Retirement Planning: How Rs 5,50,000 one-time investment can generate monthly income of Rs 96,000 for 30 years
Retirement Planning: It is important to stay in your investments for a long term! The long duration may take your investment to a few crores. At that stage, you may start a systematic withdrawal plan (SWP) to draw a monthly income for decades. A Rs 5,50,000 one-time investment may take you to draw a monthly income of approximately Rs 96,000 for 30 years.
Retirement Planning: Everyone needs a regular income post retirement. But how can that income be generated? It can be created through business, income sources such as a rental property, purchasing a pension plan for perpetual annuity, or returns from investments. When you talk about investment, you can surely take the benefit of starting to invest early, where your small investment may fulfil your retirement requirements for life long. One may opt for periodic or one-time investment to create their corpus. But if they start their investments early and let them grow for years, they may generate a monthly income for decades from a small one-time investment. Even a Rs 5,50,000 mutual fund lump sum investment may generate a monthly income of Rs 96,000 through a systematic withdrawal plan (SWP) for 30 years. Know how it may be possible.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
Why is retirement planning necessary?
In your retirement stage, you need a regular income. It may come in the form of a monthly pension, rental income, business, return from investment, etc. But either of them or a mix should be there as a regular income source(s).
How can retirement corpus be created through investment?
A person can create a corpus through daily, weekly, monthly, quarterly, half-yearly, or yearly investment, or they may go for a one-time investment. They may choose a mix of both, where they make periodic investments and also go for a one-time investment whenever they get a large sum.
Retirement investment stages
There are two stages of retirement investment– pre-retirement and post-retirement.
In the pre-retirement stage, if the investment horizon is long, the investor can be aggressive in their investments as they have years to fight market fluctuation.
However, in the post-retirement stage, they need a regular income and can't be aggressive in their investments. E.g., if they keep their portfolio equity-heavy and the market falls, their corpus may deplete in a few years.
Different types of retirement investments
One may invest their money in equity, such as stocks and mutual funds, or fixed interest schemes such as fixed deposit (FD), corporate bonds, and National Savings Certificate (NSC). Ideally, one should have a mix of both for their retirement portfolio.
Monthly investment for retirement portfolio
Long duration can play a key role in multiplying one's investment. Let's understand it with an example. Let's see how a Rs 12,250 monthly SIP investment, or Rs 1.5 lakh investment a year, can grow in 10, 20, and 30 years at a 12 per cent annualised return.
In 10 years, total investment will be Rs 14,70,000, estimated capital gains will be Rs 12,74,440, and the estimated corpus will be Rs 27,44,440.
Monthly investment for retirement portfolio
In 20 years, total investment will be Rs 29,40,000, estimated capital gains will be Rs 83,28,253, and the estimated corpus will be Rs 1,12,68,253.
In 30 years, total investment will be Rs 44,10,000, estimated capital gains will be Rs 3,33,31,922, and the estimated corpus will be Rs 3,77,41,922.
One-time investment for retirement portfolio
Let's see how a Rs 10,00,000 one-time investment can grow in 10, 20, and 30 years at a 12 per cent annualised return.
In 10 years, estimated capital gains will be Rs 21,05,848, and the estimated corpus will be Rs 31,05,848.
One-time investment for retirement portfolio
In 20 years, estimated capital gains will be Rs 86,46,293, and the estimated corpus will be Rs 96,46,293.
In 30 years, estimated capital gains will be Rs 2,89,59,922, and the estimated corpus will be Rs 2,99,59,922.
What is systematic withdrawal plan (SWP)?
It is the reverse of SIP. In an SIP investment, you invest a fixed amount every investment cycle to create a corpus.
In SWP, you invest a lump sum amount in a mutual fund scheme(s) and withdraw a fixed amount every month.
Since your money also grows when you are withdrawing the amount, your corpus may give you a monthly income for decades.
Calculations for story
Our calculations will be in two phases. In the first phase, we will show how much retirement corpus a Rs 5,50,000 one-time investment can create in 30 years and then how a post-tax return may generate an estimated monthly income of nearly Rs 96,000 for 30 years. It means if a 25-year-old invests Rs 5,50,000 one time and lets it grow for 30 years, then at 55 years of age, they may have a corpus that may give them an estimated Rs 96,000 monthly income till the age of 85.
Retirement corpus from Rs 5,50,000 one-time investment
At a 12 per cent annualised return, a Rs 5,50,000 one-time investment may generate estimated capital gains of Rs 1,59,27,957 and an estimated retirement corpus of Rs 1,64,77,957.
Tax on Rs 1,64,77,957 retirement corpus
An investor gets a Rs 1,25,000 exemption on long term capital gains (LTCG). After that, the income tax LTCG is 12.5 per cent.
According to that, the estimated tax on a Rs 1,64,77,957 retirement corpus will be Rs 19,75,369.625, and the post-tax return will be Rs 14502587.375
SWP amount
Rs 1,45,02,587.375 will be the amount to invest in a mutual fund scheme for SWP. Since we are investing it for retirement, we need to be conservative in post-retirement investments, and we expect a 7 per cent return from our investment.
How to get Rs 96,000 monthly income for 30 years
If we get a 7 per cent annualised return on Rs 1,45,02,587.375, it can provide an estimated income of Rs 95,900 for 30 years. After withdrawing that amount, the remaining amount will be Rs 32,523. The total estimated withdrawn amount in 30 years will be Rs 3,45,24,000.