Recently, a reader asked, “Can the freefincal robo advisor tool handle my situation? I am 40 years old and have Rs. 1 Crore cash in the bank. I have no other investments (don’t ask why; it’s a long story!). I want to retire by age 55. How should I invest this Rs. 1 Crore for a comfortable retirement?”.
As regular readers may know, the freefincal robo advisor tool does retirement planning in two steps. Before retirement, it provides a variable asset allocation schedule in which the equity allocation is reduced from around 60% to around 20-30% (depending on age and other inputs) at the time of retirement in a step-wise manner to combat the sequence of returns risk (long duration of poor equity returns). This is based on our extensive research.
After retirement, it divides the corpus into an emergency bucket, an income bucket with guaranteed inflation-indexed income for the first 15 years of retirement, and low-risk, medium-risk, and high-risk buckets to combat inflation. A full illustration is available here: Retirement plan review: Am I on track to retire by 50?
Let us now use the robo tool to handle the current situation. We can input details of our current investments so that their future growth can be computed to arrive at the net retirement corpus required and the corresponding monthly investment.
In this case, the reader has no prior investments. So we suggest investing 60% in equity mutual funds (a simple Nifty or Sensex index fund will do) and the rest 40% in fixed income (some tax-efficient candidates are a mix of arbitrage funds, conservative hybrid funds, debt-oriented multi-asset or dynamic asset allocation funds). See, for example, the Parag Parikh Dynamic Asset Allocation Fund vs the Parag Parikh Conservative Hybrid Fund.
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With a return expectation of 10% post-tax from equity and 6% post-tax from fixed income, this Rs. 1 Crore will grow to about Rs. 3.46 crores in fifteen years. The asset allocation schedule is given below.
- Total corpus required: Rs. 11.4 Crores
- Net corpus required after accounting for the future growth of Rs. 1 Crore: Rs. 7.4 Crores
- The initial monthly investment necessary to obtain the net corpus is Rs. 1.18 lakhs. This assumes the monthly investment is increased by 10% each year.
These calculations also take into account the retirement bucket strategy mentioned above. For more details, see: Can I retire by 55? Retirement Planning Case Study.