can choose the variable asset allocation in the last section, where you can choose the allocation in successive years you wish to make to the above asset classes. Here, the calculator shows you the corpus you can accumulate if you change your asset allocation.
