retirement plan
If you have a corpus of Rs 1 crore for retirement and you want it to last for your entire life, then first of all it is important to decide how long will your retirement last – 20 years, 30 years or even more? Apart from this, it is important to pay attention to three things. Return rate (earning rate), inflation and withdrawal rate every year.
What does the 4% rule say?
A famous rule for retirement is the 4% rule. According to this, if you withdraw 4% every year from your retirement fund and earn 6% or more returns from the remaining amount, then your fund can last almost your entire life. For example, if you have Rs 1 crore and you withdraw Rs 4 lakh every year (ie around Rs 33,000 every month), then the fund can last for 25 years or more. Provided that returns are above 6%. If you have to increase your income every year according to 4% inflation, then the life of the fund will reduce slightly, but if your return rate is 8% or 10%, then you can withdraw a little more.
How many years will the fund last at different return rates
- 6% returns and 4% inflation: The fund will last for more than 25 years.
- 8% returns and 4% inflation: The fund will last for more than 40 years.
- 10% return and 4% inflation: If you want to withdraw Rs 1 lakh every month, then the fund will last for about 10-11 years.
- If you want to run it for 15 years then you need 15% return, which is very difficult.
For how many years should a retirement plan be made?
According to Raj Khosla, Founder and MD, MyMoneyMantra.com, “Retirement planning should be based on 85 minus your retirement age.” Meaning, if you are retiring at the age of 60, then prepare a fund for at least 25 years. According to Raj, it is important to pay attention to these things while making a retirement plan. Retirement age, health and family history, inflation and healthcare expenses, the lifestyle you want They recommend reviewing your retirement plan every 3 years.
Is the fear of running out of money in retirement justified?
Raj says, this fear is real. This is called longevity risk. To avoid this, it is important that you prepare a budget, estimate health expenses, stay away from debt and adopt the right withdrawal strategy. Also, in retirement, keep some money invested in growth i.e. equity.
How to avoid inflation?
According to Vivek Banka, Founder, GoalTeller, inflation is the biggest threat to retirement funds because income does not increase and expenses increase. Therefore, it is important to keep some investments in equity (share market) even in retirement so that you can get inflation adjusted returns. Divide investments into three parts: Investing in equity (shares/mutual funds), debt funds, short-term funds, real estate can also provide regular income and protection from inflation.
What should be the long term strategy?
Vivek says, keep the right balance of equity and fixed income in retirement. Like 70:30 or 60:40. His advice is to keep an amount equal to 5 years’ expenses in fixed income and invest the rest in equities so that you do not need to sell immediately if the market falls. Both Raj Khosla and Vivek Banka believe that the safest way is to withdraw 4% every year, and adjust it every year for inflation. Vivek says, if managed very well, it can go up to 5%, but 4% is the most reliable rate.