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Hi,
I am a 44 year old IT professional, married with no kids, and I'm planning to retire from active work by 46 (with an option to pick up some freelance engagements). Few basic information are as below:
1. 3 houses paid for, worth approx INR 5.5 Cr
2. Cumulative FD worth INR 2 Cr, split between myself & spouse
3. NPS worth INR 13 lakhs
4. MF portfolio worth approx INR 40 lakhs
5. Medical insurance with a cumulative coverage of INR 1.5 Cr, for self & spouse.
6. Parents are not financially dependent on me.
7. Current monthly expenses are around INR 1.5 lakh.
8. Annual holiday pegged at INR 20 lakhs
9. No rental yield from the houses, as they're self occupied
I will continue to save/invest approx INR 6.5 lakh per month till my retirement date, which is tentatively set for mid 2026.
My questions are as below:
1. Assuming I have a net savings/investment of INR 4 Cr, along with the 3 houses, will it lead to a sufficient retirement corpus.
2. If I need to continue living a similar lifestyle, how much will I need as a corpus.
Thanks in advance.
Ans: Retirement planning is crucial, especially when you're aiming to retire early and maintain a comfortable lifestyle. Let's delve into a comprehensive analysis of your financial situation and create a strategy to ensure a secure and enjoyable retirement.
Understanding Your Current Financial Situation
Assets and Investments
Three Houses: Worth approximately Rs. 5.5 crore. These are self-occupied and provide no rental income.
Fixed Deposits: Totaling Rs. 2 crore, split between you and your spouse.
National Pension System (NPS): Worth Rs. 13 lakh.
Mutual Fund Portfolio: Valued at around Rs. 40 lakh.
Medical Insurance: Coverage of Rs. 1.5 crore for you and your spouse.
Current Expenses
Monthly Expenses: Rs. 1.5 lakh.
Annual Holiday Expenses: Rs. 20 lakh.
Savings and Investments Until Retirement
You will save and invest Rs. 6.5 lakh per month until mid-2026.
Evaluating Your Retirement Corpus Requirements
Estimation of Required Corpus
To estimate your retirement corpus, we need to consider your current expenses, inflation, and your expected lifespan. Let's break this down step by step.
Monthly Expenses: Rs. 1.5 lakh.
Annual Expenses: Rs. 1.5 lakh x 12 = Rs. 18 lakh.
Annual Holiday Expenses: Rs. 20 lakh.
Total Annual Expenses: Rs. 18 lakh + Rs. 20 lakh = Rs. 38 lakh.
Accounting for Inflation
Inflation reduces the purchasing power of money over time. Assuming an average inflation rate of 6% per annum, we need to estimate your future expenses.
Calculating Future Expenses
You are currently 44 and plan to retire at 46. Let's assume you live till 85, giving us a retirement period of 39 years.
Future Value of Annual Expenses: Rs. 38 lakh will increase due to inflation.
So, your annual expenses at the start of retirement will be approximately Rs. 42.7 lakh.
Total Corpus Required
To maintain a similar lifestyle throughout your retirement, we need to calculate the corpus required to support these expenses, adjusted for inflation over 39 years.
Considering Withdrawal Rate
A common rule of thumb is the 4% withdrawal rate, which suggests you can withdraw 4% of your retirement corpus annually without depleting it prematurely.
Corpus Required for First Year Expenses:
you need approximately Rs. 10.67 crore at the start of your retirement.
Analyzing the Gap
Required Corpus: Rs. 10.67 crore.
Projected Corpus by Retirement: Rs. 4.48 crore.
Gap: Rs. 10.67 crore - Rs. 4.48 crore ≈ Rs. 6.19 crore.
Strategies to Bridge the Gap
Optimizing Investments
Reallocate Assets: Shift some FD and mutual funds into higher growth options like equity mutual funds. This can potentially provide higher returns.
Increase Savings Rate: If possible, increase your monthly savings rate.
Extend Retirement Date: Consider extending your retirement by a few years to accumulate a larger corpus.
Detailed Investment Strategies
Equity Mutual Funds
Investing in equity mutual funds offers growth potential. These funds can provide returns that beat inflation over the long term. Focus on large-cap and diversified equity funds to manage risk.
Hybrid Mutual Funds
Hybrid funds offer a balanced approach, combining equity and debt. They provide growth with reduced volatility. These can be a good addition to your portfolio for stability and growth.
Debt Mutual Funds
Debt funds are less volatile and provide stable returns. They are suitable for preserving capital and generating regular income. Include a mix of short-term and medium-term debt funds.
National Pension System (NPS)
Continue contributing to NPS. It offers tax benefits and market-linked returns. At retirement, use a portion for annuities and withdraw the rest.
Realign Fixed Deposits
Consider moving a portion of your fixed deposits to mutual funds or other growth-oriented investments. FDs offer safety but lower returns compared to mutual funds.
Medical Insurance Coverage
Your medical insurance coverage of Rs. 1.5 crore is sufficient. Ensure it continues post-retirement. Consider adding top-up plans if needed.
Regular Review and Rebalancing
Regularly review your investment portfolio. Rebalance it to maintain the desired asset allocation. Adjust based on market conditions and your financial goals.
Risk Management
Emergency Fund
Maintain an emergency fund equivalent to 6-12 months of expenses. This ensures liquidity for unforeseen expenses.
Diversification
Diversify your investments across asset classes to reduce risk. Avoid putting all your money in one type of investment.
Monitoring Expenses
Track Expenses
Keep track of your expenses. Adjust your budget if needed to ensure you stay within your retirement income.
Manage Lifestyle Inflation
Be cautious of lifestyle inflation. As your income grows, avoid unnecessary expenses that can erode your savings.
Tax Planning
Tax-Efficient Withdrawals
Plan your withdrawals to minimize tax liability. Use systematic withdrawal plans (SWP) from mutual funds for regular income.
Utilize Tax Benefits
Take advantage of tax-saving investments under Section 80C, 80D, and other applicable sections. This reduces your taxable income.
Freelance Engagements
Consider freelance work post-retirement. It can provide additional income and keep you engaged. This can reduce the pressure on your retirement corpus.
Conclusion
Retirement planning requires careful analysis and strategy. With your current savings and planned investments, you're on the right track. By optimizing your investments, increasing savings, and managing expenses, you can build a sufficient retirement corpus.
Ensure regular review and rebalancing of your portfolio. Work with a Certified Financial Planner (CFP) to tailor your strategy and achieve your retirement goals.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in