People are often concerned about their post-retirement expenses. AP Singh of Ghaziabad is already beginning to calculate his post-retirement expenses. He is due to retire at the end of this year.
He will receive approximately ₹1 lakh upon retirement. He wants to invest this money to generate regular income. He wants to know where, how much, and how he should invest it. Moneycontrol asked experts this question.
₹1 crore can cover expenses for 25-30 years
Experts say that if a fund of Rs 1 crore is managed correctly and with discipline, it can easily cover expenses for the next 25-30 years. Ajay Kumar Yadav, Group CEO of financial planning firm Wise Finserv, said, “First, it’s important to calculate how much monthly income AP Singh will need for essential and other expenses. Then, he needs to develop an allocation strategy.”
Capital should not be submerged under any circumstances
He said that special care must be taken to ensure that their capital is not lost under any circumstances. Investments in fixed deposits, secured high-rated bonds, senior citizens’ schemes, annuities, and debt mutual funds can yield returns of approximately 8% CAGR. However, along with capital protection, it is also important to focus on returns. Fixed income instruments offer greater security, but the value of money decreases over time.
Inflation will affect investment returns
Inflation also impacts returns. Taxes further reduce real returns. Debt instruments typically yield returns that are only 1-2% above inflation. This means that if Singh invests solely in fixed deposits and bonds, his funds likely won’t last 25-30 years. He also needs to invest in instruments that generate monthly or quarterly income. This means he needs to ensure regular income after retirement without losing capital.
25-40% investment will have to be made in shares
Investing around 25-40 per cent of your capital in equities will ensure continued capital appreciation. Amit Suri, CFP and founder of wealth management firm AUM Wealth, said, “The primary principle is that your withdrawal rate should be lower than the growth rate of your equity assets. A mutual fund’s Systematic Withdrawal Plan (SWP) is a smart way to generate income without hindering compounding.” For investing in equities, it’s best to invest in large-cap funds, balanced funds, and multi-asset allocation funds.
12% CAGR return from equity allocation
Yadav said, “Among these, multi-asset allocation funds and balanced advantage/dynamic asset allocation funds can be considered ‘all-season funds.’ This is because fund managers have the flexibility to increase or decrease investments in equities, debt, gold, and silver as needed. Equity allocation can generate returns of up to 12% CAGR over the long term.” This also helps with taxation.
Investing in equity is also beneficial from tax point of view
Under the new tax regime, annual income up to Rs 12 lakh is tax-free. Shares are tax-friendly, as capital gains above Rs 1.25 lakh are taxed at 12.5% long-term and 20% short-term capital gains. We assume that investing in shares generates a 12% annual return, while fixed income grows at an 8% annual rate. AP Singh’s annual income should initially be Rs 6 lakh. The impact of inflation will need to be calculated annually. Inflation is assumed to be 5% for the first 10 years. It is assumed to be 4.5% between the 11th and 20th years. It is assumed to be 4% in the last decade.
Balance investments in fixed instruments and equities
Singh earns approximately ₹4.8 lakh annually from his fixed-income portfolio. The remaining funds are received through Systematic Withdrawal Plans (SWPs) from mutual funds. Instead of a fixed withdrawal rate, this plan adjusts the amount of each SWP. This approach allows Singh to easily meet his monthly expenses without putting any pressure on his portfolio. With high market returns, balanced withdrawals, and compounding benefits, Singh’s wealth will not only be sufficient to cover his post-retirement expenses but also allow him to create a substantial corpus for the next generation.
