When I retire in April 2016, I will have a corpus of around ₹50 lakhs and no liabilities. I plan to keep ₹10 lakhs out of it for expenditure in another 3.5 years. The rest can be blocked in any way for 3.5 years and another 1.5 years can be run with the accumulated returns. Please help me with advice about exact investments etc.
- K.G. Mittal
Even for people who have a reasonable size of savings, the main problem in retirement planning in India is to compensate for inflation. If India were a well-managed economy with a two or three per cent inflation rate, your choices would have been simple. However, because of decades of government waste and overspending, we have a situation where our savings are eaten away at a ferocious rate by the declining purchasing power of the rupee.
Over the average 25-year period during which a retiree needs his income, you can expect prices to rise by about eight times. If the inflation rate were to be a reasonable 3 per cent, they would barely double over that period.
The question is, how to compensate for this inflation. If you need ₹30,000 a month for your monthly expenses today, you will need ₹77,000 a month after ten years, and ₹1.3 lakh a month after 15, ₹2.2 lakh a month after 20. Not only will your withdrawals need to increase, the remaining capital must also increase in order to support those higher withdrawals. It's not an easy problem to solve.
There's one simple way to estimate the basics of your retirement expenses. In order to support an inflation-adjusted withdrawal rate, you should only withdraw whatever your savings earn over and above the inflation rate.
Please read that again and think about it. Let's take an example. If your savings earn 11 per cent, and the inflation rate is 8 per cent, then you must withdraw only 3 per cent. This will allow your savings to grow at least with inflation and ensure that you will not become poorer in old age.
The above example also shows why fixed deposits and other instruments with a low rate are a really bad idea. These instruments rarely pay anything much above the consumer inflation rate. Therefore, if you stick to the above principle, you can't really withdraw anything!
If you stick to the above method, then not only will you live in comfort till the age of 100 years, 120 years or however long your life is, you will also leave substantial wealth for your descendants to fight over. So do remember to make a clear will.
Balanced Funds are Best
Let's get down to some specifics now. Based on past experience and the underlying principles, we believe that balanced funds (what we also call the Hybrid: Equity-oriented category in our data) offer the best choice. These funds generally invest 70 to 80 per cent of their assets in equity, with the rest in fixed-income securities. They give much of the returns of equity with lower volatility than pure equity funds. You may consider investing in any of the following balanced funds: Canara Robeco Balance Fund, HDFC Balanced Fund, ICICI Prudential Balanced Advantage Fund, L&T India Prudence Fund, and Tata Balanced Fund.
Over a period of more than five to seven years, you can expect most balanced funds to generate at least 5 to 6 per cent more than the inflation rate. This is a conservative estimate and gives you plenty of buffer for withdrawing at least 4 per cent a year. Once the investments have grown for a few years, you may even be able to withdraw 5 per cent (of the then value), when needed.
That means that for a monthly expense of ₹30,000, you need a ₹90 lakh investment. With a kitty of ₹50 lakh, you should withdraw no more than ₹16,600 a month. That does sound tough. However, we are unfortunate enough to live in a country with a long history of economically incompetent governments and this is the price we Indians have to pay for it.