Can NRIs retire in India with only safe investment options like a fixed deposit?
We discuss if it is a good idea for conservative NRI investors to create a retirement portfolio in India only with safe and risk-free investment options.
Can NRIs retire in India with only safe investment options like a fixed deposit?
Posted on 25 Sep 2022
Author: Sayan Sircar
10 mins read
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We discuss if it is a good idea for conservative NRI investors to create a retirement portfolio in India only with safe and risk-free investment options.
📚 Topics covered:
- Introduction
- Worked out example
- Minimum returns for a 30-year SWP
- Where should NRIs invest?
- Risks of investing in safe assets
Introduction
NRIs wishing to retire in India have multiple incentives to return to their home country in their sunset years. One of the major attractions is higher fixed income interest rates compared to the west and historically high stock market returns.
However, a common question from NRI would-be retirees is if it is possible to retire in India only with safe and risk-free investments. Some options are bank fixed deposits and pension plans. Interest from schemes like SCSS, coupons from gilt bonds and rental income from real estate are also options.
In this article, we will discuss how much capital is needed to retire based on:
- choice of investment
- lifestyle cost
- how long retirement
It comes down to one simple metric: does the retirement portfolio manage to support withdrawals for the expected longevity period?
We will also define the concept of the safe withdrawal rate (SWR), which is:
- the amount needed in Year 1 of retirement
- this amount is then increased by inflation every year
Caveat: This article does not consider goals like children’s education, marriage and other goals like house purchase that will have to be separately planned.
Worked out example
We will assume that the first year’s withdrawal is between 1% and 5%. The withdrawal amount will be increased by inflation every year. As a practical example, we will take
- starting portfolio of one crore
- ₹2.5 lakhs expense in year one; 2.5 * 1.07 = ₹2.675 lakhs expense in year two etc.
| Start | ₹ 1,00,00,000 |
|---|---|
| Withdrawals ⬇️ | – |
| Year 1 | ₹ 2,50,000 |
| Year 2 | ₹ 2,67,500 |
| Year 3 | ₹ 2,86,225 |
| Year 4 | ₹ 3,06,261 |
| Year 5 | ₹ 3,27,699 |
In this case, the starting corpus is 1/2.5% = 40x expenses, the usual metric used in FIRE calculations.
We see that a 5% return from the corpus, post-tax, is sufficient to fund the withdrawals for 30 years. If longevity is more, the desired return will be higher or the SWR needs to be lower.
| Year | Withdrawal | Portfolio value* |
|---|---|---|
| Year 1 | ₹ 2,50,000 | ₹ 1,02,37,500 |
| Year 2 | ₹ 2,67,500 | ₹ 1,04,68,500 |
| Year 3 | ₹ 2,86,225 | ₹ 1,06,91,389 |
| Year 4 | ₹ 3,06,261 | ₹ 1,09,04,384 |
| Year 5 | ₹ 3,27,699 | ₹ 1,11,05,520 |
| Year 6 | ₹ 3,50,638 | ₹ 1,12,92,626 |
| Year 7 | ₹ 3,75,183 | ₹ 1,14,63,315 |
| Year 8 | ₹ 4,01,445 | ₹ 1,16,14,964 |
| Year 9 | ₹ 4,29,547 | ₹ 1,17,44,688 |
| Year 10 | ₹ 4,59,615 | ₹ 1,18,49,327 |
| Year 11 | ₹ 4,91,788 | ₹ 1,19,25,416 |
| Year 12 | ₹ 5,26,213 | ₹ 1,19,69,163 |
| Year 13 | ₹ 5,63,048 | ₹ 1,19,76,421 |
| Year 14 | ₹ 6,02,461 | ₹ 1,19,42,658 |
| Year 15 | ₹ 6,44,634 | ₹ 1,18,62,925 |
| Year 16 | ₹ 6,89,758 | ₹ 1,17,31,826 |
| Year 17 | ₹ 7,38,041 | ₹ 1,15,43,474 |
| Year 18 | ₹ 7,89,704 | ₹ 1,12,91,459 |
| Year 19 | ₹ 8,44,983 | ₹ 1,09,68,799 |
| Year 20 | ₹ 9,04,132 | ₹ 1,05,67,901 |
| Year 21 | ₹ 9,67,421 | ₹ 1,00,80,504 |
| Year 22 | ₹ 10,35,141 | ₹ 94,97,631 |
| Year 23 | ₹ 11,07,600 | ₹ 88,09,532 |
| Year 24 | ₹ 11,85,132 | ₹ 80,05,620 |
| Year 25 | ₹ 12,68,092 | ₹ 70,74,405 |
| Year 26 | ₹ 13,56,858 | ₹ 60,03,424 |
| Year 27 | ₹ 14,51,838 | ₹ 47,79,165 |
| Year 28 | ₹ 15,53,467 | ₹ 33,86,983 |
| Year 29 | ₹ 16,62,210 | ₹ 18,11,012 |
| Year 30 | ₹ 17,78,564 | ₹ 34,070 |
- at the end of the year
Minimum returns for a 30-year SWP
In the table below, we have summarized the returns you need for a 30-year SWP.
| SWR | Minimum Return |
|---|---|
| 2.0% | 3.6% |
| 2.5% | 5.0% |
| 3.0% | 6.3% |
| 3.5% | 7.4% |
| 4.0% | 8.5% |
| 4.5% | 9.4% |
| 5.0% | 10.3% |
You cannot retire in India with only safe investments if you plan to withdraw more than 3% a year
This table shows the minimum return needed on the portfolio to sustain 30 years in retirement. We know that safe options give around 7% pre-tax, and the SWR cannot exceed 3%. If a higher return is necessary on the portfolio, then only safe options cannot be used.
Where should NRIs invest?
We will create a two-bucket portfolio with the following criteria:
- short term liquidity
- safety of both principal and uninterrupted interest
The buckets will be:
- Bucket 1: cash component for both expenses and emergency fund
- Bucket 2: income component for income generation
It is crucial to take a health insurance policy with a significant super-top-up policy as soon as possible
Related article: What are top-up and super-top-up health insurance policies? Do you need either?
Allowed investments
For bucket one, we will keep 12 months of retirement expenses in bank accounts with sweep FDs. Bucket one will be continuously refilled from income from bucket two. Any excess income in bucket one will have to be reinvested into bucket two.
Investors need to be aware of the risk of not having the same higher interest rates for reinvestment as they had when the investments were originally made.
For bucket two, a mixture of annuities or pension plans as well as gilt bonds can be used. Schemes like SCSS as well as traditional FDs may be used. Both pension schemes and gilt bonds let you establish a minimum income floor since the payments are guaranteed for life (pension) or up to 40 years (for bonds).
We have extensively covered the allowed investment options in this post: How to choose debt instruments for retirement?.
Disallowed investments
We must avoid the following options:
- rental income: yields in India are quite low and will bring down the overall portfolio return
- unregulated schemes: any fund or scheme without SEBI regulation should be avoided since they have no legal recourse
- investments without income: investments like jewellery and land do not generate returns and will have to be counted outside the investment portfolio. They will be included only if they are sold and invested
Risks of investing in safe assets
Income is taxable at slab rates
Every income options discussed above are taxable at slab rates. Even after splitting income between two spouses, income tax at higher slabs might be applicable. The portfolio needs to be carefully tweaked from a tax perspective to take benefit of sections like 87A, 80TTA and 80C. It might even make sense to switch to the new tax regime if that is more beneficial.
Inflation risk
We are speaking of inflation risk at the end because we have limited the SWR in a way that as per today’s interest rates, the portfolio will last the desired number of years. The danger here is that as India matures as a country, both inflation and interest rates are expected to come down. But it is not possible to predict today how the interplay between rates and inflation will happen over the next three decades.
Related:
Inflation: the impact on your goals and how to choose assets that beat it
Unexpected expenses and longevity
There is another risk that at higher SWR levels, i.e. if you start withdrawing too much, the corpus will get depleted faster than expected. There needs to be a buffer for unexpected events like prolonged illness or unplanned large withdrawals. Longevity risk in the case of retirement planning is simply living longer than planned. Our calculations have been done with a 30-year horizon but depending on health and advances in medical technology, living longer is a high possibility.
It is therefore extremely risky, unless the SWR is very low, to go for a purely low-risk fixed income portfolio for retirement. We have dealt with this topic here as well: Can you retire by keeping money only in FD or pension?.
The better and safer option for retirement portfolio creation is the 3-bucket portfolio as described here: How to plan for retirement using the bucket approach?. Having a third bucket to beat inflation will mitigate some of the risks described above.
Related Articles
- Can you run a SWP from mutual funds when you are retired?
- How long will your money last if you retire today?
- How to plan for retirement using the bucket approach?
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This post titled Can NRIs retire in India with only safe investment options like a fixed deposit? first appeared on 25 Sep 2022 at https://arthgyaan.com
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