I just turned 50. My net worth distributed amongst equity and debt is Rs 4 cr. My asset allocation is 50:50. I am living in my own house. I have no debt. I am a widower. My children are settled. I have no dependents. I do my SIPs. How much money will I need at the age of 60 to retire? Accordingly, I will know if I have to increase my savings and investments. I am not looking at leaving behind any legacy.
You seem to be in a good position. What is particularly solid is that you have zero debt, you own a place to stay, and have no dependents. Since I do not have much information, let me share my views based on what you have shared.
What is the corpus you would need when you retire?
List your expected outflows (household expenses, insurance premiums, healthcare, travel/leisure costs, etc). Also list the expected inflows during retirement in the form of pension, annuities, rental income, interest income and dividends. The gap between the expenses and inflows is the yield that your portfolio should ideally provide to help you sustain your lifestyle.
You said you would like to retire at the age of 60. Let us assume a life expectancy of 25 years post retirement. So whatever you accumulate will have to suffice for over two decades. Which brings us to the next point, inflation.
This eats into your purchasing power. And you have to take it into account when doing your calculations. Let’s say your monthly expenses today are Rs 1 lakh, and we assume an annual inflation rate of 6%. Rs 1 lakh will have the same purchasing power as Rs 1.79 lakh with an average annual inflation rate of 6% after 10 years.
The return expectations from the portfolio should be reasonable and in accordance with the allocation to the underlying asset classes in the portfolio. If we assume equity market returns of 11% per annum and fixed income returns of 6.5% per annum, and stay with your current asset allocation of equity and debt at 50:50, your portfolio value may grow close to at least Rs 9.2 crore over the next 10 years.
This may help you sustain a starting monthly withdrawal of close to Rs 4.5 lakh per month (Rs 2.5 lakh in present value terms). This has been arrived at keeping a 25-year time frame in mind and the assumption that the corpus will be depleted at the end of this period, as you specified that you don’t want to leave a legacy.
4 retirement planning blindspots
7 steps to estimate your retirement cash flow needs
How to mess up your retirement planning
Some action points on your current portfolio.
All the above calculations have been done on the information provided. To increase the corpus, you can increase your SIPs (no details on the on-going SIP amounts have been provided). The corpus at retirement would be higher by the extent of the future value of the SIP installments. You may look at increasing your SIP amounts, or top-up your investments whenever you have any excess savings or windfall gains. Continue investing systematically and please do not try and time the market.
Additionally, given that the horizon to start withdrawing money is about 10 years away, you could look to scale up the current allocation to say 70:30 (equity: debt) to garner a higher retirement corpus from the wealth generating potential of equities. The exposure to equities should be in line with your risk appetite (ability and willingness to take risk) and investment horizon as related to your goal. Higher the investment horizon and risk appetite, the higher can be the allocation to equities.
Remain invested in line with your recommended strategic asset allocation and periodically evaluate any material deviations (over/under-weight) from the recommended asset allocation and re-balance your portfolio accordingly.
One should also evaluate the performance of the funds in your portfolio vis-à-vis that of their respective category peers. If a fund has been delivering below-average performance consistently, you may switch to a more consistent one.
It will be a drain on your finances if you have to tap into them for an emergency. Worse, if you get into debt. To insulate your portfolio from any such untoward cash needs, it is advisable to have a substantial health insurance policy and an Emergency Fund in place. The latter aggregate to about 6-12 months of your monthly expenses.
ASK MORNINGSTAR archives
Articles authored by MOHASIN ATHANIKAR
Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.
