Last Updated on July 28, 2024 at 6:04 pm
A reader asks, “Can a 45-year-old get Rs. one lakh monthly income with Rs. 3 Crores retirement corpus?”. We will assume the reader wishes to retire immediately with a corpus of Rs. 3 crores.
Let us punch this scenario into the freefincal robo advisor tool.
We acknowledge the efforts of reader Sunil who pointed out inadequecies and mistakes in the original version of the article. We have therefore corrected these in this version and added a cautionary note.
Note: This retirement planning illustration depends on several inputs and assumptions. Not all of them are shown here. These inputs and assumptions must be changed by the individual according to their circumstances. Please do not copy these numbers for your personal use without a proper calculation.
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This illustration should only be viewed as theoretical excercise to answer what it takes to get the income required from the give corpus. The assumptions required (see below) in this instance are far from practical and should not be copied. Please create your own financial plan with our robo tool with conservative assumptions.
Assumptions:
- Age of the investor: 45
- Years in retirement: 45 (life expectancy is age 90)
- Monthly expenses in the first year of retirement: Rs. one lakh. So, the assumed annual income in the first year of retirement is Rs. 12 lakhs.
- Inflation during retirement is 6%. This means the annual income will increase by 6% each year for 45 years.
- Corpus in hand = Rs. 3 crores. There is no other source of income (the robo advisor can handle three sources of increasing income from rent or pension)
Note: When referring to drawing income, we assume the amount withdrawn on the first day of each year in retirement will be 6% higher than the previous year to account for inflation. For the first year, we will withdraw Rs. 12 lakhs and 6% more, or Rs. 12.72 lakhs, for the next year.
The retirement corpus is assumed to be invested in five buckets.
- An emergency bucket to handle unexpected expenses.
- An income bucket to provide guaranteed income for the first 15 years of retirement.
- During this time, investments are made in the following three buckets.
- Corpus from a low-risk bucket will provide retirement income from years 16 to 26. To provide this income, the low-risk bucket will have an asset allocation of 30% equity and 70% debt during the investment period (years 1 to 15 of retirement).
- Corpus from a medium-risk bucket will provide retirement income from years 27 to 35. To provide this income, this bucket shall have an asset allocation of 50% equity and 50% debt during the investment period (year 1 to year 26)
- Corpus from a high-risk bucket will provide retirement income from years 36 to 45. To provide this income, this bucket shall have an asset allocation of 100% equity during the investment period (year 1 to year 35)
The retirement corpus will be divided into five parts—overall asset allocation excluding the emergency bucket, 67% fixed income and 33% equity.
The key question is, is Rs. 3 crores sufficient? We can make the robo tool arrive at a corpus close to Rs. 3 crores (3.06 Crores) only if we choose an equity return close to 15% or increase equity allocation with an equity return of 10%. The reader was ‘ok’ with these modifications although we strongly suggested othewise (the reader uses the robo tool which allows full modification of assumptions as per the user’s wishes).
Since we believe that the corpus available is not enough, to be on the safe side, we recommend working part-time and developing active and passive income streams to reduce the stress on the retirement corpus.
We suggest users do not expect too much returns or go overboard on equity just because they wish to retire early. It can be quite dangerous. The above illustration should only be viewed as theoretical excercise to answer what it takes to get the income required from the give corpus. The assumptions required in this instance are far from practical and should not be copied. Please create your own financial plan with our robo tool with conservative assumptions.