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How does one plan for a monthly income?
A case study
Making provisions for a regular and stable monthly income is among the most common requests dealt with by financial planners. Our team recently interacted with a 50-year old gentleman, let's call him Mr Kumar who wanted to plan for a monthly income starting 5 years hence i.e. at the age of 55 years. This gave him an investment tenure of 5 years. Also, the client had an appetite for high risk investment avenues.
 Our target was to help the client build a corpus that would provide for his monthly expenses that amount to Rs 10,000 at present. In other words, we were required to create an investment plan, which would help the client earn Rs 10,000 per month and thereby ensure that he can maintain the present lifestyle, 5 years from now.
Providing for monthly income
| Monthly income required (Rs) |
10,000 |
| Time available (years) |
5 |
| Inflation (%) |
5 |
| Adjusted monthly income (Rs) |
12,763 |
| Expected return from corpus (%) |
5 |
| Corpus required (Rs) |
30,63,076 |
To begin with, we need to compute how much Mr. Kumar, will need every month to meet his regular expenses. Assuming an inflation rate of 5% per annum, Rs 10,000 now would be worth Rs 12,763 at the end of 5 years. This will be Mr. Kumar's monthly outflow.
Furthermore, it is pertinent that the savings be treated as sacrosanct and hence, they should not be exposed to high risk levels. In result, we shall assume that Mr. Kumar's funds will be invested in a low-risk investment avenue that fetches a return of 5% per annum.
Given the specifications, Mr. Kumar would need a corpus of Rs 30,63,076 in lumpsum and has a time period of 5 years to achieve this target.
Investing to build a corpus
| Sum to be accumulated (Rs) |
3,063,076 |
| Time to build the sum (years) |
5 |
| Expected return on investments (%) |
15 |
| Annual investment (Rs) |
454,302 |
| Monthly investment (Rs) |
35,481 |
Since Mr. Kumar has an appetite for high risk investment avenues, his portfolio can be composed of pre-dominantly equity-oriented investments like diversified equity funds. Assuming that they earn a return of 15% per annum over the next 5 years, his annual investment would work out to Rs 4,54,302 i.e. an investment of approximately Rs 35,481 every month.
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