Will Your Retirement Corpus Be Adequate Enough To Last A Lifetime?
You have taken early retirement from your job and have amassed 1.5 crores with you, which you have got from your investments, thanks to your patience and discipline in continuing your SIP (Systematic Investment Plan). You are unsure whether this amount will be sufficient to take care of your 50,000 per month worth of expenses. After all, you have seen some of your workplace colleagues still continuing the work despite having built a huge corpus.
On top of that, it is hard to get mainstream financial advisers to admit that there is such a thing as a finite chunk of money that you can live safely on, forever. They say things like, “Financial independence is great, but truly retiring from making money? Forget it.” Just sit back, and read this article to find out how much money is enough for your retirement and how long it can last.
It is very much possible to have your retirement funds last for your lifetime if you plan it well enough. Let’s take a deep dive into it and see how that is possible. If you were to put that in fixed deposits, inflation will most likely eat up your principal in a few years. With FD rates of leading banks between 5.1-5.8%, you are free to withdraw only that percentage which is free from inflation. That means suppose the FD rate is 5.8% and inflation is 5%, you are free to withdraw only 0.8% of your corpus annually. This will amount to just Rs.10,000 per month. To beat inflation, having equity is a must in your portfolio.
The best way to have exposure to equity is through a balanced or hybrid mutual fund. Over the long term, these balanced funds have given returns around 12%, and this is even after considering the current crisis. Let’s be even more conservative and assume that these balanced funds might give a return of 10% over the long term in the future. Now with an inflation of 5%, you are free to withdraw 5% from your corpus. This means you can withdraw up to a little more than Rs.62,000 (which is more than the 50,000 you require) and probably your corpus will last a lifetime. For your corpus of 1.5 crores, your withdrawal of 6 lakh initially, gives a 4% withdrawal rate. In this case, chances are very high that your corpus will last a lifetime. If you start with a 2 crore corpus (3% withdrawal rate), it is almost certain that you’ll have a growing surplus for life.
So, a fixed chunk of money is about as safe a retirement strategy as you’ll ever find. It’s safer than relying on any job (private), because keeping a steady job depends on the overall economy remaining healthy enough to feed your family, your company remaining solvent, and you remaining productive and useful to that company. Meanwhile, a good investment portfolio just depends on the world economy, in general, continuing to exist.
Now coming to the question of what might happen if the market crashes. During this time mutual fund NAVs will also fall. I bet that is a question you might have in your mind. It is given that your corpus will also go down. But, considering that you are invested in balanced funds, the drop in your corpus will be lesser than the broader market. And as far as the market is concerned, it is bound to recover within a year or two. If you want reassurance, you can choose to withdraw less from your corpus during this period. In this case, you can take a dip in your emergency savings.
Or, you can take it a step further. You can tweak your asset allocation in such a way that your downside is protected — no matter what happens. Keep a major portion of your portfolio in debt, and as each year passes, gradually hike equity exposure — Let’s say by the end of 10 years, you want to have 40% in equity. Then after year 1, you will rebalance to have 4% in equity, 8% at the end of year 2, and so on. This way, no matter what happens in the market, your downside is limited.
The only con of this is that you might have to sacrifice some of your returns, but you get a huge peace of mind in exchange — which I believe is worth way more than the returns which you are sacrificing.
So, 5% would most likely do the job for you (which is 20 times your annual expenses), but you need to have at least 2 years’ worth of your expenses in an emergency fund. If you want to be more conservative, 4% (25 times your annual expenses) will last a lifetime. And 3% would be perfect if you are concerned a lot about the stock market’s volatility. But I would suggest 4% will most likely last you for your lifetime (almost certain if you follow the step-up equity allocation strategy which is explained above). This is where the 25-30 times your annual expenses come from which I had discussed in my past posts.
All in all, a fixed amount of money is good enough for a retirement plan, and the math doesn’t care whether you are 5 years old or 80 years old. If you get the numbers right, you are set for a lifetime, in fact, for generations.
Till next time.