Advertisement

-

How to be Living on Interest via Mutual Funds


We know that money works through compounding interest. It is one of the secrets of the wealthy: making money work for them. Money is the best employee because:
- Money does not get sick
- It does not sleep
- It works 24/7
- It does not go into vacation leaves

and that is why it is important to let money work for us. The only challenge is to accumulate money. We need the discipline to set aside and invest our money. 

Do you want to live a relaxing retirement?
Do you want to live a relaxing retirement?
Assuming we have already accumulated enough money for retirement. Then we want to be living on interest. Using the simple retirement formula:
Annual Income x 10 = Retirement Goal

Assuming average lifestyle today is 20,000 per month, then retirement goal should be:
20,000 x 12 months x 10 = 2,400,000 ~ 3M retirement goal

To be living on interest, we invest our 3 Million in an investment vehicle like a mutual fund that earns around 10% interest per year. So: 
3,000,000 x 10% = 300,000 gain as interest
300,000 / 12 months = 25,000 per month living on interest

The 3 Million is intact, but you earn 25,000 per month. Money working for you. So even without working, your money is working for you and that is what we call financial freedom.

However, this computation is based on an ideal scenario. Let's blow this up by using actual data from mutual fund performance and let us include inflation in the scenario:

An appropriate vehicle for retirement purposes is a low-risk, low-return investment like a mutual fund most especially a bond fund. 

For this example let us use data from Philam Asset Management Inc. It's bond fund product: Philam Bond Fund existed almost 20 years in the Philippines, and to utilize their historical performance, let us use the data from the last 15 years.  

Accounting inflation for the last 15 years, using data from trading economics: it's average is around 4% per year. 
Inflation rate at 4% per year for the last 15 years in the Philippines
Inflation rate at 4% per year for the last 15 years in the Philippines
Assuming an average lifestyle of 20,000 per month today, 15 years ago due to inflation at 4% per year, the same lifestyle only cost around 11,000 - 12,000 per month. 

Since inflation is accounted in this example, instead of using the simple retirement formula, we use the 10/20 rule (Click this link to learn more about the 10/20 rule):
Annual Income x 20 = Retirement Savings
12,000 x 12 months x 20 = 2,880,000 ~ 3M retirement savings

Summarizing the data:
- Data from Philam Bond Fund 15 years ago
- Inflation rate at 4% average for the last 15 years
- 20,000 monthly lifestyle today which is around 12,000 per month 15 years ago
- 3,000,000 retirement savings

Computation:
June 7, 2001: NAVPS (Net Asset Value Per Share) is 1.4854

Ergo 3 million pesos converting into shares:
3,000,000 / 1.4854 = 2,019,658 shares

Lifestyle is ~11,000 pesos per month or ~133K per year converting into shares:
133,263.48 / 1.4854 = 89,715.55 shares needed to be redeemed 

Computing the share balance:
2,019,658 (total shares) - 89,715.55 (needed shares)1,929,942.45 shares left

The market value of the shares left is multiplied by the current NAVPS:
1,929,942.45 x 1.4854 = 2,866,736.52 pesos left

Next year:
The lifestyle is increased by 4% at the same time the value of the fund also increases. Same computation is applied above and computing from 15 years ago up to today:

Table Version:
Retirement: Living on Interest
Retirement: Living on Interest
Graph Version:
Lifestyle versus Retirement Fund
Lifestyle versus Retirement Fund
Summary:
Date: June 2001
Annual lifestyle: ~133,000
Retirement Fund: 3,000,000

Date: June 2016
Annual lifestyle: 240,000
Retirement Fund: ~4,200,000

Looking at the all the data above, the client redeems every year for 15 years, shares from his mutual fund account, living his annual lifestyle. Yet, the total market value is almost untouched or it even grew. This is what you call living on interest. 

Want to experience a life of FINANCE, BUSINESS and INVESTMENTS? Experience #LifeatIMG. Be a member now! (Click here)

Want FINANCE, BUSINESS and INVESTMENT updates? Make sure to subscribe to our free email newsletter and/or follow our social media accounts.




PS: Do you want to learn and invest in the Stock Market? Let Bro Bo Sanchez be your financial and spiritual mentor. Join us here: --> Truly Rich Club 2.0