Q. I am 55 years old. I have about ₹3 crore accumulated towards retirement and plan to work for the next 2 years. During this time, I can potentially save about ₹3 lakh a month and will have an additional lump sum of ₹30 lakh upon retirement. I have no loans but do anticipate future expenditure of about ₹1.2 crore. As per my calculations, I would need about ₹1.5 lakh per month when I retire to my farm house after providing for 15% inflation over the next three years. I will have rental income of about ₹30,000 a month if I keep my assets. I have disposable assets worth ₹2 crore that I don’t intend to dispose unless there’s an emergency.
Can you tell me how best to plan the investment of the accumulated corpus as well as the recurring amounts. I would specifically like to know what instruments and what methods. What are the risks with this strategy? What can go wrong? Assuming I would need to provide for living expenses until I am 85, what’s the inflation I should budget for annually? Ideally, I would look for near risk-free, 6-7% returns post tax.
Subramaniam K
A. The corpus you would need to retire comfortably would be based, not just on your expected living expenses post-retirement, but also on your dependents, health status, the amount of insurance you have against health issues and emergencies, as also the inflation and return assumptions pre- and post-retirement. To prevent a sharp dent to your capital from health or other emergencies, we suggest you get sufficient health insurance and household insurance and maintain one year’s expenses in a liquid avenue such as fixed deposits with leading banks, to tackle emergencies. The health insurance can be a combination of a base policy and a super top up policy, that will kick in once the base policy is exhausted.
Having said this, you can work out your required retirement corpus based on the following thumb rules and assumptions. There are several online calculators that can help you. One, for Indian conditions, it would be desirable to have about 30 times your expected living expenses at the time of retirement to see you through your retirement years. That is, if your annual expenses are ₹18 lakh a year at the time of retirement, you should strive to have about ₹5.4 crore to comfortably tide over your retirement years. If rents etc. will take care of ₹30,000 a month and reduce your annual outgo to about ₹14.4 lakh a year, your corpus should be in the range of ₹4.3 crore. However, this is ballpark and could vary based on your assumed inflation rate and investment pattern. Two, you can assume an inflation rate of 6% per annum pre- and post-retirement, based on consumer price inflation trends in the last two decades. Three, your longevity assumption of 85 years may not be realistic as India’s life expectancy across socio-economic strata is today close to 70 years. Folks from higher income strata can expect to live much longer. A longevity assumption of 90 would be safer. Four, striving for a post-tax return of 6-7% from safe avenues would be somewhat unrealistic. It would be better to peg your post-tax return assumption at 5-6%. Your calculations can go awry if inflation or your living expenses over-shoot your assumptions or investment returns fall short, or taxation of returns changes in your retirement years.
As to the options you can use to derive a regular income post-retirement, here are a few:
1. Safe, sovereign-backed instruments such as the post office Senior Citizens Savings Scheme and Post Office Monthly Income Scheme offering 7.4% and 6.6% per annum respectively.
2. Pradhan Mantri Vaya Vandana Yojana from LIC, which offers an assured pension at a 7.4% annual rate for 10 years, for an upfront investment up to ₹15 lakh.
3. Government of India dated securities or State Development Loans (SDLs) can now be bought in primary auctions from RBI on the RBI Retail Direct Gilt platform.
4.Guaranteed pension schemes from LIC and private insurers.
5. Investments in bank FDs or FDs of highly rated NBFCs.
6. Investments in the growth options of debt, hybrid mutual funds, from which you can set up Systematic Withdrawal Plans to receive regular cash flows.
(The writer is Aarati Krishnan)
