The amount you need to invest to create a corpus of Rs 5 crore will depend on your time to retire and the investment vehicle you choose.
New Delhi: Many young earners (especially in their twenties or in their early thirties) pay little attention towards retirement planning as they believe it is too early to do that. But you will be surprised if you know the amount you need for your retirement to maintain your existing standard of living.
To give an example, if you are 30 years old and your household expenses are Rs 50,000 per month (Rs 6 lakh per annum) then at the time of retirement (at 60) you will require Rs 2.16 lakh per month or Rs 25.93 lakh per annum to maintain the same lifestyle. Here we have assumed an average inflation of 5% over the next 30 years. If inflation remains higher than 5% then the required amount at retirement will increase further.
To earn Rs 25.93 lakh on your savings every year post retirement, you need savings of around Rs 4.32 crore assuming your retirement corpus will earn 6% interest per annum.
To accumulate this amount by retirement you need sound planning and proper investment. It is needless to say that the sooner you begin the better it is.
Where to invest for retirement
When it comes to accumulation of retirement corpus, people generally play safe and go for fixed interest-bearing risk-free instruments like fixed deposit, or PPF which at best give 8% return. But financial planners say as retirement planning is for the longer term, one can take equity exposure and get a better return, which will help you accumulate a bigger corpus by retirement.
Diversified large cap mutual funds, multicap funds, which have the potential to generate an annualised return of 12% over the longer term, can be included in your portfolio to accumulate a bigger retirement kitty, say financial planners. If you are afraid of taking full exposure in equity, then you can go for National Pension System (NPS) by taking 25:75 debt: equity exposure, which will help you generate an annualised return of around 10%, say experts. By investing regularly through SIP in mutual funds or in NPS one can easily accumulate a retirement corpus of Rs 5 crore.
How much you need to invest every month to accumulate Rs 5 crore
The amount you need to invest to accumulate a corpus of Rs 5 crore will depend on your time to retire and the investment vehicle you choose. For example, your current age is 25 years and you want to retire at the age of 55 years then you need to save Rs 16,229 every month for the next 30 years to accumulate Rs 5 crore. This is assuming an annual return of 12%.
The required amount will go up to Rs 18,252 if you start one year later at the age of 26. Similarly, if you delay it by five more years, then you will be required to invest Rs 29,374 every month to accumulate the same amount. The required amount increases drastically with a delay in investment as the effect of compounding reduces.
Here is an illustration of how much you need to save every month to accumulate Rs 5 crore by retirement assuming that your investment grows at an annual rate of 12%.
What if you cannot invest the required amount now
Even if you can not invest the above-mentioned amount in mutual fund SIPs every month due to low income you can start with a small amount and can increase the investment every year by a fixed percentage (say 10%) or a fixed amount through set-up SIP to accumulate the desired corpus. For example, you are 30-year old now and you want to accumulate Rs 5 crore before you turn 55 but you can not invest Rs 29,374 per month then you can start with Rs 12,700 investment in SIP for the first year and increase the SIP amount by 10% every year. In this case you will be able to accumulate Rs 5 crore by the time you turn 55. But without top-up every year, it would take you 32 years to accumulate Rs 5 crore corpus.
Worth mentioning here is that you also need to create an emergency fund along with your regular investment for retirement so that your retirement corpus remains untouched in case of emergencies like job loss, hospitalisation or any pandemic that we are witnessing now, which can create potential risk to employment.
An emergency corpus should be to the extent of your six month’s household expenses including EMIs if any. The ongoing Covid-19 pandemic has left many jobless. So it is very much essential to have an emergency corpus.
