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49-year-old with 2.5cr savings wants to retire soon: How to ensure a comfortable retirement?

Ramalingam Kalirajan |10865 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Oct 10, 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

Asked by Anonymous - Oct 10, 2024Hindi

Hello sir, I’m 49 and want to retire in the next 2to3 years. I have about 1.5cr in MF’s and about 1 cr in PF. I have a loan of 30 lakhs that I plan to close by next year. Can you suggest best way to plan retirement, I would need about 1.75 lakhs pm with 4 percent inflation each year for the next 25 years

Ans: At 49, planning for retirement in the next 2 to 3 years is a significant financial step. The goal of generating Rs 1.75 lakhs per month with 4% inflation is achievable with careful planning and the right strategies.

You already have Rs 1.5 crores in mutual funds and Rs 1 crore in your provident fund. This is a solid base. There are a few key points to consider before finalising your retirement strategy.

Let's break down the approach in a simple, clear, and step-by-step manner to help you achieve financial independence during your retirement years.

Assessing Your Financial Position
Before you retire, it's crucial to review your current financial standing. You have:

Rs 1.5 crores in mutual funds
Rs 1 crore in your provident fund
Rs 30 lakhs loan to be closed next year
You are in a strong financial position, but careful planning is necessary to ensure sustainability for the next 25 years.

After retiring, you will need Rs 1.75 lakhs monthly, adjusted for inflation. Over 25 years, inflation will reduce the purchasing power of your money. A sustainable retirement income strategy must consider inflation and ensure your investments grow to cover future needs.

Closing Your Loan
Your plan to close your Rs 30 lakhs loan next year is a good idea.

Loan Repayment: It's essential to clear any high-interest liabilities before retirement. Loans can eat into your retirement corpus.

Once the loan is closed, you will have fewer fixed outflows, giving you more freedom to manage your retirement funds.

Investing for Income Generation
Now, let’s focus on generating Rs 1.75 lakhs per month for 25 years, adjusted for inflation.

Step 1: Divide Your Corpus for Different Time Horizons
A proven approach to retirement planning is the bucket strategy. This strategy involves dividing your corpus into three parts based on your investment time horizon. It ensures you have liquidity for short-term needs while your long-term investments grow.

Bucket 1: Immediate Needs (First 5 Years)

Allocate funds for your immediate retirement years (first 5 years). The goal here is stability and safety.

Use a combination of liquid funds or short-term debt funds for regular withdrawals. You can set up a Systematic Withdrawal Plan (SWP) from these funds to meet your monthly expenses.

This will help you avoid withdrawing from volatile equity markets during the early years of retirement.

Bucket 2: Medium-Term Growth (5 to 10 Years)

This bucket is for the next 5 to 10 years after retirement.

Allocate funds to hybrid funds, balanced advantage funds, or debt-oriented funds. These funds provide moderate growth with lower risk compared to equity funds.

The medium-term bucket will provide returns that keep pace with inflation and preserve your capital.

Bucket 3: Long-Term Growth (10 to 25 Years)

For the long-term, allocate funds to actively managed equity mutual funds. These funds have the potential to outperform inflation over the long run and can give you the growth needed to sustain your corpus.

Avoid relying on index funds. While they are low-cost, actively managed funds have the potential to deliver better returns over time, especially in volatile or emerging markets like India.

Regular funds managed by a Certified Financial Planner (CFP) or a mutual fund distributor (MFD) are beneficial because you can receive expert advice. Direct funds often leave investors without guidance, and even minor missteps can impact long-term wealth creation.

Step 2: Ensuring Inflation-Protected Growth
To meet the requirement of Rs 1.75 lakhs per month, you need to ensure that your investments grow at a pace that beats inflation. Here’s what you should keep in mind:

Inflation-Protected Growth: Given the 4% inflation rate, your corpus needs to grow at a higher rate to preserve purchasing power.

Equity Exposure: Equity mutual funds can help grow your wealth in the long run. By carefully choosing a mix of growth-oriented equity funds and hybrid funds, you can protect your wealth from the eroding effects of inflation.

Systematic Withdrawal Plan (SWP): An SWP from debt funds for the first 5 years and a shift to hybrid or equity funds later on will ensure a smooth flow of income, even during market downturns.

Step 3: Withdrawal Strategy
A systematic withdrawal strategy ensures that your corpus lasts throughout your retirement. A well-designed SWP can give you consistent income while allowing your investments to grow in the background.

Start with Debt Funds: In the first 5 years, focus on withdrawing from debt funds or balanced funds. This prevents you from selling your equity holdings during a market correction.

Shift to Equity Funds: After the initial period, shift to withdrawing from your equity or hybrid funds, which should have appreciated over time.

Step 4: Emergency Fund
Even during retirement, you need to maintain a cash buffer for emergencies.

Emergency Fund: Keep at least 6 months’ worth of expenses in a separate emergency fund. This should be kept in a liquid fund or fixed deposit to ensure easy access.
Tax Efficiency and Long-Term Capital Gains
As you draw down your corpus, it’s important to be mindful of taxation.

Capital Gains Tax: Equity mutual funds are subject to a long-term capital gains (LTCG) tax of 12.5% for gains above Rs 1.25 lakhs. Short-term capital gains (STCG) are taxed at 20%.

Debt Mutual Funds: Gains from debt funds are taxed as per your income tax slab.

Careful tax planning, along with regular withdrawals, can help you manage tax outflows and preserve more of your retirement corpus.

Health and Life Insurance
Since you have already mentioned having adequate health insurance, continue reviewing your insurance cover.

Health Insurance: Ensure you and your spouse are adequately covered for healthcare needs. Healthcare costs tend to rise with age, and medical insurance should keep pace.

Life Insurance: If you still have any life insurance policies, review them to ensure they meet your needs. If they are investment-oriented policies (like ULIPs), consider whether they are offering good returns compared to mutual funds.

Finally
Your current corpus of Rs 2.5 crores (after the loan is closed) is substantial. With careful planning, you can achieve your retirement goal of Rs 1.75 lakhs per month with 4% inflation for the next 25 years.

Start with Debt: Focus on debt and liquid funds for the first 5 years.

Diversify: Ensure a mix of equity, hybrid, and debt funds for medium- and long-term needs.

Regular Monitoring: Keep reviewing your portfolio annually to ensure it aligns with market conditions and your financial goals.

Tax Planning: Be mindful of capital gains taxes when selling mutual funds.

With a structured withdrawal strategy and a diversified portfolio, your retirement can be financially secure and sustainable.

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

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