Retirement Planning: How Rs 3,00,000 one-time investment may generate Rs 51,600 monthly income for 30 years
Retirement Planning, SWP: A small one-time investment may help you get a substantial monthly amount at retirement if you let your corpus grow for years and use a systematic withdrawal plan (SWP) to draw a monthly income for decades. Even a Rs 3,00,000 one-time investment may lead to Rs 51,600 monthly income for 30 years.
Monthly Income for Retirement Planning: The monthly investment cycle suits most of us because most people have a monthly earning cycle. We take out a portion of our income and invest it to create a corpus that can help us meet our financial goals, be it the pre-retirement stage or post-retirement. But many times, we get a large sum in the form of an office bonus, inheritance share, or returns from investments. In such times, we may use this amount to make a one-time investment and let it grow over the years. Long-term financial planning in such a way may generate a corpus that one can use to complete their retirement requirements. They may use it to generate a substantial monthly amount post retirement, where they can draw monthly income for a long time. Likewise, know how a Rs 3,00,000 one-time investment may lead to approximately Rs 51,600 monthly income for 30 years if one uses the lump sum investment and systematic withdrawal plan (SWP) for retirement planning.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
Why retirement planning is necessary
It is necessary to make your post-retirement life financially free, which means you don't have to depend on anyone for your daily expenses. You have resources to live life your own way.
Why you need retirement corpus
When you have a retirement corpus, you have a pool of money from where you can generate passive income in the form of returns. If it is large enough, you may survive just on the returns from it, or it can also be used as a perpetuity, where you draw the principal along with interest for your regular income.
How much corpus do you need?
The required corpus should be enough to help you sustain yourself throughout retirement life. For that, you need to know the corpus that you require in the first year of your retirement. You can adjust it against the average inflation rate for the rest of the retirement years to calculate the overall corpus. The inflation rate and the estimated return from investments are two key factors to calculate the corpus.
But how will you know your life expectancy?
It is important to know how many years you need income post retirement. Since it is impossible to predict one's life, the estimate of years can be on the basis of your retirement age, health history, family health history, lifestyle, etc.
How one can create retirement corpus
One can invest in market-linked and non-market linked investment options to create a retirement corpus. While market-linked investments can drive growth, non-market linked investments can ensure stability. If you have many years to retire, you may follow the aggressive strategy, where you may have a high proportion of equity, but if you have a few years, you may have a substantial proportion of fixed interest investment options.
What to do with retirement corpus
Since you need to generate a regular passive income from the retirement corpus, it may not be invested purely into equity. It's because if the market falls for a long time, your corpus may deplete fast. The post-retirement investment may be a mix of equity or debt, or one may go for purely debt.
How one-time investment works
One invests an amount and lets it grow over the years to grow their corpus. The benefit of long-term investment is that through compounding, it can grow faster with time.
E.g., if one invests Rs 1 lakh in a mutual fund where the expected annualised return is 12 per cent, this is how their investment may grow in 10, 20, and 30 years.
In 10 years, estimated capital gains will be Rs 2,10,585, and the estimated corpus will be Rs 3,10,585. In 20 years, estimated capital gains will be Rs 8,64,629, and the estimated corpus will be Rs 9,64,629. In 30 years, estimated capital gains will be Rs 28,95,992 and the estimated corpus will be Rs 29,95,992.
How SWP investment works
One invests a lump sum amount in a mutual fund scheme, or in many schemes, and instructs the mutual fund house to credit a fixed amount in your account every month. The fund house sells net asset value (NAV) units of the same amount from your mutual fund investment to credit that amount. So, while your fund grows, you also withdraw a fixed amount every month.
How you may get Rs 51,600 monthly income through Rs 3 lakh investment
Here, one may use the combination of a one-time investment and a systematic withdrawal plan (SWP) in mutual funds. In the first stage, one may make a one-time investment and let the corpus grow for 30 years, and in the second phase, they may generate a monthly income for the next 30 years. So, if a 25-year-old makes a one-time investment, they may let the corpus grow by 55 years of age and may withdraw a monthly income till the age of 85. Let's see how this process may work.
Corpus from Rs 3,00,000 investment in 30 years
If the investor gets a 12 per cent return on their investment in 30 years, estimated capital gains will be Rs 86,87,977, while the estimated corpus will be Rs 89,87,977.
Post-tax return
If we calculate tax as per the current rules, the investor will get a Rs 1,25,000 exemption on long term capital gains (LTCG). After that, they need to pay 12.5 per cent income tax on the rest of the corpus. The total tax on the corpus will be Rs 10,70,372.125, and the post-tax return will be Rs 79,17,604.875.
SWP investment conditions
Here, Rs 79,17,604.875 is the amount that we may invest in a mutual fund and start an SWP to get monthly income. Since we can't be very aggressive in our investments, we may invest in a hybrid, debt, or both funds, where our expected rate of annualised return will be 7 per cent.
How much monthly income we may get for 30 years
At a 7 per cent annualised return, the expected monthly amount will be Rs 51,537.
Total withdrawal in 30 years
At Rs 51,537 a month, the total estimated withdrawal in 30 years will be Rs 1,85,53,320. After withdrawing that balance, the estimated remaining amount will be Rs 750.