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How much retirement corpus is enough?

Posted on 06 Aug 2021
Author: Sayan Sircar

Tags: Retirement ; Pension

4 mins read
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This post stress-tests the corpus accumulated to support your desired post-retirement expenses

Testing retirement corpus

📚 Topics covered:

Introduction
Assumptions made:
Walk-through of the example (success case)
- Without pension
- With a pension plan
Walk-through of the example (failure case)
- Without pension
- With a pension plan
Sensitivities
A note on having the prerequisites in place

Introduction

We use the retirement bucket calculator to see how long a certain corpus like ₹2 crores can support inflation-indexed drawdown of ₹ 10,000 to ₹2 lakhs/month.

We will invest in 3 buckets:

Bucket 1: Cash for immediate expenses (up to 5 years) and emergency fund
Bucket 2: Income assets like FD, government savings schemes, annuities and debt mutual funds to generate income
Bucket 3: Inflation beating portfolio mostly in direct stocks (including dividend-paying) and equity mutual funds

Inflation: the impact on your goals and how to choose assets that beat it

Assumptions made:

Annual expenses in the first year of retirement is ₹ 6 lakhs i.e. 50,000/month increasing at the rate of inflation every year. Estimation of the expenses in retirement is covered in more detail here.
Inflation is 7% and is uniform before and after retirement
Risk profile is moderate (60:40 equity and debt allocation for goals > 15 years away: see this for details)
Starting corpus is ₹ 2 crores
Income tax is flat at 10%
Yearly rebalancing between the buckets is performed

We will use the retirement bucket Excel template to estimate this and consider the test to be successful if the corpus lasts at least 30 years in retirement i.e. after 30 years, money left should be non-zero.

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Walk-through of the example (success case)

Without pension

Testing retirement corpus

Bucket 1 - Cash - ₹32.8 lakhs
Bucket 2 - Income - ₹81.8 lakhs
Bucket 3 - Growth - ₹85.4 lakhs

which is expected to last around 32 years. The graph shows how the portfolio value (blue line) first increases with time, peaks after some time and then rapidly falls to zero in around 32 years. The orange line shows the yearly expense increasing at the rate of inflation over time.

With a pension plan

Testing retirement corpus with pension

Bucket 1 - Cash - ₹24.8 lakhs
Bucket 2 - Income - ₹65.6 lakhs and ₹40 lakhs in pension
Bucket 3 - Growth - ₹69.8 lakhs

We see that the total time drops to 29 years in retirement. However, given that there is a pension plan, we see that a fixed sum of ₹ 1.8 lakhs/year (pre-tax) will continue to be paid out till the death of the investor. This effectively puts a floor on the income even after the corpus drops to zero though due to inflation, the value of the annuity will have limited impact beyond a psychological benefit.

Walk-through of the example (failure case)

Without pension

Testing retirement corpus failure case

Bucket 1 - Cash - ₹56.0 lakhs
Bucket 2 - Income - ₹82.2 lakhs
Bucket 3 - Growth - ₹61.8 lakhs

which is expected to last around 19 years. The blue line barely gets a chance to rise and falls to zero in just 19 years.

With a pension plan

Testing retirement corpus failure case with pension

Bucket 1 - Cash - ₹48.0 lakhs
Bucket 2 - Income - ₹66.1 lakhs and ₹40 lakhs in pension
Bucket 3 - Growth - ₹45.9 lakhs

The pension lowers the period further to 17 years but gives ₹ 1.08 lakhs income (pre-tax) for life. This is recommended vs the without pension case since the number of years at full withdrawal is just 2 years less (17 vs. 19) but there is guaranteed income for life. This shows that if the corpus is low relative to the income needed, it will be prudent to take a pension plan.

Sensitivities

Testing retirement corpus - sensitivities

Here we plot expenses in the first year of retirement (growing with inflation) vs. starting corpus in lakhs. The green zone is where you need to be by either having a high corpus or lower expenses. Since corpus will be fixed post-retirement and fluctuate due to market movement, the only variable under control is managing the lifestyle expenses.

A note on having the prerequisites in place

At all times ensure that you have the following in place

an emergency fund with 6-12 months of expenses
a term insurance policy (unless you are retired with no income)
a health insurance policy (separate from the company provided one if any) for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up
a personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
no high-interest debt like credit card or personal loans

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