Business Matters | How much do you need to fund your living expenses after retirement?

If you are not a government servant assured of a pension, you are probably saving up while you work, investing in stocks, mutual funds, maybe gold, a roof above your head, and so on. Once you retire, you will have to dip into these savings and investments every year.

Historically, various analyses have said withdrawing 4% of your retirement corpus in the first year and then bumping up that percentage slightly every year thereafter could give you enough to live on till the end of your life. But for a country like India, and with current inflation and estimated average longevity, is that enough?

Globally, withdrawing a certain part of your retirement corpus, starting with 4% in the 1st year, would make your funds last you about 30 years. So, if you retire at 60, and expect to live till 90, then you are all set.

A recent research paper by Rajan Raju and Ravi Saraogi showed how the global standard can’t be used in the India context.

The authors argue that while criticism has been aplenty on how the 4% figure applicable in the US context is unsuitable elsewhere, there has been little to show what exactly the ideal number for India would be.

Their research concludes that even a withdrawal rate of 3.5% for an Indian citizen is bound to fail over 35 years – and obviously, they warn that if your portfolio of savings includes too much investment in equity, it could potentially give you healthy returns, but Indian markets are so volatile that you could also end up losing capital. And if you are heavily dependent on fixed deposits, then the returns could be too low, given the tax implications and the effect of relatively high inflation.

The authors of the paper say that a rate of 3-3.5% is more sustainable for the Indian context and that they’d likely stick with the 3% referred to earlier in this episode to be on the conservative side.

Also, to help your corpus bear the vagaries of the stock markets, they suggest bringing in gold. They suggest that instead of the 40:60 ratio between equity and fixed deposits, why not look at a 30:10:60 Equity: Gold: Fixed Deposit for portfolio?

They also suggest withdrawing a smaller percentage of the corpus in the early years of retirement, the assumption being that one tends to need more and more, given healthcare needs in later years.

Our internal expert on investment advice – Aarati Krishnan, Consulting Editor, Businessline – says in her article here –

“let’s assume a 25-year old wants to retire at 60. If her current expenses are Rs. 50,000 a month or Rs. 6 lakh a year. At 6% inflation, those annual expenses would come to Rs. 46 lakh in 35 years’ time. She would then need a corpus of Rs. 15.37 crore by the time she is 60 to give her that kind of annual income. This was calculated at a 3% withdrawal rate, so approx 33 into Rs. 46.1 lakh. That would mean setting aside one-third of her current income for this purpose. Her other goals in life such as housing, children’s education, health emergency costs and vacations would have to come from the remaining 67%.

And if she puts this 33% in FDs, the rate of return and taxation would prevent her from reaching her goal. She may be better off investing in equities with a 12% annual return. But then Indian stock markets are volatile.”

Indexation is a benefit in the income-tax law that adjusts the purchase price of an investment to reflect the effect of inflation.

In sum, humongous as it may sound to have corpus running into crore or tens of crore, this is the most realistic estimate for a corpus needed for retirement planning I have come across. Think about it and tell us what your thoughts are.

Did you know

The first savings bank in India was established in Calcutta in 1833-34 by the government, according to the National Savings Institute. However, the government Savings Bank Act was passed in 1873, and it was in 1882 that the Post Office Savings Bank of India came into existence.

Last week’s quiz

And for the quiz question of last week, Why do countries want to export more and more and why not settle for the domestic market, we received several well thought answers. Thank you all, for the respect you accorded us. And many of you got it absolutely right. The most obvious part of the answer is why would we not go and get a bigger market for our companies? If there is money to be made, let’s make it.

The other important part of the answer is to be able to earn foreign exchange to support our imports. There are things critical to our existence that we are dependent on the outside world for. For example, we import a lot of active pharmaceutical ingredients or APIs to make our medicines, from the simple paracetamol to life-saving drugs. 85% of our oil needs come from imported crude oil. We need to have a stock of foreign exchange to fund our imports and exports help us earn this forex. Exports help bring down the trade deficit that has an impact on our current account. When we have a lower deficit or even a surplus that is favourable for the rupee against other currencies such as the US Dollar. That makes our imports cheaper.

Quiz question for this week

What was the interest rate offered by the first savings bank account offered by the government in 1833-34?

Script and presentation: K Bharat Kumar

Production: Shibu Narayan