Is your retirement corpus sufficient?

Saurabh Saraf, 63, is looking forward to retiring in the next two years. He takes pride in having built a sizeable corpus through disciplined investments in the PPF, EPF and equity mutual funds. These choices have been made after careful research over the past 25 years. While he feels a sense of accomplishment, a lingering doubt remains—what if the corpus falls short of his needs?

Saurabh Saraf has done all the right things by starting early, saving regularly and keeping his retirement corpus untouched. However, the adequacy of this corpus will depend not on his past savings, but on future inflation. Assuming that Saraf might live for another 30 years, his retirement income would be similar to his first salary— good to begin with, but too small as time goes by.

It takes both math and a set of assumptions about the future to estimate the adequacy of the corpus. Many retirees make the mistake of comparing returns on safe investments with inflation to reassure themselves. For example, Saraf might assume that a government savings scheme with 8% per annum return, and inflation at 7% should be enough to meet his post-retirement needs. This math ignores the fact that the interest income is a simple rate, while inflation compounds every year.

What this implies is that Saraf’s large corpus will shrink in real terms as the years pass. Therefore, he needs a two-pronged approach. First, he should ensure that he withdraws only a small part of his retirement corpus each year. For instance, if he needs around 5% of the total corpus annually, he is in a strong starting position. Second, he must allocate a portion of his funds to growth assets, such as equity mutual funds, to counter inflation. With a 15-year time horizon, by the time inflation pushes up his expenses, his corpus would have grown. His retirement corpus must generate both income and long-term growth to remain sufficient throughout his lifetime.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.


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