How to Plan Your Retirement With Mutual Funds

Last Updated: 13 Jun 2024

Retirement is not just a period of relaxation but also a period of trepidation. Here is a period when your income flows will either stop or slow substantially. You normally have double the time and half the money. That can be scary if you are looking to address issues like monthly expenses, emergencies and insurance after retirement. Of course, one of the keys to enjoying a happy retired life is to have all your liabilities paid off, and enough life insurance to take care of your health needs. But above all, you need a solid corpus that works hard for you. That is the crux of retirement planning.

How exactly to plan for retirement when it is 25-30 years away?

People often wonder, if it is possible to plan for retirement that is 25-30 years away. After all, there are so many uncertainties so how do you plan retirement. The idea is to get approximately close to what you need so that your retirement can be comfortable and worry free. Let us take a live example of Ashok a young man who has 25 years to retire but wants to correctly start planning now itself.

Ashok is just about 30 years old and wants to save adequately for his twilight years after he retires at the age of 55. His big challenge is how to pay for and figuring out how much he needs post retirement? Let us look at it this way. He has around 25 years to accumulate a sizable corpus. With such a long period on hand, he must obviously focus on equity funds.

There are methodologies of pay-out out the retirement corpus, but the fact is that the best way to plan your retirement is through mutual funds and ideally by following the SIP route.

How much can ashok’s corpus grow over the next 25 years

The answer would entirely depend on the investment instrument he chooses. For example, he can get the best returns on a thematic / sector fund, but then it is too risky due to the concentration. It is best avoided for retirement planning. Debt returns are too low and with 25 years on hand, Ashok can actually afford to take on more risk. The best choice would be to do SIP on equity funds. Here are some options and how it would work.

Particulars	Balanced Fund (12%)	Equity Fund (14%)	Thematic fund (17%)
Monthly Investment	Rs.10,000	Rs.10,000	Rs.10,000
Expected Yield Annually	12%	14%	16%
Risk over 30 years	Low	Medium	High
Total SIP Value	Rs.1.90 crore	Rs.2.73 crore	Rs.3.97 crore

Thematic funds give a much corpus, but that is too cyclical. You are in trouble if you are caught in the wrong leg of the cycle. It is better to look at a more stable and reliable option. Balanced funds have a mix of equity and debt, but at this stage, Ashok can afford to take the risk of pure equities. Hence the equity diversified fund giving around 14% yield annually would be the best option for Ashok.

It must be remembered that Ashok wants to create wealth without too much of hassles. His best choice was would be a diversified equity fund which would grow his corpus to approximately Rs.2.73 crore by contributing just Rs.10,000 per month today. Whether this corpus will be sufficient or not, will depend on his standard of living after retirement and his commitments at that point of time. But this is a good place to start off retirement planning.

How does he invest the corpus for regular income after retirement?

Of course, they will and that has to be built into Ashok’s financial plan. In fact, there are some key assumptions that must be part of the plan.

• Ashok’s expenses are not going to remain static. They will go up along with inflation and perhaps more. For example, some expenses will come down due to the use of technology and some costs like lifestyle costs will go up over time.
• Let use a ballpark and say that his monthly expenses post retirement will be Rs.1.60 lakh every month and we are just about talking about regular and routine expenses. Now the question, how to use the corpus of Rs.2.73 crore to earn target monthly income.
• Before going ahead, there is one more assumption. There is an assumption that he repays his debt and has no liabilities, except some small credit card payables. Secondly, he has adequate health and hospitalization cover for himself and his spouse.

How does he invest the corpus for regular income after retirement?

Can he invest the entire corpus in liquid funds? Remember, liquid funds generate about 5% annualized returns and when it comes to long term revenue projections, it is always better to err on the side of caution. His corpus of Rs.2.73 crore would translate into yearly earnings of Rs.13.65 lakh or a monthly income of just Rs.1.14 lakh. We have not even considered the tax and it is already well below his need of Rs.1.60 lakhs per month. How can this problem be resolved.

There are two options in front of Ashok. Either he will have to drop his standard of living big time, post retirement. That is easier said than done because the drop is going to be huge. However, there is a way out wherein he can get higher income with same corpus. That is where systematic withdrawal plans or SWPs come in handy. For retirement planning, SWPs are the best choice or best option available.

How can SWPS help in the case of ashok?

Let us understand the difference. In the previous case, we assumed that the corpus will remain intact till the end. But that is not required. He can start at the age of 55 and gradually deplete his corpus over time. That is what a systematic withdrawal plan or SWP is all about.

How will the SWP work? The SWP can be structured in such a way that over a period of next 20 years, the entire corpus is withdrawn (principal + interest). Obviously, you opt for a growth plan and each month you withdraw a fixed amount which will include principal component and capital gains component. Now, as Ashok continues to draw down the corpus, the balance corpus continues to earn 5% in the liquid fund. The gain portion will be very small in the initial years so tax will be minimal. As he crosses 3 years, then it becomes LTCG and he has to only pay 20% tax after considering the benefit of indexation.

That is still too confusing, how will the SWP numbers look like?

OK, let us translate all these arguments into an elegant table where the entire process flow of drawing down the corpus is shown. We have been generous and paid out Rs.182,500 to Ashok monthly, against the demand of just Rs.160,000 per month. That leaves him with some emergency funds which we can put aside for a rainy day.

Here is how the calculations look like for Ashok.

Year	Corpus in liquid Fund	Annual Interest income 5%	Annual Withdrawal	Closing Balance
Year 1	273,00,000	13,65,000	21,90,000	264,75,000
Year 2	264,75,000	13,23,750	21,90,000	256,08,750
Year 3	256,08,750	12,80,438	21,90,000	246,99,188
Year 4	246,99,188	12,34,959	21,90,000	237,44,147
Year 5	237,44,147	11,87,207	21,90,000	227,41,354
Year 6	227,41,354	11,37,068	21,90,000	216,88,422
Year 7	216,88,422	10,84,421	21,90,000	205,82,843
Year 8	205,82,843	10,29,142	21,90,000	194,21,985
Year 9	194,21,985	9,71,099	21,90,000	182,03,084
Year 10	182,03,084	9,10,154	21,90,000	169,23,239
Year 11	169,23,239	8,46,162	21,90,000	155,79,401
Year 12	155,79,401	7,78,970	21,90,000	141,68,371
Year 13	141,68,371	7,08,419	21,90,000	126,86,789
Year 14	126,86,789	6,34,339	21,90,000	111,31,129
Year 15	111,31,129	5,56,556	21,90,000	94,97,685
Year 16	94,97,685	4,74,884	21,90,000	77,82,569
Year 17	77,82,569	3,89,128	21,90,000	59,81,698
Year 18	59,81,698	2,99,085	21,90,000	40,90,783
Year 19	40,90,783	2,04,539	21,90,000	21,05,322
Year 20	21,05,322	1,05,266	21,90,000	20,588

Look at the difference. Here the corpus will be depleted over a period of 20 years. For simplicity we have shown in yearly format rather than in monthly format, but you can understand how it works monthly. He is now generating annual income of Rs.21.90 lakh or Rs.1.83 lakh per month. That is nearly Rs.23,000 more than what he requires each month. Even after considering the impact of tax, the surplus can be good enough to create a smart corpus when he turns 75. That is where a SWP can make a better impact in retirement planning compared to just parking funds and earning returns.