You may think that Rs.50 lakh or Rs.1 crore is enough to retire on today, but the question is with the continuous price rise, will it be enough for 25 or 30 years? If your retirement is still 20-25 years away you need to plan all the more carefully as even 50 lakhs may be a minuscule amount at that point of time.
Even for people who have a reasonable size of savings, the main problem in retirement planning in India is to compensate for inflation. If India were a well-managed economy with a 2-3% inflation rate, your choices would have been simple. Over the average 25-year period during which a retiree needs his income, you can expect prices to rise by about four times assuming an inflation rate of 6%. If the inflation rate were to be a reasonable 3%, they would barely double over that period.
The question is how to compensate for this inflation. If you need Rs.30000 a month for your monthly expenses today, accounting for 6% inflation you will need Rs.53700/month after ten years, and Rs 72000/ month after 15 and Rs.96200/month after 20 years. Not only will your withdrawals need to increase, the remaining capital must also increase in order to support those higher withdrawals. It’s not an easy problem to solve.
One simple rule that we can follow is to withdraw only the surplus returns that you get from your savings above the rate of inflation. Thus if your returns are 9% and inflation is at 6% you withdraw only 3%. This ensures that you don’t get poorer as you get old. It also shows why having only bank fixed deposits and other fixed deposit which barely manages to beat inflation in your portfolio is a bad idea.
One other option is to build an additional retirement corpus which will give you returns above your current expense as explained in the chart below. Typically one should have a corpus of 24 times ones current yearly expense and invest in investments with expected returns of 8-9% on an average assuming an additional life expectancy of 20-25 years.
Year | Monthly expense (Rs.) | Yearly expense (Rs.) | Corpus Fund (Rs.) | Yearly Returns (Rs.) |
Today | 30,000 | 360,000 | 8,640,000 | 691,200 |
5 | 40,147 | 481,761 | 10,335,150 | 826,812 |
10 | 53,725 | 644,705 | 12,027,721 | 962,218 |
15 | 71,897 | 862,761 | 13,446,545 | 1,075,724 |
20 | 96,214 | 1,154,569 | 14,101,880 | 1,128,150 |
25 | 128,756 | 1,545,073 | 13,151,945 | 1,052,156 |
* Assuming a corpus of 24 times current yearly expense, inflation @ 6% & expected return @ 8% on investment | ||||
One more option is to invest in a Debt oriented MIP or an Equity oriented Balanced Fund. Typically MIPs invest about 70-80% in debt & the balance in equity & in the long run you can expect 10-11% returns from your investments. Given that there is a tax on dividend in debt funds in India, the best way is to invest and then do a monthly or quarterly SWP (Systematic Withdrawal Plan) of about 6% of your fund.
A slightly riskier option would be investing in a balanced fund which has a higher weightage of equity and go for a dividend option or a SWP, but dividend may not be regular or guaranteed. You can expect returns of 11-12% on balanced funds in the long run.
One must also remember that this will cover only your monthly expenses & given the cost of medical emergency/hospitalization once must be adequately covered foe mediclaim/health insurance for old age. Time & again we see old age related ailments burning a big hole in your pocket and making a major dent to your retirement corpus.
As seen above the figures thrown up by excel sheets and online retirement calculators can be intimidating. To some investors, such enormous figures seem so unattainable that they just stop bothering about retirement. That’s a mistake. Retirement cannot be wished away and everyone will stop working one day. The pay cheques will stop coming, but your living expenses won’t end but keep rising due to inflation. To achieve the above retirement corpus one must start investing as early as possible, should be disciplined & lastly should have a proper mix of debt & equity related investments. Only investing in debt may make it difficult to achieve your goal given conservative returns of about 8% while you can conservatively assume returns of 12-14% from equities they come with some amount of risk. I will discuss the various tools of retirement investment mix in the next article.
Some tips to boost retirement corpus:
1. Don’t withdraw your EPF but transfer it when you change jobs. This should be a priority at the new workplace.
2. Automate your savings by taking the SIP route. This way, even if you forget to invest one month, your bank won’t.
3. Whenever you get a raise, allocate 15-20% of the additional income to savings. You won’t even notice the outgo.
4. Don’t dip into your PF for your child’s education. Take a loan instead. It helps inculcate the saving habit in the child.
5. Monitor your retirement portfolio’s performance every 2-3 years and take corrective steps if required. The retirement fund has to be built up over a long period of 20-30 years so don’t get swayed away from short term fluctuations especially from equity investments.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’