Retirement Planning: Retirement is an important stage for everyone. It’s a time when one needs a regular income for their daily expenses but may not have the source to earn income.
In such a stage, the return from their investments may come handy.
They may make monthly, sporadic, or one-time investment in their working years and let this corpus grow for their retirement years.
In the retirement stage, when they may not have any income source, they may start withdrawing it in phases through a systematic withdrawal plan (SWP).
Such a combination for one-time investment and SWP may help them get funds for their retirement for decades.
Know how investment grows in the long term, how the power of compounding plays a key role in creating a sizeable retirement corpus, and how from a Rs 5,00,000 one-time investment and SWP one may generate Rs 87,000 monthly income for 30 years.
What is retirement corpus?
It’s a pool of money that works as the fund for your retirement.
You can withdraw an amount from it every month for your expenses.
The purpose of the retirement corpus is to keep you financially free in the retirement days.
How much should be retirement corpus?
It should not run dry for your expected life. If you have a post-retirement life expectancy of 25 years, it should suffice for that period. Here, you need to keep in mind that prices of things will rise because of inflation.
Investment for retirement corpus
One can make a monthly or a one-time investment for retirement planning, or they may invest when they have a surplus amount.
But for a sizeable retirement corpus, a healthy practice is to start investing early and let money grow for years.
The corpus is likely to grow faster with time because of the power of compounding.
Types of investment for retirement planning
If one is in their early stage of career, they can keep their retirement investment portfolio equity-heavy.
However, if they are in their 40s, they may also need to keep a good proportion of fixed interest assets.
It can be a combination of equity and debt assets, which can provide stability and growth to their retirement portfolio.
One-time investment (lump sum) for retirement
One may make a lump sum investment in a mutual fund for retirement.
Since it is impossible to time the market, it is impossible to know if the lump sum investment will grow in the near term.
However, the lump sum investment can be more suitable in the long term.
A small amount can increase to a large corpus if one lets their corpus grow.
From Rs 5,00,000 one-time investment to Rs 87,000 monthly income for 30 years
Let’s break up this strategy into 2 phases.
In the first phase, we will show how a Rs 5,00,000 one-time investment can grow in 30 years, and in the second phase, we will show how one may withdraw Rs 87,000 a month for 30 years.
Retirement corpus in 30 years from Rs 5,00,000 one-time investment
Here we are taking the example of a 25-year-old investor who makes a Rs 5,00,000 one-time investment.
The investor gets a 12 per cent annualised return on their investment and lets the corpus grow for 30 years.
In 30 years, estimated capital gains will be Rs 1,44,79,961, while the estimated retirement corpus will be Rs 1,49,79,961.
The investor will have this corpus at 55 years of age.
Income tax on retirement corpus
As per the current long term capital gain (LTCG) tax rate of 12.5 per cent, the estimated tax on Rs 1,49,79,961 will be Rs 17,94,370.125 (this also includes Rs 1,25,000 relaxation on LTCG).
After paying tax, the estimated balance retirement corpus will be Rs 1,31,85,590.875. This will be the estimated corpus for SWP investment.
How SWP investment works
In an SWP investment, you invest a lump sum amount in a mutual fund and tell the fund house to pay you a fixed amount every month.
The fund house sells net asset value (NAV) units of the same amount from your investment for it.
But at the same time, your investment grows also.
So, if your rate of withdrawal is less than the rate of growth, your retirement corpus won’t end, and you may withdraw amounts from it forever.
How to get Rs 87,000 monthly income for 30 years
The investor, who is 55 years old now, may invest the corpus in a conservative mutual fund(s) where they get an annualised growth rate of 7 per cent.
At this growth rate, a Rs 1,31,85,590.875 corpus can provide Rs 87,000 monthly income for 30 years.
It means the investor may get Rs 87,000 a month till the age of 85.
In 30 years, the total withdrawal amount will be Rs 3,13,20,000, while the remaining balance will be Rs 2,64,203.
(Disclaimer: These are projections and not investment advice. Do your own due diligence or consult an expert for financial planning.)
