“Oh, how time flies,” Rajesh sighed. It’s been a whirlwind fifteen years since he swapped his hometown in Madhya Pradesh for Bengaluru’s bustling tech scene. Starting as a software executive, he climbed the corporate ladder in no time.
His career progress, marriage, and fatherhood, all seem like they happened overnight. Now as Rajesh turns 40, Bengaluru is home, where he shares his life with his wife and two children. However, amid the hustle of work and family life, his retirement planning was left simmering on the back burner. Now he finds himself playing catch-up, asking, “Can I retire with a pension of Rs 1 lakh per month, considering I earn Rs 2 lakh a month today, and I plan to work until I’m 60.”
The big question is, can Rajesh make it happen?
While early retirement planning gives you a head start (more on that later), it might not be too late for Rajesh. Let’s figure out a plan:
First, what post-retirement income would Rajesh and his family be comfortable with? Rajesh estimates he’ll need Rs 1 lakh per month. But does this mean he needs a retirement fund that spits out Rs 1 lakh a month when he turns 60? Not exactly. What Rajesh means is he wants a pension in twenty years that holds the same purchasing power as Rs 1 lakh does today.
Inflation is a silent game-changer in retirement planning. Assuming a yearly inflation rate of 6%, Rajesh would actually need a monthly pension of Rs 3,20,714 (or Rs 38.49 lakh annually) by the time he retires at 60.
So, what should Rajesh’s retirement fund look like?
A handy rule of thumb is to accumulate at least 25 times (or 30 times if you are up for it) your annual expenses by the time you retire. So, for Rajesh, who envisions a comfortable lifestyle with annual expenses of Rs 38.49 lakh, he would need a hefty corpus of Rs 9.6 crore.
And how does Rajesh build this corpus?
That depends on Rajesh’s current savings, potential savings from future income, and the nature of their investment portfolio.
The type of investments Rajesh chooses will be pivotal. For example, if he chooses to invest purely in debt instruments that offer about 6% annually, the family would need to invest Rs 87,000 every month via a SIP in debt mutual funds or an RD to build a Rs 9.6 crore portfolio.
In simpler terms, they’d need to set aside about 43-44% of their income. Here, we’re assuming the SIP amount will grow by 10% each year, reflecting an increase in household income.
However, if Rajesh opts for a balanced portfolio with about 50%-60% in equities, he could potentially earn 8% annually. Historically, equities have delivered better returns (around 10% annually) than debt. In this scenario, a monthly SIP of Rs 73,000, or about 36% of their initial monthly income, should suffice.
If Rajesh decides to go all-in with equities, he’ll need to contribute just Rs 60,000 via SIP (around 30% of the initial family income) until he retires at 60. As he nears retirement, it would be wise for Rajesh to gradually shift from equities to fixed income, reducing his equity exposure to around 50%.
This approach would require a larger SIP investment, particularly for portfolios heavy on equities. Equities can be volatile in the short term, and this strategy helps safeguard post-retirement income from potential market crashes.
What if Rajesh has existing Investments?
Rajesh and his wife don’t need to start from scratch if they already have some savings. Let’s say Rajesh has Rs 50 lakh in investments at the age of 40 and expects his EPF to add another Rs 2 crore by the time he retires. They can adjust their retirement corpus target accordingly.
With Rs 50 lakh invested in equities, Rajesh could expect around Rs 3 crore by the time he turns 60. Factoring in these amounts, their new retirement corpus target would be Rs 4.6 crore. This goal could be comfortably achieved with a monthly SIP of Rs 29,000 in equity funds, which is only about 15% of their household income.
But remember, existing loans can move your retirement goalposts. If you have a credit card, car, or personal loan, make sure to prioritize repayment. These loans carry high interest – possibly higher than what equities could earn annually.
Cost of Procrastination
Lastly, some of us have a habit of delaying investment decisions. What happens if Rajesh and his family decide to delay their investment by a few years?
If Rajesh starts saving for retirement at 45 instead of 40 (a delay of five years), he’ll need to more than double his original SIP. To achieve the same retirement corpus of Rs 9.6 crore, he’d need an initial SIP of Rs 1,29,000 (compared to Rs 60,000).
For those fully invested in debt, an even higher initial SIP of Rs 1,72,000 (compared to Rs 87,000) would be necessary to reach the goal. This would consume 85% of the couple’s initial salary, making the goal much harder, if not impossible, to achieve. Don’t delay your retirement investments.
While DIY retirement planning is popular, it can be helpful to consult a financial advisor for a comprehensive view of your retirement goal.
A 40-year-old can retire with a monthly pension of Rs 1 lakh, in 20 years, if they consistently invest at least Rs 60,000 in an equity-oriented SIP. Any further delay can make this goal unattainable.