A 45-year-old surgeon has Rs 8 crore from selling his clinic stake and a Rs 1.2 crore home loan, and wants Rs 40 lakh a year in today's money from 55. Should he prepay the loan, what are his return and risk objectives, and what is a first allocation?

Prepay the loan, set a required return of about 5.4% a year, and start near 40% equity, 50% bonds and 10% gold. Prepaying earns a certain 8.6% and frees Rs 14.3 lakh a year of savings. The goal needs about Rs 16.6 crore at 55, which Rs 6.8 crore plus Rs 39.3 lakh a year reaches at 5.4%. The mix is assumed to earn about 8.8%, a margin for bad years, not a reason for 80% small caps.

Compare what the loan costs with what the same money would safely earn. Prepaying a 8.6% loan is a certain 8.6% return, paid in money he has already been taxed on, and nothing in his safe assets beats that after tax. A bond or deposit yielding around 7% before tax earns less once interest is taxed at his slab. The tax deduction on home loan interest softens the loan's cost, but it is capped and depends on the tax regime he chooses; confirm the current rules and his regime before counting it. Keep six to twelve months of spending liquid, then prepay. It also frees the Rs 14.3 lakh EMI, taking his yearly savings to about Rs 39.3 lakh.

Inflate the spending first: Rs 40 lakh at 6% for ten years is Rs 71.6 lakh in the first year of retirement. That amount then rises 6% a year for 30 years while the money earns 8%. The present value of that rising stream at 55 is about Rs 16.6 crore, and that number, not his risk appetite, is the target. It is like planning a road trip by first measuring the distance, then deciding how fast to drive, rather than choosing the speed because the car can do it.

Return objective: about 5.4% a year nominal until 55, enough to fund Rs 40 lakh a year in today's money to 85, with a margin above it. Risk objective: his ability to take risk is high, because of a ten-year horizon, a large income and a fully funded goal. His willingness is stated as high but untested by a real fall. His need for risk is low, and in an investment policy statement the need sets the ceiling: there is no reason to run 80% small caps to earn a return the goal does not require. A limit that a fall of 15% in a bad year is acceptable gives both of you a number to hold to.

Because it adds a large chance of a painful fall and buys nothing the goal needs. At 40% equity he is expected to reach about Rs 21.7 crore at 55 against Rs 16.6 crore needed; that surplus is the cushion for a poor decade. An 80% small cap book that fell 50% in a bad year would lose about Rs 2.7 crore, and the likeliest way to miss a funded goal is to sell at the bottom. Review the mix every year and as 55 approaches, when the drawdown needs its own plan.