Case 078Goal and retirement planningCore

A 33-year-old has a Rs 1.5 lakh monthly surplus, needs a Rs 60 lakh home down payment in 4 years and wants to retire at 60. How do you split the surplus, and how do you invest each part?

The situation

Sahil Mandrekar is 33, salaried, with a stable job and Rs 1.5 lakh a month left over after expenses, rent and his insurance premiums. He has an emergency fund already. He wants Rs 60 lakh for the down payment on a flat in four years, and he wants to retire at 60, in 27 years.

Use illustrative returns: 7% a year for short-term debt and 10% a year for a diversified equity portfolio over long periods. After buying the flat, his home loan EMI will take Rs 50,000 of the surplus, since it replaces rent he pays today.

Your task

How much of the Rs 1.5 lakh goes to each goal, into what, and what does the retirement side build?

Quick check

Why not put the home money in equity too, since equity is expected to return more?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Send about Rs 1.09 lakh a month to a debt bucket for the flat and the remaining Rs 41,323 to equity for retirement. At an assumed 7%, the debt bucket reaches Rs 60 lakh in 48 months. After the purchase, Rs 1 lakh a month goes to retirement; at an assumed 10% the equity bucket builds about Rs 13.1 crore by 60, roughly Rs 2.7 crore in today's money.

Step 1Why does each goal get its own bucket?

Because the two goals have different dates, and a date decides how much a fall can hurt. Money for next month's school fees does not belong in the same jar as money for a daughter's wedding in twenty years. The flat needs a known sum on a known date, so its money goes where the value on that date is close to certain; retirement is 27 years away, so its money can take the swings that come with higher expected growth. Mixing them hides the short goal's risk inside a long-horizon average.

Step 2How much must go to the flat each month?

Solve for the monthly amount that grows to Rs 60 lakh. At 7% a year, each rupee saved monthly for 48 months grows to a combined Rs 55.21, so the monthly amount is Rs 60 lakh divided by 55.21. That is about Rs 108,677 a month, leaving Rs 41,323 for retirement during the four years. The debt bucket should be short-term debt funds or recurring depositsA bank deposit where a fixed sum is paid in each month for a fixed term, earning a rate set on the day it is opened. maturing near month 48, so their value in year four does not depend on markets that year.

The relationship
P=60,00,000[(1+0.07/12)48−1]/(0.07/12)=60,00,00055.21≈Rs 1,08,677P = \frac{60{,}00{,}000}{\left[(1 + 0.07/12)^{48} - 1\right] / (0.07/12)} = \frac{60{,}00{,}000}{55.21} \approx \text{Rs } 1{,}08{,}677
Pmonthly amount into the home bucket
0.07/12assumed monthly return on short-term debt
48months until the purchase
55.21what Re 1 a month for 48 months grows to
What it says in wordsDivide the target by what one rupee saved every month becomes by the goal date.
One surplus, two dates: each rupee goes to the bucket whose date it servesMonthly surplusRs 1,50,000Rs 108,677Rs 41,323Home bucket: debt, 4 yearsShort-term debt funds and depositsAssumed 7% a year, 48 monthsReaches Rs 60 lakh in year 4Retirement bucket: equity, 27 yearsRs 41,323 for 4 years, then Rs 1 lakhAssumed 10% a year to age 60About Rs 13.1 crore at 60After year 4 the home EMI takes Rs 50,000 and retirement takes the other Rs 1 lakh
Sahil's Rs 1.5 lakh surplus splits into about Rs 1.09 lakh a month to a debt bucket that reaches Rs 60 lakh in four years and Rs 41,323 to an equity bucket, which gets Rs 1 lakh a month after the purchase and builds about Rs 13.1 crore by 60.
Step 3What would go wrong if the flat money went into equity?

On the average path, equity at 12% would turn the same Rs 1.09 lakh a month into about Rs 66.5 lakh. But a 25% fall in the months before the purchase leaves about Rs 49.9 lakh, Rs 10.1 lakh short, and he cannot wait two years for a recovery while the seller waits. The extra Rs 6.5 lakh on the good path is not worth a Rs 10 lakh hole on the bad one. That asymmetry, small upside against a hard miss on the date, is what goal-based planning is built on.

The home money in month 48: the risk that matters is the date, not the averageDebt at 7%Rs 60.0 lakhon timeEquity at 12%, good pathRs 66.5 lakhEquity, 25% fall late in year 4Rs 49.9 lakhRs 10.1 lakh shortthe Rs 60 lakh down payment
The home money reaches Rs 60 lakh on time in debt; in equity it might reach Rs 66.5 lakh, but a 25% fall late in year four would leave Rs 49.9 lakh, about Rs 10 lakh short of the down payment.

State the limits plainly. The retirement figure of about Rs 13.1 crore rests on an assumed 10% for 27 years, on the EMI taking only Rs 50,000 and on his surplus never rising. It is a direction, not a promise; the plan is reviewed each year, and every pay rise adds to the retirement side.

Where candidates lose it

Candidates split the surplus by a rule, half and half or 70/30, instead of solving for the amount the dated goal needs. The flat decides its own number; retirement gets what is left.

The second miss is putting both goals in one balanced fund. It looks tidy, but it leaves the down payment exposed to a fall in year four and holds retirement money too conservatively for 27 years.

What the interviewer asks next

  • Prices of flats in his area rise 8% a year. What does that do to the Rs 60 lakh target and the monthly amount?
  • At what point in the four years would you start moving any equity savings for the flat into debt, if he insisted on equity?
  • He gets a Rs 10 lakh bonus in year two. Where does it go?

Company names and figures are illustrative.