I am 40, a salaried person and earn Rs 1 lakh. How can I earn a pension of Rs 50,000 per month?

I am a salaried person and earn Rs 1 lakh every month. I want to invest to secure my retirement. Can you suggest how much I should set aside now to earn a pension of Rs 50,000 after I turn 60?

Richa

Reply by: Sushil Jain, CFP  

As we always suggest, the thumb rule for managing cash flow is 25% of income should go into investment, 25% for lifestyle expenses and remaining 50% for meeting household expenses. Remember this is only a thumb rule, create a customised plan to get the desired results.

Retirement goal is the most important goal of any individual compare with other goals. For other goals, you may go for a loan and can also get it postponed in certain cases. But in case of retirement, you cannot get a loan or postpone it. The only option available is if you have a house to reverse mortgage or you have set aside funds for retirement corpus, if you do not have an adequate pension or pension plan.  

For retirement planning, you should follow the following 3 steps:

1) Calculate the fund required at the time of retirement that will give you a monthly desired income till you survive.

2) Calculate how much you need to save and invest to create the corpus needed

3) Choose where to invest to get the desired return

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Step -1  

Today’s Rs 50,000 will be approximate Rs 1.6 lakh per month at the time of retirement (after 20 years) assuming 6% inflation per annum. To maintain the same standard of living after retirement you need a corpus of around Rs 3.98 crore, assuming your life expectancy is 80 years and retirement will be at 60 and 8% of income on the corpus after retirement.

Step 2 

To generate Rs 3.98 crore in the next 20 years, you need a monthly investment Rs 38,000 based on the following assumption.

1) You should invest 40% in debt and 60% in equity. It will help you in asset allocation as well as tax planning

2) You should gradually increase investment in equity by increasing SIP amount by 5% every year.

3) You should invest Rs 15,000 a month in debt and Rs 23,000 in equity. The equity investment should increase by 5% every year.

4) You will able to generate approximate Rs 88 lakh from debt and Rs 3.15 crore from equity assuming 8% return from debt and 12 % from equity.

5) At the time of retirement, your asset allocation will be 20% in debt and 80% in equity.

6) You need to reallocate it to debt hybrid fund, which we have assumed will give you 8% return and after assuming 30% tax on it the net return will be 5.6% only.

Step 3

The last step is to select the funds to invest in. For debt, we should invest between PPF, NPS and debt hybrid fund. You can expect around 8% return on your investment. The equity investment option should divide between large-cap, large and mid-cap, and mid-cap funds.

You can consider the following fund to invest:

Debt Fund: Kotak Debt Hybrid Fund

Large-Cap Equity: Nippon India Large Cap Fund

Large& Mid-Cap Equity: ICICI Prudential Large & Mid Cap Fund, SBI Large & Mid Cap Fund

Mid-Cap Equity –: Motilal Oswal Midcap Fund, HDFC Mid Cap Opportunities Fund.

There is no doubt that retirement planning is the most important goal of life, but we suggest you have adequate health cover and life cover to protect you and your family from unwanted financial stress in case of an emergency, you should also have at least 6 months’ expenses in your bank or liquid fund as an emergency fund. We recommend you do estate planning and make a proper will. 

(Views expressed by the investment expert are his/her own.)

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