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Ramalingam Kalirajan |8319 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 24, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by SHAILESH on Oct 23, 2024Hindi

I have 2 crore corpus at the age of 55 in hybrid fund. If my current expenses are 70,000 per month then considering inflation and corpus , how long my corpus can last ?

Ans: First, congratulations on accumulating a substantial Rs. 2 crore corpus by age 55. This is a solid financial foundation, especially since you are holding it in a hybrid fund, which balances risk and return. However, as you plan for the future, it's important to assess how long this corpus will last considering your monthly expenses, inflation, and any withdrawals.

Let's examine this situation from multiple angles.

Understanding Your Expenses and Inflation
Your current monthly expenses are Rs. 70,000, which is Rs. 8.4 lakh per year. To ensure long-term financial security, it is critical to consider how inflation will impact your expenses over time. Inflation gradually erodes the purchasing power of money.

Typically, the inflation rate in India for essential expenses is around 6-7% per year. However, this may vary, and it's wise to assume at least a 6% inflation rate to be on the safer side.

At a 6% annual inflation rate:

Your current Rs. 70,000 monthly expense could increase to approximately Rs. 1.25 lakh per month in 10 years.
Assessing the Returns on Your Hybrid Fund
Hybrid funds are known to provide a mix of equity and debt exposure, which reduces risk but also limits potential returns compared to purely equity-focused funds. Based on historical data, you can expect a hybrid fund to generate an average return of around 8-10% annually.

Since your goal is to make your corpus last for a significant period, it is essential to strike a balance between withdrawal and the returns your investment can generate.

We will assume that:

Your hybrid fund can provide an average return of 8% per year.
The inflation rate remains at 6% per year.
Withdrawal Strategy
One of the most effective ways to ensure that your corpus lasts longer is through a systematic withdrawal plan (SWP). With an SWP, you withdraw a fixed amount from your investment at regular intervals, ensuring that your remaining corpus continues to generate returns.

Since your goal is to sustain your lifestyle without depleting your corpus too quickly, withdrawing an amount aligned with your monthly expenses, adjusted for inflation, is essential.

Initially, you would need to withdraw Rs. 70,000 per month, but this amount will gradually increase due to inflation. The returns from your hybrid fund will also help your corpus grow, counteracting the impact of inflation.

How Long Can the Corpus Last?
If we estimate your expenses growing at 6% inflation, and your hybrid fund growing at 8%, it is possible that the corpus will sustain for around 20-25 years. However, the exact time period may vary based on actual inflation rates, market conditions, and unexpected expenses.

Factors that will affect how long the corpus lasts include:

Health expenses: Medical costs can rise sharply with age. Ensure you have adequate health insurance.
Lifestyle adjustments: You may want to make lifestyle changes that either increase or decrease your expenses.
Returns variability: If markets underperform, your hybrid fund returns may be lower than expected, impacting the longevity of the corpus.
Taxation Considerations
You also need to be mindful of taxation when withdrawing from your hybrid fund.

Equity-oriented hybrid funds: Long-term capital gains (LTCG) on equity mutual funds are taxed at 12.5% if your gains exceed Rs. 1.25 lakh per year. Short-term capital gains (STCG) are taxed at 20%.

Debt-oriented hybrid funds: The gains are taxed as per your income tax slab, depending on your age and other income.

Considering your age, you may fall into a lower tax slab if you no longer have significant salary income. However, tax liabilities will still reduce your net returns, so careful planning is essential.

Risk of Running Out of Corpus
There is always the risk that your corpus may deplete faster than anticipated due to:

Higher-than-expected inflation: If inflation exceeds 6%, your expenses will increase faster than anticipated, putting additional strain on your corpus.

Lower-than-expected returns: Market downturns may result in your hybrid fund delivering lower returns, which could shorten the longevity of your corpus.

Suggestions to Safeguard Your Corpus
Continue Investing Post-Retirement: Even after retiring, you can consider investing a portion of your monthly withdrawals back into safer instruments like debt mutual funds or fixed deposits to continue generating returns. This could help extend the lifespan of your corpus.

Rebalance Your Portfolio: As you age, you might want to shift a greater portion of your hybrid fund towards debt instruments, which provide more stability and lower risk. However, keeping some equity exposure is still important to beat inflation.

Emergency Fund: Keep a separate emergency fund outside of your main corpus to handle unexpected large expenses. This will prevent you from dipping into your retirement corpus for sudden needs.

Health Insurance: Ensure you have adequate health coverage to handle rising healthcare costs in India. This will prevent a significant drain on your corpus due to medical emergencies.

Track Inflation: Regularly review your expenses and the inflation rate. If inflation rises significantly, you might need to adjust your withdrawal strategy or look for ways to reduce discretionary expenses.

Alternatives to Hybrid Funds
If you are concerned about the longevity of your corpus, you might want to consider shifting a portion of your corpus to other safer options such as debt mutual funds or fixed deposits. These options provide stability but might offer lower returns. However, they are less volatile than hybrid funds.

Avoid opting for real estate or annuity plans as they are illiquid and may not provide the flexibility you need in retirement. Similarly, index funds might seem attractive, but they are not actively managed and might not deliver the dynamic returns you expect from a hybrid fund.

Final Insights
You have already built a strong corpus of Rs. 2 crore by age 55. This shows disciplined savings and a commitment to securing your future. By managing your expenses, adjusting for inflation, and continuing with a conservative investment strategy, you can ensure that your corpus lasts for 20-25 years.

Carefully monitor your withdrawals and returns to make sure your corpus is on track to last as long as needed.

Keep health insurance and an emergency fund separate from your retirement corpus to avoid unexpected shocks.

Plan your taxes well, as the taxation on hybrid funds can affect your returns.

Regular reviews of your financial plan will keep you on track, allowing you to enjoy your retirement without financial worries.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

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