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Can NRIs retire in India with only safe investment options like a fixed deposit?

Posted on 25 Sep 2022
Author: Sayan Sircar

Tags: NRI ; Retirement

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.

Can NRIs retire in India with only safe investment options like fixed deposit?

📚 Topics covered:

Introduction
Worked out example
Minimum returns for a 30-year SWP
Where should NRIs invest?
- Allowed investments
- Disallowed investments
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

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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

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.

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.

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