Dear Readers,
I am turning 45. Married with son admitted to professional college last year and daughter stepping in this year. I have been working for 23 years in IT industry and through some plain living and saving have built up some corpus. I have plans for an early retirement within the next 1.5 years, and I request some key inputs to execute the plan. Without going into the actuals, here are some details on the plan:
I. Retiral accounts (cumulative FDs, monthly interest FDs, debt mutual funds, tax free bonds, 1 jeevan anand policy completed 7 years, 1 ICICI lifetime super pension completed 5 years). The %age split of different investments are: (FDs+Bonds: 52%, Debt Funds:30%, Others: 18%). Portion of this generates monthly income & the rest keeps appreciating at FD/Bond rates (post tax).
II. Known future expenses: College expenses, marriage expenses, health charity etc:
These constist primarily of FDs: 70%, Debt Funds: 20% Equity & equity funds: 10%
1. College fund: To take care of all college expenses till undergraduate professional degree.If kids qualify for higher education with stipend then will go for it. Else will give basic life support till they get job.
2.Marriage expense for kids: Reasonable allocation for Marriage expenses.This is purely a lifestyle decision but costs increase each year. Right now it is around 15% of the total corpus.
3. Health fund: Currently covered by employer. After retirement Health insurance : (the annual interest from the health component will be used for paying health insurance). Currently 2% of total corpus. Need to increase this to atleast 4%
4. Emergency fund: 10 months of planned monthly expense. (Currently kept in savings bank for immediate liquidity)..
5. Monthly expense: will be a fixed %age (say 4%) withdrawal from the retiral component. This will be for food, clothing, casual visits to the doctor, electricity and telephone bills, & sparse outings.
6. House: completely paid off, no loans. Sufficient for 4 people, + aged mother. This is 1 floor of a duplex co-owned with brother.
7. Car: No loan. 7 yrs old now. If sufficient funds are available will go for replacement. Otherwise will maintain this one. Has been used only during weekends. Commute to office on two wheeler. This needs replacement. Both vehicles needed during retirement for casual transportation, dropping kids at bus stop, and emergencies..
7. Charity: Currently 1% of total corpus. If ever I work beyond the planned retirement date, will focus on increasing this component only.
8. Control expenses: No cable. No post paid cell plans, 1 credit card – no outstanding. (Used for any online purchases only of books etc, immediately paid off within due date). Never had (and will never have) A/C ofcourse. Rare outings to theme park or a multiplex are ok.
9. Tax: Withdrawals @4% rate, and annual appreciation in FDs attract tax. Total taxable income from retirement start date will fall in 20% tax bracket. Always on the lookout for parking funds to bring this to lower end of 20% bracket. I do not aim to breach the 10% bracket if this means higher risks in equity related instruments. Tax free bonds can reduce risk and also divert funds from taxable FDs. No withdrawals from any mutual funds for the 1st year. Delay withdrawal as much as possible for getting max advantage of indexation.
10. From now till retirement date I plan to:
– Create a corpus for house/transport maintanance: painting, minor repairs for house and vehicles.
– Optimize/diversify asset allocation, across investment avenues: increasing equity through sip (if needed)
– Stream line monthly income streams to get close to amount actually spent per month.
– Increase allocations within select items (like charity) above to get a better balance
– Firm up transportation options (renovate or buy car/2-wheeler)
– Provide for any unknown expenses (big question mark here :-))
Now the questions:
1. What are the red flags. Where can things go wrong ?
2. Equity (and equity funds) is 5% of total corpus. Does this need to be increased ?
3. Does the retirement component need to have equity for 4% withdrawal rate ?
4. Is term insurance required if 100% of retirement corpus is nominated to wife and kids ?
I have been following Jagoinvestor articles and forums for a few months now and really impressed with the good work people here are doing. Hope to see your valuable thoughts on the above.