Will our retirement corpus last your lifetime? Here’s how you should plan

Allocating assets wisely is vital to ensuring your corpus outlasts your retirement.

Retirement is a phase of life where financial independence is key. For individuals retiring at 60, the goal is to ensure that their retirement corpus lasts for the next 25 years, maintaining a comfortable lifestyle while coping with inflation and growing investments.

Let’s take a simple example. Your monthly expenses at age 60 (your first year in retirement) is Rs 1 lakh a month. This means you need Rs 12 lakh annually in the first year. On the other side, you have a tidy corpus of Rs 3 crore at the start of your retirement.

Remember, this is just an illustration to highlight two things; how much money you should withdraw after retiring and at what rate your retirement corpus grows after age 60.

Defining the retirement objective

Your goal is clear: you want to withdraw Rs 1 lakh per month for the next 25 years. But this would grow with inflation as items become costlier over the years. It is safe to assume a 4 percent annual rate of inflation. Simultaneously, your Rs 3 crore corpus should grow at 8 percent, 10 percent or 12 percent annually, depending on your asset allocation strategy.

Understanding the impact of inflation on monthly withdrawals

The pace at which prices go up is a crucial factor that erodes purchasing power over time. With a 4 percent inflation rate, the Rs 1 lakh you plan to withdraw monthly today will need to rise over the years to maintain the same standard of living.

Here’s how inflation will impact your withdrawals over 25 years:

• In Year 1, you withdraw Rs 1 lakh p.m.
• In Year 2, due to 4 percent inflation, your monthly withdrawal increases to Rs 1.04 lakh p.m.
• By Year 25, your monthly withdrawal will have increased to approximately Rs 2.67 lakh p.m. (Rs 32 lakh annually). Thus, inflation has a compounding effect on your withdrawals over time, highlighting the importance of proper investment growth to sustain your corpus.

Allocating assets wisely is vital to ensuring your corpus outlasts your retirement. A diversified portfolio with exposure to equities, bonds and other instruments can help you grow your corpus at an 8, 10 or 12 percent annual rate.

Let’s look at how each growth rate can impact your corpus over 25 years:

8% annual growth rate: A moderately conservative strategy, balancing growth and safety.
10% annual growth rate: A more aggressive approach, with a higher allocation to equities.
12% annual growth rate: A highly growth-oriented strategy, likely involving significant exposure to equities and growth-oriented assets.

Calculating the corpus requirement

Now, let’s see how much of a nest egg you need at the start of your retirement, assuming you want it to grow at different rates while maintaining a 4 percent inflation-adjusted withdrawal rate.

• Corpus at 8% growth: If your investments grow 8 percent annually, your starting Rs 3 crore corpus will reduce to Rs 1.31 crore by the 25th year, considering inflation-adjusted withdrawals.
• Corpus at 10% growth: With a 10 percent annual growth rate, your corpus will still have Rs 2.11 crore left after 25 years of withdrawals.
• Corpus at 12% growth: With a highly aggressive growth rate of 12 percent annually, your corpus will not only sustain withdrawals but may even grow to Rs 4.37 crore after 25 years.Evaluating the results

It’s clear that the choice of growth rate—determined by your asset allocation strategy—plays a critical role in whether your Rs 3 crore corpus will last through retirement.

Also read | Retirement planning: The magical 30x rule and how it helps you build a comfortable life

Periodic review of your portfolio

Investing is not a one-time decision. You must from time to time take a close look at your portfolio, perhaps annually, to ensure it remains aligned with your goals. As you age, you might want to shift more of your assets to safer instruments like bonds or fixed deposits to preserve capital. You can also consult an experienced financial expert who can help you make data-driven decisions on adjusting your allocation over time.

The importance of flexibility and discipline

Your investment journey in your post-working life is about balancing growth with withdrawals. While your goal is to ensure financial independence, you must be flexible with your withdrawals and spending patterns. For example, in years when your investments outperform, you may consider increasing your withdrawal slightly, while in low-return years, you may want to cut back.

Being disciplined with your spending and adhering to your asset allocation plan can ensure that you enjoy a comfortable and independent retirement.

Also read | Retirement planning in your 40s: Why this is the right time and here’s what you need to do

Conclusion

With proper planning and execution, a peaceful and independent life in retirement is achievable. With Rs 3 crore invested at age 60, a well-planned asset allocation strategy can ensure you sustain a Rs 1 lakh monthly withdrawal for 25 years despite 4 percent inflation. The key lies in maintaining an optimal balance between growth and withdrawals.

With careful rebalancing under the guidance of an experienced financial expert, a diverse portfolio and a disciplined withdrawal strategy, you can enjoy a comfortable and independent retirement without worrying about running out of money.

Plan ahead and wisely, and enjoy a financially secure retirement.

The author is a personal financial mentor, boasting an impressive track record of over 25-plus years in the personal finance market.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.