A reader asks, “I am 50 years old and plan to retire next year. My yearly expense is Rs. 12 lakhs. What is the corpus required to sustain 35 years in retirement?”
The Rs. 12 lakhs annual expense (or Rs. one lakh a month) is only for the first year of retirement. For each subsequent year, it would be prudent to assume that expenses increase at the rate of % (inflation assumption).
Let us find out the corpus required using the freefincal robo advisory tool. For immediate retirement, for a given existing corpus, the tool would tell us whether a bucket strategy can be used or if the corpus is too low, an annuity purchase is recommended. A custom bucket strategy calculation is also possible.
Assumptions:
- Years in retirement: 40 (from age 50 to age 90). To err on the side of caution, we will use age 90 instead of age 85 assumed by the reader.
- Inflation after retirement: 6%
Results: Method 1 (using bucket strategy alone)
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- Input: To find out the minimum corpus required for an initial income of Rs. one lakh per month, we shall set the existing corpus to zero.
- Output: Rs. 2.1 Crores is required to provide guaranteed inflation-protected income from fixed income sources (at 5% return) for the first 15 years of retirement. Out of this, an emergency corpus of Rs. 18.1 Lakhs is set aside. Here we have not opted for income flooring. That is, not part of the income is from a pension.
- An additional Rs. 1.7 Crores is to be invested in three buckets. The total equity allocation out of this is Rs. 1.7 Crores is about 60-63%. and the rest in fixed income. A detailed illustration of this strategy is available here” Retirement plan review: Am I on track to retire by 50?
- Thus the total minimum corpus required is Rs. 3.8 crores. Note that out of this, only 28% is in equity.
Results: Method 2 (using bucket strategy and a single annuity)
- If Rs. 12 lakhs per year is required as a guaranteed pension (income floor) and the inflationary increase is managed from a fixed income bucket, then Rs. 3.11 Crores is necessary for the first 15Y alone! See: Creating the “ideal” retirement plan with income flooring!
- An additional Rs. 1.26 Crores is to be invested in three buckets. The total equity allocation out of this Rs. 1.26 Crores is about 65%, and the rest is in fixed income.
- Thus the total minimum corpus required is about Rs. 4.37 crores. Note that out of this, only 19% is in equity. This is because, Rs. 2.4 Crores is required for the annuity, assuming the post-tax annuity rate is 5%.
Results: Method 3 (using bucket strategy and multiple annuities)
Here, the retiree buys an annuity at different stages in retirement (say every ten years). This is explained in detail here: Use this annuity ladder calculator to plan for retirement with multiple pension streams.
- The total corpus required in this case is (hold on to your chairs!) Rs. 8.67 Crores.
The reader must take stock of the available corpus and decide on the strategy. If the existing corpus is well below that recommended in method 1 (using bucket strategy alone), then it is better to (1) postpone retirement, (2) consider annuities as the major income component (inflation protection is then not possible), (3) get the professional opinion of a SEBI registered fee-only advisor.