A reader says, “Dear Pattu Sir, I am 28 and wish to retire by 50. What is the retirement corpus I require?”
We shall compute this using the freefincal robo advisory tool with the following modifications (remaining assumptions stay the same):
- Monthly expenses Rs. 50,000;
- The current corpus is practically zero
- Post-tax return expected from equity investments is 10%
- Post-tax return expected from the current taxable fixed income is 5%
- The rate of return expected from the current tax-free fixed income is 6%
- Inflation before retirement is 7%
- Inflation during retirement is 6%
- Life expectancy: 90 years
- Increase in monthly investment each year: 10%
The required retirement corpus is Rs. 8.42 Crores, but the monthly investment is only Rs. 48,520, increasing at 10% annually.
The recommended change in asset allocation and the corresponding change in overall portfolio return are shown below.
The equity allocation is gradually reduced from an initial 60% equity to 30% at age 50.
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Even though the equity allocation reduces, the initial investment required is lower because of the assumed 10% increase in investments each year. This is reasonably possible with regular income hikes, bonuses and promotions.
Of the total corpus of Rs. 8.42 crores, 5% is kept aside for emergencies. Of the remaining corpus, 30% is set aside for equity; the rest is fixed income distributed among four buckets.
- An income bucket with 53% of the remaining corpus for guaranteed income for the first 15 years in retirement. During this time, investments will be made in the following three buckets.
- A low-risk bucket with 26% of the remaining corpus for income from year 16 to year 25 in retirement. The low-risk bucket will have an asset allocation of 50% equity and 50% debt during the investment period (years 1 to 15 of retirement).
- Corpus from a medium risk bucket with 14% of the remaining corpus will provide income from years 26 to 33 in retirement. This bucket shall have an asset allocation of 70% equity and 30% debt during the investment period (year 1 to year 25)
- Corpus from a high-risk bucket with 7% of the remaining corpus will provide income from years 34 to 40 in retirement. This bucket shall have an asset allocation of 100% equity and 0% debt during the investment period (year 1 to year 33)
- The buckets will be actively managed to reduce risk during this investment period through rebalancing and profit booking from one bucket to another. To understand how this works, try the Retirement Bucket Strategy Simulator.
- After 15 years, the low-risk bucket will be turned into 100% debt and provide income for about ten years. After that, the other buckets will also be progressively used.
We believe the reader is on track to retire by age 50 as long as he follows the investment schedule mentioned above.