Last Updated on February 13, 2022 at 3:13 pm
A reader asks, “I will turn 50 this year and am considering retirement. How do I find out the corpus required for retirement in 2022? My annual expenses are about Rs. 6.5 lakhs ”
As mentioned in a recent article – I thought a pension was unnecessary but age taught me a retirement planning lesson! – there are several ways to estimate the retirement corpus required.
The first is what we would like to call a withdrawal rate estimate.
Suppose we expect a 50-year-old to live until age 90 (to be on the safe side), that is 40 years in retirement. We shall assume an inflation of 6% and an overall post-tax return from the corpus as 5% Then using this spreadsheet formula, we will get about Rs. 3.15 Crores.
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=PV((1+5%)/(1+6%)-1,40,-650000,,1)
Why such a low rate of return? This is on the entire corpus and one cannot have too much equity after retirement. Even 40% is a bit high. So it would be better to assume a return lower than inflation on the safe side.
Why is the corpus so low even though the real return is negative? This is because we are planning for immediate retirement. If this were a 30-year-old, the current expenses of Rs. 6.5 lakhs would inflate to almost 21 lakhs after 20 years (at age 50). Then the corpus required will be about Rs. 10 crores.
The above corpus will not change much if the return and inflation estimate changes but the real returns stay the same.
This is only a crude calculation. We can get a much better estimate and more importantly get clarity on how to invest the corpus using the freefincal robo advisory tool.
The retirement corpus is assumed to be invested in five buckets. Please note that the numbers provided below represent an example. The output of the robo tool depends on multiple inputs. So please do not extrapolate these numbers or percentages for your own situation without doing a full retirement planning calculation.
- An emergency bucket to handle unexpected expenses about 5%: Say Rs. 12 Lakhs
- An income bucket provides guaranteed income for the first 15 years in retirement. About 47% of the remaining corpus or Rs. 104 lakhs is invested here. There is no equity exposure in this bucket.
- During this time (first 15 years), investments are made in three buckets: a low-risk bucket, a medium-risk bucket and a high-risk bucket.
- The buckets will be actively managed to reduced risk: rebalancing and also profit booking from one bucket to another. To understand how this works, try this: The Retirement Bucket Strategy Simulator.
- After 15 years, the low-risk bucket will be turned into 100% debt and provide income for about 11 years. After that, the other buckets will also be progressively used.
Details of the other buckets are given below.
- Corpus from a low-Risk bucket that provides income from year 16 to year 26 in retirement. To provide this income, the low-risk bucket will have an asset allocation of 30% equity 70% debt during the investment period (years 1 to 15 of retirement). About 27% or Rs. 59 lakhs is invested here.
- Corpus from a medium risk bucket will provide income from years 27 to 34 in retirement. To provide this income, this bucket shall have an asset allocation of 50% equity and 50% debt during the investment period (year 1 to year 26). About 16% or Rs. 35 lakhs is invested here.
- Corpus from a high-risk bucket will provide income from year 35 to 42 in retirement. To provide this income, this bucket shall have an asset allocation of 70% equity and 30% debt during the investment period (year 1 to year 34). About 9% or Rs. 19 lakhs is invested here.
The overall equity exposure is only 33% excluding the emergency bucket and therefore is reasonably safe. The inflation assumed is 6%, the expected post-tax return from equity is 9% and the expected post-tax return from fixed income is 5% (for bucket investments).
For the income bucket, we have assumed a fixed income return of 5% for the first 25 years and 4% for the last 15 years -all these numbers can be varied at will by the user in the settings page of the robo advisory tool.
The minimum total corpus required for a reasonably comfortable retirement in 2022 is about Rs. 2,30,00,000 (for a 50-year-old with an initial annual expense of Rs. 6.5 lakhs expected to live until age 90). We can round this off to Rs. 2.5 crores.
You may wonder where the current year features in this calculation. It makes its presence felt via our inflation and return expectations. We should repeat this calculation every year before and after retirement to ensure we are making the right underlying assumptions.
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