A reader says, “I’m 48 years old, unmarried, and the only son of dependent parents. I work in a MNC IT firm and own two houses (in Mumbai and Bengaluru) and a car. I have term and medical insurance for the 3 of us”.
“Unfortunately, a big mistake I have made is having very little exposure to the equity market (almost negligible, only about 5 lakh rupees). There were other family emergencies during my 30s which needed my attention and took away a sizable chunk of my accumulation.”
“I have been the old school investor putting money in FDs mostly. As a family, we have over one crore parked in various FDs, and I have a sizable amount in my EPF. In all, my accumulation is about Rs. 1.7 crore. Physical family-owned gold is additional.”
“My household expenses are about Rs 30,000/- p.m. However, real-world inflation of 7-10% is scary and could erode my earnings. I was wondering if I could park Rs. 62.5 lakh out of my total accumulation in Index Funds for a period of the next18 years (when I turn 66), hoping it will turn into Rs. 5 crore at a 12% CAGR in 18 years. Simultaneously, I plan to park the balance of Rs. 1 crore in fixed income to fetch hopefully 6% over that period. I somehow want to compensate for the lost opportunity and time over the last few decades.”
“Please, can you elaborately advise if this is prudent, considering I will be retired in a decade or 12 years and might have 30% exposure to my accumulation in equity? Do you think it’s wise for me to have so much exposure to the equity market through Index Funds after age 55-60?”
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First, Let us do a retirement planning exercise using the freefincal robo advisor tool with these numbers.
- Current monthly expenses that will persist in retirement:30,000 (this seems quite low even if you exclude expenses for your parents; please double check)
- Annual expenses that will persist in retirement: 30,000 (I have included this to account for health insurance premiums and other annual expenses).
- Your age at the end of the current year is 48
- Age you wish to retire 60
- Years to retirement 12
- Total average monthly expenses (annual/12) 32,500
- Post-tax return expected from equity investments % 10.00
- Post-tax return expected from current taxable fixed income % 6.50
- Rate of return expected from current tax-free fixed income % 7.50
- Value of current equity investments ( stocks and equity mutual funds) 5,00,000. This will grow to Rs. 15,69,214 at retirement.
- Value of current taxable fixed income investments (FD, RD, bonds, etc.) 1,00,00,000. This will grow to Rs. 2,12,90,962 at retirement.
- Total Value of current tax-free fixed income investments (PPF + EPF etc.) 70,00,000. This will grow to Rs. 1,66,72,457 at retirement.
The total corpus required to generate inflation-protected income until age 90 via a bucket strategy* is Rs. 2.51 Crores (subject to inputs sent to us and assumptions made above).
* See for example: How much do I need to retire in 2024?
Your current investments should grow to close to Rs. 4 Crores. So, you are all set for retirement except for the asset allocation issue. The robo-advisor tool estimates that you would need about 18% to 20% equity when you retire at 60.
So you can start investing aggressively (with fresh investments) in a Nifty 50 index fund from now until retirement and build this allocation. You do not need to transfer money from your fixed-income instruments to equity now.
“I want to compensate for the lost opportunity and time over the last few decades.”
There is no need for compensation or lost opportunity as you are on course to achieve a sufficient corpus at retirement. So, leave your current investments as is and start investing in equity.
Other considerations:
- Double-check your expenses. Review your retirement plan with fresh inputs and assumptions each year.
- Ensure you have robust health insurance for yourself and your parents.
- Aim to continue working part-time after retirement. This will support your retirement corpus and also help keep you engaged and healthy.