previous article we discussed the retirement corpus required for an affluent lifestyle in India. The next logical question is how to build one.
We estimated that a corpus of INR 6 crores to INR 10+ crores would be required depending on the kind of post-retirement investment required, whether in risky, high-return assets like equities or low-return assets like fixed income.
Let us understand what building this kind of a corpus entails. There are several factors which impact the corpus building; viz. starting corpus, time available before retirement, returns generated during the time.
Let’s consider the case of a 50-year-old NRI with a starting corpus of INR 1 crore. To grow INR 1 crore to INR 6 crore in 10 years, by the time s/he is 60, requires a compounded annual growth rate (CAGR) of 20% (19.62%, to be precise). A required rate of return of 20% is too high and one cannot “plan” on getting such a return. This corpus is just not sufficient to create the required corpus of INR 6 crores.
If the starting corpus were higher, say, INR 2-2.5 crores, it would grow to INR 6 crores at a CAGR of 9%-12% (9.15%-11.62% to be precise). This required rate of return, calculated in INR terms, looks reasonable and feasible if the corpus was nearly fully allocated to equities.
The NRI with starting corpus of INR 1 crore can still build the required corpus but would have to make significant contributions to it during his remaining working life of 10 years. S/he can start doing an SIP (systematic investment plan) to the corpus. Assuming a 10%-12% return over the period, the SIP amount would have to range from INR 1 lac to INR 1.5 lac per month to achieve the required corpus.
We are purposely not being too precise about the amounts or the rates of returns since it would be false precision. One does not know what the future returns from any asset class over such long periods of time would be. We are trying to get a range of figures and then rounding it off to a number which can be held in the mind easily long after the calculations, or this article, is forgotten.
In summary, to build a retirement corpus of INR 6 crores in 10 years, a 50-year-old NRI either starts with a corpus of INR 2.5 crores or with a corpus of INR 1 crores with a monthly SIP of INR 1-1.5 lakhs: in both cases, investing it in equities.
What we would like to point out is that this requires the person to develop risk tolerance if they do not already have. They will need that risk tolerance for next few decades during their retirement as well as discussed in the previous article since even during the retirement phase the corpus would need to be invested in equities.
If the person is unable to do that, s/he should develop a tolerance for a significantly less affluent lifestyle during their retirement, and, their monthly SIP contributions would also need a significant increase since they would need a much larger corpus during the retirement period if it were invested in only fixed income instruments.
Should you invest in mutual funds?
Let me give you an example of the alternative. Assuming you had around INR 2.5 crores and you invested it in fixed income yielding 4% net of taxes you would end up with INR 3.7 crores in 10 years’ time. Assuming you wanted your corpus to last you until the age of 95 years, or at least you wouldn’t want to run out of money at age 85 or 90, this amount would be sufficient for spending around INR 25000 per month, or INR 3 lakhs per year, assuming you already have a house you own. And, yes, it is possible to live in India on that amount as well. It is just a relatively less affluent lifestyle.
What can be clearly said is that if you have INR 1 crore and invest it only in fixed income you will end up with INR 1.5 crores 10 years later. For the INR 25000 monthly lifestyle today in India, this could last you for around 20 years. After that you run out of money. The “crorepati”, unfortunately, is not rich enough for a long, simple retired life.
The solution out of this dilemma is, of course, to, a) save a higher percentage of your income for the remaining time before retirement, b) retire later, c) reduce post-retirement spending levels, d) develop risk tolerance and e) invest in equities.
For developing risk tolerance, we suggest that you develop a better understanding of equities, what the risks mean, where returns come from, how businesses create economic value, and human behaviour among many other topics on how the world works.
Don’t worry, you have many decades to absorb these lessons. No amount of learning the theory of swimming can help you compared to jumping in the pool. Once you learn to float then the theory definitely helps you become a better swimmer. We will try to address aspects of several of the above-mentioned topics in future articles which can help you develop a better understanding of equities.
Disclaimer: Equity investments are subject to market risks. Global investments entail currency and country risks. The above is not a recommendation to buy, sell or hold any of the stocks or sectors mentioned. We and our clients might have exposure to the above-mentioned stocks or sectors. Please consult your investment advisor and assess the suitability of investment products for your circumstances before investing.