Retirement Planning: Can Rs 3,50,000 one-time investment provide Rs 60,000 monthly income for 30 years; know its possibility

Do you have a pension plan for your retirement or a source of income that can take care of your retirement expenses? If your answer is no, you may require a retirement corpus. The passive income from the corpus can help you live a financially free life.

It's a stage in your retirement when you don't have to earn for your daily expenses. When you have a retirement pool or a source of income from where you get a regular amount for your expenses. If one plans their retirement early in their life, they may achieve financial freedom quite early in their life.

The calculation of a retirement corpus can't be done without considering inflation as a factor. Prices of things increase, and with that, increase your expenses. If you plan to retire after 20 years and expect a retired life for 30 years, you should estimate your expenses from the first to last retirement year.  The historical inflation can be taken as a reference when calculating the retirement corpus.

Let's understand it with an example. If you are 30 years old, your current expenses are Rs 40,000 a month, and you plan to retire at 60, then first know the amount you require in the first year of your retirement. Based on that, calculate inflation-adjusted expenses for the expected life. You will get your retirement corpus. Here, it is necessary to know that if you have other financial goals to achieve post retirement, those goals should also be calculated for retirement corpus. 

There are 3 important factors to calculate your retirement corpus. Pre-retirement investment return rate, post-retirement return rate, and inflation. Through the inflation rate, you can calculate the expenses in the 1st year of your retirement. 

Now adjusting the post-retirement return against inflation, you can calculate the retirement corpus you require for the rest of your life. In the next step, with the help of the pre-retirement return rate, you can calculate the lump sum or periodic investment you need for your corpus.

The one who starts to invest early will have more years for compounding of their investments compared to a late beginner. So, an early beginner can achieve financial freedom early in their life, or if they have fixed a retirement age by which they want to regularly invest, they can create a much larger corpus compared to a late starter. Let's see it with an example. A is 20 years old, and B is 30. Both want to retire at 60 and want to invest Rs 12,000 a month till 60. Each expects a 12 per cent annualised return from their investments. Let's see what corpus they can create.

 

A will have 40 years to invest; their overall investment in those years will be Rs 57,60,000, estimated capital gains will be Rs 11,17,56,852, and the estimated retirement corpus will be Rs 11,75,16,852. B will have 30 years to invest; their overall investment in those years will be Rs 43,20,000, estimated capital gains will be Rs 3,26,51,679, and the estimated retirement corpus will be Rs 3,69,71,679. Here you can see that with a few lakh extra investment amount, A can create over Rs 8 crore extra corpus than B's corpus.

In our calculation, we will have two phases. In the first phase, we will show how a one-time investment of Rs 3,50,000 will grow in 30 years and how one may withdraw an over Rs 60,000 monthly income from the post-tax corpus for 30 years. So, if a person is 25 years old and invests Rs 3,50,000, and lets it grow until 55 years of age, they may generate an over Rs 60,000 monthly income till 85 years of age.

If one invests a Rs 3,50,000 lump sum amount in a mutual fund and gets a 12 per cent annualised return for 30 years, their estimated capital gains will be Rs 1,01,35,973, and the estimated retirement corpus will be Rs 1,04,85,973. 

In this case, long term capital gains (LTCG) will apply, where a mutual fund investor gets a tax exemption for the first Rs 1,25,000 profit, and pays 12.50 per cent tax on the rest of the gains.

The estimated income tax on this retirement corpus will be Rs 12,51,371.625. So the estimated post-tax return will be Rs 92,34,601.375.

Post-tax retirement corpus of Rs 92,34,601.375 is the amount that can be used to set up a SWP plan in a mutual fund. Since it's a retirement corpus and one can't take a risk on this amount, it should be invested in a debt or hybrid fund, where the chances of corpus decline are minimum. We will expect a 7 per cent annualised return from this investment.

At a 7 per cent annualised growth, the estimated monthly amount that the investor may receive will be Rs 61,100.