Last Updated on January 26, 2023 at 7:37 am
A reader says, ” I am 45 years old and am doing well. My company recently shut down operations in India, and I have been offered a hefty severance package. I wanted your advice on generating 10% annual returns ( or the best returns possible)”.
“Here is my financial status:
- Severance package: 70 Lakhs
Self-owned house: 1 - Equity and MF: 1.5 cr
- EPF: 50L
- Cash at hand: 20L
- Debt : Zero
- Monthly expense: 65,000
- Health Insurance: worth 25 Lakh”
“With this severance package, is it possible to generate returns of around 7 Lakhs per year which will give me the financial freedom to do whatever I want to do in life? I am OK with moderate risk in investment”.
Rs. 7 lakhs per year returns from an Rs. 70 lakhs corpus even before tax is unlikely. Plus, today, you should be ready to handle inflation of at least 6%. So this income will have to increase at that rate.
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So you have two choices: (1) deploy your entire corpus (severance package after tax would be closer to Rs. 50 lakhs!) + existing holdings to generate inflation-protected income – we will see below if this is possible or not and with what assumptions. (2) Seek gainful employment since age is on your side.
Let us punch the numbers into the freefincal robo advisory tool and discuss the results. The reader says he is okay with “moderate risk”. This cannot be defined. Inflation-protected income implies taking on capital market risk. However, this also means that a poor sequence of returns should be taken care of.
For instance, our first requirement for financial independence is the ability to generate inflation-indexed income for the first 15 years in retirement from fixed-income assets alone, while the rest of the corpus grows in three buckets (see below). This gives the retiree ample time to combat bad market return sequences.
The reader needs a fixed income bucker of Rs. 1.3 Crores
Also, we do not go overboard on the equity part. For the present case, the overall equity allocation is 32%.
The remaining corpus can be invested in the following way:
- low-risk bucket with 50 % fixed income (rest equity) expected to grow at a rate of 8 % p.a. Rs. 70,22,138
- medium risk bucket with 30 % fixed income (rest equity) expected to grow at a rate of 9 % p.a. Rs. 36,45,604
- High-risk bucket with 0 % fixed income (rest equity) expected to grow at a rate of 10 % p.a. Rs. 20,60,000
The key assumptions are:
- Post-tax return from equity: 10%
- Post-tax return from fixed income (invested assets): 6%
- Post-tax return from income-generating assets: 5%
The total corpus required for generating inflation-protected income for the next 44 years (until the reader reaches 90) is Rs. 2.61 Crores (this includes a small emergency bucket).
This amount is already available to the reader. However, the catch is the return assumptions mentioned above are “current”. As it is, they are hard to achieve. In the future, it will be even harder.
For the present, they are just about acceptable. If we reduce them a bit, the required corpus will become higher than the reader currently has. So even if he deploys his current assets, it is a touch-and-go situation.
Therefore we strongly recommend the reader immediately seek employment elsewhere to fortify his financial situation.