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

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.

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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53 thoughts on “Can I Plan My Retirement With Recurring Deposits and Fixed Deposits?

  1. ashalanshu

    People are too busy to finish the things early as far as the question goes for retirement but the most important point - Start investing early, is missed by almost all of us. Strange but that's the truth of our generation.

    Reply
  2. ashalanshu

    People are too busy to finish the things early as far as the question goes for retirement but the most important point - Start investing early, is missed by almost all of us. Strange but that's the truth of our generation.

    Reply
  3. Sanjiv Singhal

    I agree with the need for frugality and the fact that technically you can plan your retirement with just FDs and RDs but it's a bit unrealistic to expect someone to save 61.5% of their income. This is why calibrated risk taking is required.

    Reply
      1. Sanjiv Singhal

        absolutely. You've captured the balancing act really well in the 3 levers: "time, investment amount and returns". Understanding this balance is the key to a successful retirement plan.

        Reply
  4. Sanjiv Singhal

    I agree with the need for frugality and the fact that technically you can plan your retirement with just FDs and RDs but it's a bit unrealistic to expect someone to save 61.5% of their income. This is why calibrated risk taking is required.

    Reply
      1. Sanjiv Singhal

        absolutely. You've captured the balancing act really well in the 3 levers: "time, investment amount and returns". Understanding this balance is the key to a successful retirement plan.

        Reply
    1. pattu

      Mohit, the point is fixed income instruments like RD, FD, and to a large extent PPF will do the job only when we have enough time and money to spare. PPF has tax free interest today. When you and I retire the situation can be entirely different. The same argument holds for equity as well.

      Reply
    1. pattu

      Mohit, the point is fixed income instruments like RD, FD, and to a large extent PPF will do the job only when we have enough time and money to spare. PPF has tax free interest today. When you and I retire the situation can be entirely different. The same argument holds for equity as well.

      Reply
  5. bharat shah

    'I am sick and tired of fluctuating equity returns. Why can’t I use recurring deposits and fixed deposits to build my retirement corpus?'
    it reminds me my near younger relatives, some having good education in accounts and finance fields get sick when eventually i am talking about retirement planning or other goals. in fact , i , myself , start very late thinking for personal finance finance after coming across personal finance blogs including yours. thank you for your posts on the subject discussing in various interesting ways.

    Reply
  6. bharat shah

    'I am sick and tired of fluctuating equity returns. Why can’t I use recurring deposits and fixed deposits to build my retirement corpus?'
    it reminds me my near younger relatives, some having good education in accounts and finance fields get sick when eventually i am talking about retirement planning or other goals. in fact , i , myself , start very late thinking for personal finance finance after coming across personal finance blogs including yours. thank you for your posts on the subject discussing in various interesting ways.

    Reply
  7. sunder

    pattu, i just wanted to flag one point. this is with regards to the issue of life expectancy. your `grouchy smurf' wants retirement corpus to run up to 90. but, considering the growing life expectancy, i think he needs to plan for living upto at least 110 if not 120. looking at the way my ma and mil [ma-in-law] are going strong even at 80 -- may god bless them, i am working on our [me and my wife's] retirement plan for the possibility of us living upto 100. we may go away earlier. but, i would rather leave behind something behind than be in a position of a beggar in the last years of our lives.

    Reply
    1. ashalanshu

      Dear Sunder, no matter you take 90 or 100 or even 150 as your basis of calculation. The moot point is not that age but there should be corpus. The retirement should be looked from 2 health points.
      1. Financial health
      2. Physical health

      Interestingly people now a days put too much attention on 1 & care less about 2. In my personal opinion, one should care more for Physical health. The reason is simple. The cost of medication 'll deteriorate your financial health also & the impact 'll be huge. 🙂

      Thanks

      Reply
    2. pattu

      Ashal has made fine points. Just a ball park old enough number should do for longevity. The bucket strategy should take care of the rest 🙂

      Reply
  8. sunder

    pattu, i just wanted to flag one point. this is with regards to the issue of life expectancy. your `grouchy smurf' wants retirement corpus to run up to 90. but, considering the growing life expectancy, i think he needs to plan for living upto at least 110 if not 120. looking at the way my ma and mil [ma-in-law] are going strong even at 80 -- may god bless them, i am working on our [me and my wife's] retirement plan for the possibility of us living upto 100. we may go away earlier. but, i would rather leave behind something behind than be in a position of a beggar in the last years of our lives.

    Reply
    1. ashalanshu

      Dear Sunder, no matter you take 90 or 100 or even 150 as your basis of calculation. The moot point is not that age but there should be corpus. The retirement should be looked from 2 health points.
      1. Financial health
      2. Physical health

      Interestingly people now a days put too much attention on 1 & care less about 2. In my personal opinion, one should care more for Physical health. The reason is simple. The cost of medication 'll deteriorate your financial health also & the impact 'll be huge. 🙂

      Thanks

      Reply
    2. pattu

      Ashal has made fine points. Just a ball park old enough number should do for longevity. The bucket strategy should take care of the rest 🙂

      Reply
  9. Angs

    Pattu,
    Nice one. But still I feel that I am a layman to think of investing in share/mutual/any liquid fund. How will the saving in NPS help in this regard? Office is deducting/paying for Tier I. How about investing in Tier II? I hope that I have not missed your article on NPS!!

    Reply
    1. pattu

      Hi Angs,

      Tier-I has been doing quite well recently. For us it will be 85% debt and 15% equity in Tier I. No need for Tier II. Choose a fund like Franklin India Blue Chip and start a SIP in it. You can also consider a new fund called PPFAS Long Term Value Fund. No matter what happens to the marker don't stop your SIP.

      There are many articles on NPS. I am writing one about its advantages. Will post it soon.

      Reply
  10. Angs

    Pattu,
    Nice one. But still I feel that I am a layman to think of investing in share/mutual/any liquid fund. How will the saving in NPS help in this regard? Office is deducting/paying for Tier I. How about investing in Tier II? I hope that I have not missed your article on NPS!!

    Reply
    1. pattu

      Hi Angs,

      Tier-I has been doing quite well recently. For us it will be 85% debt and 15% equity in Tier I. No need for Tier II. Choose a fund like Franklin India Blue Chip and start a SIP in it. You can also consider a new fund called PPFAS Long Term Value Fund. No matter what happens to the marker don't stop your SIP.

      There are many articles on NPS. I am writing one about its advantages. Will post it soon.

      Reply
  11. Ramesh

    Have you considered the fact that interest of FD/RD have to be included in ITR and one will have to pay taxes? This further diminishes the compounding effect. Maybe you can actually make a comparative study involving FD/RD (with taxation) to fund retirement (as is done in this post) versus using debt funds or arbitrage funds. Just to show the major differences in the amounts involved.

    Reply
    1. pattu

      Dear Ramesh,

      Yes. A 8% FD/RD will give only 5.53% each year due to taxes (30.9%). So that has been factored in. If I use an arbitrage fund, I will conservatively use 6-8% tax free. For a liquid fund the indexation over 30 years will bring the taxes down quite a bit. So I was to use arbitrage or liquid funds the corpus will be significantly higher.

      Reply
      1. Ramesh

        I think there is a misunderstanding.

        I am saying that FD attracts tax on an accrual basis and not when the amount is received. So, if there is an FD of 10 years giving you 8% ROI, then on Rs 1000, one would be paying a tax of 24.72 (30.9% of 8% of 1000) in the first year itself, although, the income of that 80 (8% of 1000) will be compounding and will be received only at the end of 10 years. The future value of the payment made in first year will be 159 and that should be considered. Overall, I think that the effective rate of interest will be 5.53% simple interest and not 5.53% compound interest. And the result of a simple interest instead of compound interest over long period of time is bound to be massive.
        Please do check if the mathematics behind it is right.

        Reply
        1. pattu

          I understand what you are saying.
          If amt is the sum invested, n the tenure in years, t the tax rate and r the interest, then amt x(1-reff)^n, where reff = r*(1-t) assumes that compounding is done with tax paid on accrual basis. This gives the net corpus taking into account tax to be paid each FY.

          Using r*(1-t) takes into account the time value of the tax paid each year. It does not participate in the compounding while increasing accordingly each year.

          Reply
  12. Ramesh

    Have you considered the fact that interest of FD/RD have to be included in ITR and one will have to pay taxes? This further diminishes the compounding effect. Maybe you can actually make a comparative study involving FD/RD (with taxation) to fund retirement (as is done in this post) versus using debt funds or arbitrage funds. Just to show the major differences in the amounts involved.

    Reply
    1. pattu

      Dear Ramesh,

      Yes. A 8% FD/RD will give only 5.53% each year due to taxes (30.9%). So that has been factored in. If I use an arbitrage fund, I will conservatively use 6-8% tax free. For a liquid fund the indexation over 30 years will bring the taxes down quite a bit. So I was to use arbitrage or liquid funds the corpus will be significantly higher.

      Reply
      1. Ramesh

        I think there is a misunderstanding.

        I am saying that FD attracts tax on an accrual basis and not when the amount is received. So, if there is an FD of 10 years giving you 8% ROI, then on Rs 1000, one would be paying a tax of 24.72 (30.9% of 8% of 1000) in the first year itself, although, the income of that 80 (8% of 1000) will be compounding and will be received only at the end of 10 years. The future value of the payment made in first year will be 159 and that should be considered. Overall, I think that the effective rate of interest will be 5.53% simple interest and not 5.53% compound interest. And the result of a simple interest instead of compound interest over long period of time is bound to be massive.
        Please do check if the mathematics behind it is right.

        Reply
        1. pattu

          I understand what you are saying.
          If amt is the sum invested, n the tenure in years, t the tax rate and r the interest, then amt x(1-reff)^n, where reff = r*(1-t) assumes that compounding is done with tax paid on accrual basis. This gives the net corpus taking into account tax to be paid each FY.

          Using r*(1-t) takes into account the time value of the tax paid each year. It does not participate in the compounding while increasing accordingly each year.

          Reply
  13. Balaji

    Pattu

    I am wondering why you chose to suggest in one of your comments investment into PPFAS Long Term Value Fund which is an absolutely new fund from a new fund house with no track record when usually your own article of chosing right MF may not qualify this fund.

    Balaji

    Reply
    1. pattu

      Yes it would not qualify if we go by that article. Yes PPFAS is a new fund but those who manage it are not new. It is a fund with very good diversification across market caps, global equity and even asset classes. So I think it is bound to do well over the long term. Therefore I have made an exception and am invested in PPFAS.

      Reply
  14. Balaji

    Pattu

    I am wondering why you chose to suggest in one of your comments investment into PPFAS Long Term Value Fund which is an absolutely new fund from a new fund house with no track record when usually your own article of chosing right MF may not qualify this fund.

    Balaji

    Reply
    1. pattu

      Yes it would not qualify if we go by that article. Yes PPFAS is a new fund but those who manage it are not new. It is a fund with very good diversification across market caps, global equity and even asset classes. So I think it is bound to do well over the long term. Therefore I have made an exception and am invested in PPFAS.

      Reply
  15. Chintan Kapadia

    All fund manager and retirement fund planners seem to teach the belief that equity investments is the only way to achieve the huge corpus that can be enough for one's retirement expenses. They extrapolate the equity returns of that last fifteen years, especially the good growth phase till 2007. However, one should understand that generally even inflation cannot stay at average rate of 8% for 30 years. At the same time, equity investments that go wrong do not give good returns even after few decades. Equity can only generally beat inflation in the wrong run. But it can not always be true.

    Reply
    1. pattu

      these estimates are based on index returns. There is no guarantee that the index will beat inflation. However intelligent stock picking has always paid dividends. The Sensex was flat between 1994 and 2001. Franklin India Blue Chip started in 1994 soared above the Sensex because of good picks.

      Reply
  16. Chintan Kapadia

    All fund manager and retirement fund planners seem to teach the belief that equity investments is the only way to achieve the huge corpus that can be enough for one's retirement expenses. They extrapolate the equity returns of that last fifteen years, especially the good growth phase till 2007. However, one should understand that generally even inflation cannot stay at average rate of 8% for 30 years. At the same time, equity investments that go wrong do not give good returns even after few decades. Equity can only generally beat inflation in the wrong run. But it can not always be true.

    Reply
    1. pattu

      these estimates are based on index returns. There is no guarantee that the index will beat inflation. However intelligent stock picking has always paid dividends. The Sensex was flat between 1994 and 2001. Franklin India Blue Chip started in 1994 soared above the Sensex because of good picks.

      Reply
  17. Satish

    What if smurf was fifty years old and wanted to retire from the next day. He was that fed up with everything. How much money would he then need to retire the next day at age 50, spending 60000 a month and expecting to live to be a 100. Any ideas ?
    So current age= retirement age = 50, monthly needs = 60000, life expectancy 100 years total or 50 years post retirement.

    Reply
  18. chellamani

    "Although I won’t do it, I can now almost afford to plan my retirement with fixed income instruments."

    mr. pattu,

    This above comment of yours brings me to one delicate ques which may also be indecent from my side. What are your numbers in terms of corpus, how many years form now and the expected income after that period ? If you think this is too personal, please do not answer !1 Thanks

    chellamani

    Reply
    1. freefincal

      I try to put away upwards of 60% of monthly income for investing. If I invest only fixed income from now on, I will retire as per schedule (age 65). Oy equity return expectation is 15% (normal expectation is only 10%), then I am about 7-8Y from retirement (hopefully before 50).

      Reply
  19. Satish

    What if smurf was fifty years old and wanted to retire from the next day. He was that fed up with everything. How much money would he then need to retire the next day at age 50, spending 60000 a month and expecting to live to be a 100. Any ideas ?
    So current age= retirement age = 50, monthly needs = 60000, life expectancy 100 years total or 50 years post retirement.

    Reply
  20. chellamani

    mr. pattu,
    good morn..

    if I were to assume to retire in about 8 yrs from now and the following premises for retired life:

    - reasonable living for 2 persons with some entertainment in terms of 2-3 films a month 2-3 restaurant outings, decent veg food, small local travels in India and one car with a driver and a owned house without any liability on it and no other debt or any commitment towards children, (to be living in Chennai, let's say)

    what do you think is the reqd. monthly income ? my estimate is about rs. 1,75,000 per month. which means the corpus should be about rs. 3 crores assuming a representative average risk-free return of 7%.

    WOULD VERY MUCH APPRECIATE YOUR VIEWS ON THIS ?

    Thanks and regards.

    chellamani

    Reply

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