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How big will your portfolio grow in retirement?

Posted on 28 May 2023
Author: Sayan Sircar

Tags: Retirement

3 mins read
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This article gives you a glimpse of how the power of compounding creates a multi-crore portfolio in retirement.

How big will your portfolio grow in retirement?

📚 Topics covered:

Introduction
A worked-out example
- Assumptions made
- Model output
Generalising the result
How to create a retirement portfolio that helps you reach such corpus figures?

Introduction

Compounding formula

This article continues our previous article on compounding: How compounding works: the journey to a 10 crore portfolio.

We will show how compounding is expected to create phenomenal wealth over the lifetime of your portfolio. In many articles and online calculators, you can see the corpus you need to accumulate by retirement.

For example, an investor expecting to retire in 20 years for a lifestyle that costs ₹50,000/month in today’s money needs to reach a retirement corpus of ₹8 crores in 20 years to retire.

However, you will be surprised to know that this corpus is expected to grow to ₹22 crores over the next few decades. These numbers are expected to be a fun thought experiment based on certain assumptions, so do not expect to get these exact numbers if the markets do not perform as expected.

A worked-out example

Assumptions made

We will make the following assumptions:

Annual expenses if retired today (lakhs): ₹6.00/year
Inflation: 7% (current and post-retirement)
SIP Increment: 10%/year
Years to retirement: 20
Average Equity return post-tax: 11%
Average Debt return post-tax: 4%
40 years in retirement

We will use the Arthgyaan goal-based investing tool to calculate the target retirement corpus and the portfolio value from today until the end of retirement.

Model output

(click to open in a new tab)

The outputs are:

retirement corpus is ₹8 crores
peak corpus reached after 46 years from today, i.e. at the age of 66
peak corpus value is ₹22 crores

Using the Arthgyaan goal-based investing tool, we can see that in the accumulation stage, i.e. while you are earning,

the portfolio value and the equity and debt allocations increase with time
the equity allocation falls as retirement comes closer

Once retirement starts

the overall portfolio rises first and then starts falling after a peak
peaks of equity and debt components are reached at different times
the equity allocation first rises in retirement and then falls to zero

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Also read
Can you get higher than FD returns with low risk?

Generalising the result

(click to open in a new tab)

This chart shows how the portfolio reaches its peak at different times, using the same assumptions but varying the time left until retirement. Many investors will be shocked at how, due to the power of compounding, the portfolio value reaches enormous values. For example, a 30-year-old targeting retirement after 30 years may expect to see a portfolio of ₹16 crores (at the start of retirement) grow to ₹70 crores near the end of retirement.

How to create a retirement portfolio that helps you reach such corpus figures?

This article shows a simple retirement and review plan that anyone can follow in a step-by-step manner: Low-stress retirement planning calculations: worked out example. Once you follow these steps, creating and maintaining a retirement portfolio and reaching such significant corpus figures becomes very doable.

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