Monthly Income For Retirement Planning: How Rs 5,00,000 one-time investment on your child's birth may provide them Rs 87,000 monthly income from 30 years of age

When your child grows, expenses rise, such as for their education, higher studies, and upbringing. If you have an investment in place, you may cover these expenses through the passive income. It will ease your burden, and when the child enters into their professional life, rather than thinking about repaying loans or making ends meet, they can focus more on their professional career.

An early start gives you more time for the compounding of your investment. If you start investing at the time of your child's birth, the investment may grow multiple times by the time your child turns 25.

A starts an investment when their child is born; B starts when their child is 5 years old. Both want to invest till both their children turn 25. Each expects a 12 per cent annualised return. Let's see the corpus they can create with a Rs 15,000 monthly SIP investment. A will invest Rs 45,00,000, their estimated capital gains will be Rs 2,10,33,099, and their estimated corpus will be Rs 2,55,33,099. 

 

B will invest Rs 36,00,000, their estimated capital gains will be Rs 1,01,97,860, and their estimated corpus will be Rs 1,37,97,860. A 5-year delay changes the scenario entirely.

Now understand this example from a one-time investment's perspective.  A invests Rs 7 lakh on their child's birth, and B invests the same amount when their child is 5. Both expect a 12 per cent annualised return on their respective investments, and they both want to redeem their investment when children turn 30. Let's see the corpus they can create. A will have a 30-year investment horizon, and their Rs 7 lakh investment will give estimated capital gains of Rs 2,02,71,945 and an estimated corpus of Rs 2,09,71,945.

 

On the other hand, B will have a 25-year investment horizon, and their Rs 7 lakh investment will give them estimated capital gains of Rs 1,12,00,045 and an estimated corpus of Rs 1,19,00,045. Here also, you can see that a mere 5-year delay may reduce the corpus by Rs 90 lakh.

 

In the examples above, you can see that the corpus is growing faster with time. It's because in compound growth of your investments, you get return on return. It creates a snowball effect, which helps your corpus grow faster with time. 

If one doesn't want to withdraw the corpus after a long-time investment and wants to get a monthly income from it, they may invest it in a mutual fund and start a systematic withdrawal plan (SWP), from where they may get a fixed monthly income for years or decades.

We will calculate how a Rs 5,00,000 one-time investment at a 12 per cent annualised rate can create a corpus in 30 years and how one may withdraw a monthly amount for the next 30 years from it.

In 30 years, the investment will give estimated capital gains of Rs 1,44,79,961 and the estimated corpus of Rs 1,49,79,961.

As per the current long term capital gain (LTCG), the investor will get a Rs 1,25,000 exemption on LTCG and the tax rate for the rest of the gains will be 12.5 per cent.

After a Rs 1,25,000 LTGC exemption, the taxable income will be Rs 1,43,54,961. A 12.5 per cent tax on that means an estimated tax of Rs 17,94,370.125. Post-tax estimated retirement corpus will be Rs 1,31,85,590.875.

Rs 1,31,85,590.875 will be our estimated corpus for SWP mutual fund investment. Here, it is important to know that we will invest this money in a debt or hybrid mutual fund, from where our expected annualised return will be 7 per cent. The reason for a conservative approach is that since the amount is meant for a regular income and we can't take a risk on the amount, we need to be conservative.

The estimated monthly income that we may get from this investment will be Rs 87,215. One may get it for 30 years.

The total pension withdrawn in 30 years will be Rs 3,13,97,400.