So you have saved Rs 1 crore for retirement, but how to use it?For anyone planning retirement with a corpus of Rs 1 crore, the first question is: how long should your savings last? Should it cover 20 years, 30 years, or even longer? The answer to this depends on multiple factors, including your expected retirement period, the rate of return on your corpus, inflation, and the annual withdrawal rate. One way to ensure that your corpus lasts lifelong is that the rate of return should be so high that inflation can not erode the corpus.Another major factor to consider is the corpus withdrawal rate. The widely followed 4% withdrawal rule suggests that retirees can withdraw 4% of their corpus each year, adjusted for inflation, to ensure their savings last throughout their lifetime, according to an ET report.For instance, if you have Rs 1 crore saved for retirement and have a rate of return higher than 4% – this way, if you withdraw 4% each year or Rs 4 lakhs annually, the corpus can last for over 25 years. However, if your rate of return from the retirement corpus is much higher than 4%, then you may opt for a higher withdrawal rate, the ET analysis said.
How long to plan your retirement?
Raj Khosla, founder & managing director, My Money Mantra, told ET that the number of years you should plan your retirement depends on multiple factors, but a good general rule is to plan for 85 minus your retirement age as a safer assumption.“People are living longer due to better healthcare; therefore, planning for 25 to 35 years is realistic. If you retire early (before 60), you will need more corpus to cater to your retirement period,” he was quoted as saying.Factors like health, family history, lifestyle should also be on the checklist. Khosla also said that the plan should be reviewed every three years.The expert further added that longevity risk as a major concern and advises retirees to budget carefully:
- Plan for budgeting and understanding their expenses
- Consider rising healthcare costs
- Follow a safe withdrawal strategy
- Minimise debt and big expenses
Invest for growth even in retirement
With so many strings attached to retirement planning, it is important to have an expert’s opinion on how to do it right. Here is how much your corpus will last with different rates of return.
6% rate of returns and inflation is 4%
Table source: ET
Corpus earns 8% returns, inflation at 4%
Higher the returns your retirement corpus generates, the longer it will last. Below you can see how even a 2% increase in returns can help you sustain an inflation-adjusted monthly income of Rs 50,000 for over 25 years.
Table source: ET
10% rate of returns and inflation is 4%
Now try increasing the rate of returns by 2% more, and enjoy Rs 50,000 monthly income for over 40 years. However, if you want to withdraw Rs 1 lakh a month, your corpus will be exhausted in about 10.81 years at 10% returns, the ET analysis explains. This shows that even a 4% improvement in returns will not add even two more years of income. Sustaining it for 15 years would demand a 15% return, an unlikely target. In short, higher withdrawals sharply reduce corpus life unless returns are significantly higher.
Table source: ET
Is inflation a serious threat?
Vivek Banka, founder of GoalTeller, says that for many retirees, the lack of additional inflows into their corpus makes inflation the most significant threat.Vivek told ET, “This is why it is important to have investments in equity, which are going to give you inflation-adjusted returns.”Raj suggested, “Invest in equities, debt funds and short-term funds based on your risk profile. Real estate investment can hedge inflation and provide regular income also,” adding that even in retirement, retirees should stay invested in equities to ensure that “you beat inflation and do not run out of money.”
Long-term retirement strategy
Vivek said, “it can be 75% equity and 25% fixed interest assets. It can also be 70% equity and 30% fixed assets, or in the worst case, it can be 60% in equity and 40% in fixed assets.”The analyst further recommended that before retirement, retirees should take out “5 years of your lifestyle expenses, put that into fixed income investments, and the rest can be placed into equity because what that does is that it helps investors ensure that they do not exit in panic.”
Points to remember
- Do not make large withdrawals in the early years, which can drain the portfolio quickly
- Avoid withdrawing from equity markets during share market volatility.
- Keep a balanced allocation to equities in line with your risk profile.
- Adjust for inflation carefully, and consider a flexible withdrawal strategy that responds to market performance.
- Be disciplined and not ad-hoc in deciding the withdrawal amount.
- Consider inflation carefully and adopt a flexible withdrawal strategy that adapts to market conditions.
- Be disciplined in setting withdrawal amounts, avoiding ad-hoc decisions, ET reported.
Deciding ideal withdrawal rate
According to Raj, retirees should withdraw 4% of their corpus and adjust for inflation each year. Banka also advises withdrawing 4% annually but added, “I think 4% is a conservative number, but it is the best withdrawal rate. But you know, if you can manage it properly, you can go up to 5% also.”(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India)
