Is Your Retirement Corpus Enough?
Happynessfactory.in is a world class goal based online financial planning platform that brings a personal financial coach to every family helping them save and invest wisely.
30 Jul, 2018
In the post, Understanding the Special Needs of Retirement, we discussed the 3 Phases of a Retiree’s life – 60-70 years, 71-75 years and 75+ years and what you should NOT DO with your Retirement Corpus. So now let’s see why it is important to understand your investments and ascertain if your Retirement Corpus is enough.
As retirees, your main concern is getting steady income to lead a comfortable life and ensuring your capital is safeguarded. Most retirees invest their Retirement Corpus in Bank Fixed Deposits, Corporate Fixed Deposits, Govt Bonds, Corporate Bonds, Postal Schemes, Non-Convertible Debentures, Public Provident Funds and Pension Plans. While these investment avenues provide reasonable safety, the returns are very low. Taking the example of Mr. Mehta, our client let us understand the returns from different investment avenues and the returns they generate.
Mr. Mehta, a retiree, aged 59, approached us for his retirement planning with a portfolio of Rs. 1.2 crore invested in Fixed Deposits, Bonds, Non-Convertible Debentures and Postal Schemes. The weighted average rate of pre-tax returns of his entire portfolio was just 7.23% p.a.
One factor that Mr. Mehta completely overlooked was the tax impact on his returns. This is what his post-tax returns look like depending on the different tax brackets –
|Pre-Tax Interest||Post-Tax Interest (Tax 5%)||Post-Tax Interest (Tax 20%)||Post-Tax Interest (Tax 30%)|
Mr. Mehta, who fell in the 20% tax bracket realized his overall post-tax returns were only 5.78% p.a and the returns did not even beat inflation. We then showed him how his annual requirement of Rs. 6 lakh a year (Rs. 50,000 a month) will keep increasing due to 7% inflation every year and how his corpus of Rs. 1.2 crore will keep reducing every year due to his monthly expenses.
|Age||Income Need Increasing at 7% p.a.||Current Investments growing at 5.78% p.a.|
|Rs. 1.2 crore|
|60||Rs. 6,00,000||Rs. 1,20,59,376|
|61||Rs. 6,42,000||Rs. 1,20,77,757|
|62||Rs. 6,86,940||Rs. 1,20,49,661|
|63||Rs. 7,35,026||Rs. 1,19,69,074|
|Age 64 to 74|
|75||Rs. 16,55,418||Rs. 37,52,707|
|76||Rs. 17,71,298||Rs. 20,96,013|
|77||Rs. 18,95,289||Rs. 2,12,334|
So, as you can see in the table above, while his income needs increase at 7% p.a. due to inflation, the investments are yielding returns less than the inflation, at only 5.78%p.a. With such low returns his entire corpus will be depleted by the time he is 78 years if he continues with his current investments.
So how do you ensure that you live a comfortable retired life and your savings don’t get depleted?
The solution to ensure your Retirement Corpus is enough for you is to address these two areas –
1. Decide how long you want your Retirement Corpus to last – till you are 80 or 90 or beyond your lifetime?
2. Then decide the correct Asset Allocation required (how do you diversify SAFELY in various savings instruments) to help you achieve all your financial goals.