Can I Plan My Retirement With Recurring Deposits and Fixed Deposits?

Published: January 21, 2016 at 9:00 am

Last Updated on

I am sick and tired of fluctuating equity returns. Why can’t I use recurring deposits and fixed deposits to build my retirement corpus?

How would you answer such a question? I would say, Yes, you absolutely can do so!

 To make my point clearer, let us run through a specific retirement corpus calculation. A more general account of how retirement calculators work can be found here.

Let us consider a 30 year old named Grouchy Smurf. His current yearly expenses are approximately Rs. 3, 60,000 (Rs. 30,000 per month). He belongs to the 30% tax bracket. His retirement is about 30 years away, and he wishes to plan for a retirement corpus that will last up to age 90.

Source: Smurfs Wiki
Grouchy Smurf. Source: Smurfs Wiki

Assuming his expenses will increase each year at an average rate of 8% throughout his life, he would require a little more than 3.25 Lakhs each month in his first year of retirement! Subsequently this sum should increase each year by 8%.

If he is able to source recurring deposits and fixed deposits that offer at least 8% p. a. throughout his lifetime*, then the effective post-tax return is 5.53%.

(*) Those witnessing rate cuts for the first time, will also realize how far-fetched this assumption is!

Over a 60 year period (30 years before and 30 years after retirement), it may be practically impossible to get recurring/fixed deposits that offer 8% each year.  However, since there will be years in which Grouchy maybe able to lock onto interest rates much higher than 8%, we will roll with this assumption and see where it leads us.

With the above assumptions,  Grouchy would require a whopping 16.75 Crores to ensure he is financial independent for 30 years after retirement!

With 5.53% post-tax return, Grouchy will need to invest about Rs. 48,000 per month and increase this sum by about 10% each year until he retires.

If Grouchy can manage this, he can plan his retirement with recurring and fixed deposits without breaking his head over fluctuating equity returns.

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In fact,he can do much better than this if he started a SIP in a liquid fund or even an arbitrage fund. These would offer much better (post-tax) returns with practically insignificant risk over a 30 year period. So clearly there is no need to worry about finding high interest (in this case 8%) RDs and FDs.

Therefore, the most important question to ask Grouchy is: can he manage to (initially) keep aside 48,000 per month for retirement? 

If he cannot, what are his options? I will leave it to you to make suitable inferences.

The power of compounding depends on three factors: time, investment amount and returns, in that order.

  • If I can start investing early for my goals,
  • If I can invest quite a bit of money each month (in Grouchy’s case a 160% of his current expenses!!) then,
  • I can afford to choose an instrument with low volatility, at the cost of securing a lower, but assured return.

Of course a prudent investor will choose much better instruments to secure higher returns. My point is, starting early and investing as much as possible is more important than running after ‘high’ returns.

  • The contended investor recognises that A frugal lifestyle is the only guaranteed means of beating inflation.

What do you think?

Post script: Grouchy Smurf is one of my favourite cartoon characters.  Although I won’t do it, I can now almost afford to plan my retirement with fixed income instruments.

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Need help in planning your retirement? Choose from a wide variety of retirement calculators suitable for all ages!

Want to know the return required for a given investment amount, use this four-part series on goal-based investing.

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