Q: Rajeev had done what they said he should have done. He invested ₹5,000 a month in an SIP (systematic investment plan) in mutual funds since 2000, when he was 43. Today, he realises he needs ₹1 lakh a month when he retires this year. How well has he done?

A: Fantastically, if you look at the numbers. He has a return of over 24 per cent a year.

The bad news? Rajeev isn’t going to make it. His money has grown to ₹1.19 crore. That money, stored in a “low-risk” fixed deposit, will give him just ₹80,000 per month. He’s going to only earn 80 per cent of what he wanted, despite stellar returns. With inflation, his expenses will double in about 12 years. He’ll have to dip into the corpus to fund himself. He’ll run out of money by the time he is 72. Not a good age to be poor.

Rajeev did the right thing and yet ended up in a bad place. Simply because he didn’t plan it right. He didn’t put enough money, or target what he needed.


How do you plan?

Retirement is a boring topic to think about. You’ve got to save for it, they tell you. Just invest in something. And then hope and pray that all will be fine. But it will be fine, because we’re that sort of people. We’ll eat a little less if things go south. We’ll avoid the odd holiday and work a few years more if we must. We’ll get by. But you don’t want just that much. You want to live and breathe and travel and do things that the shackles of a job don’t permit. You want to be free, and in general, being free is expensive.

We’re going to look at how expensive it is to plan retirement.

Your retirement will involve spending some money. Much of what you spend now may not apply — you won’t have those kids’ clothes to buy, and you might not have to pay rent. But you’ll have other things to spend on — from travel to adventure to sipping wine or buying gifts for grandchildren. Despite lifestyle changes, you may not spend less, and to be able to keep doing so, you have to plan well and ahead. Inflation will keep pushing your expenses up, and you may well live to be 90.

You read the advertisements that ask you to invest today and make ₹1 crore in 20 years and get excited. But ₹1 crore will give you just ₹8 lakh per annum at today’s interest rates (assuming they last). And at an inflation of six per cent a year, it will buy you only what is now available for ₹2.5 lakh. Let’s put it way — a crore in 20 years translates into a monthly “income” of only ₹20,000 of today’s money.

What then do you need at retirement?

Let’s say you’re a 25-year-old and you spend ₹30,000 a month now. At 60, if you factor in inflation, you will spend ₹2.44 lakh a month. At 65, the figure will be ₹3.08 lakh a month. And between age 60 and 90, you have to cover an area of expense that will only increase every year.

Let’s assume you can get a risk-free eight per cent on your savings. You’ll need about ₹6.8 crore at 60 to be able to live till you’re 90, and be left with no corpus at the end.

Did you say ₹6.8 crores? That’s a lot of zeroes! Yet, it’s almost ridiculously affordable.


How to get to ₹6.8 crore by 60

You might agree that a blend of investments in stocks and fixed income give you 12 per cent a year in the long term. You must invest some money every month, for the next 35 years. As inflation takes up expenses by six per cent a year, your income goes up too, so you save six per cent more every year. This is a “growing” investment.

So you’ll start at zero. You need to get to ₹6.8 crore in 35 years. You’re going to get 12 per cent a year on your investment. And you can increase your savings thanks to inflation. How much money do you put aside each month?

The answer is illuminating. It’s just ₹6,300 per month. That’s it. You’ll grow it to ₹6.8 crore in 35 years, and it will be enough to last you till your 90th birthday.

At 25, if you save 21 per cent of your expenses every month, it will take care of your expenses post retirement.

Run the same calculations for age 30 — spending ₹30,000 per month.

You need ₹4.62 crore at age 60 to last you another 30 years. And you need to invest ₹9,000 per month to get there. In other words, you save 30 per cent of your expenses.


Lump sum in my throat

So you think you have some savings, and therefore you can start with some money and reach your retirement goal easily? For example, if you are spending ₹1 lakh a month at age 35, you will need ₹76 lakh, which will grow till you are 60. And then you use it for your expenses and live till you turn 90. Now, ₹76 lakh is a lot of money, so there’s always the “half-and-half” option. A little bit of what you have saved till now, and a little bit of what you want to save further, and your recipe for retirement is ready.

What happens if you’re older than 40? It gets a little difficult. You need a ridiculously high monthly investment. At this point, you have to make some ugly choices. You may have to cut down your expenses after you retire. You may have to work a few years more after the age of 60 — perhaps through consulting or other sources. You could reverse-mortgage your house, and the bank will pay you a certain amount of money. The last option is to attempt to get a return higher than 12 per cent, which adds the risk that you might not make it and have to depend on others.

Either way, the tough part about being older is that you don’t get that much of a head start. But it’s never too late.

Consider this: You can get about eight per cent with very low risk. And if you invest for more than 10 years, you might be able to pull off about 15 per cent in the stock market. If you’re looking at 12 per cent average returns, you might want to have about 70 per cent of your money in equity, and 30 per cent in fixed income.

India has some inexpensive options for this. Mutual funds are the easiest and simplest. You buy an equity fund without a fancy name for stock market exposure. You’ll need to buy something that invests in large stocks (such as Reliance, Infosys and TCS). And then, you’ll need to piggyback on the next-generation stocks, which are typically small and growing — and they’re the mid-caps.

Choosing funds isn’t rocket science, but you might feel that way because of the jargon they throw at you. A simple way to choose is to find funds that have done well in the last few years (a relatively high “rank” in their category), and which manage enough money but not too much — which is anywhere between ₹1,000 crore and ₹10,000 crore. You’ll get a lot of this information online, at valueresearchonline.com, for example.

What about the “fixed income”? India loves fixed income. And there are so many options. A good one is the public provident fund (PPF) which offers eight per cent plus every year, tax-free. And then, there are government saving schemes, fixed deposits and others. We would suggest mutual funds that invest in “debt”, which give you the ability to grow your money without paying tax. So some money in PPF and the rest in debt mutual funds.


What happens when you retire?

As you get closer to the age of 60, you want your money to be more “secure”.

Taking all your money out of equity is not a good idea. You might keep 20 per cent or more of your money in stocks, but move the rest to fixed income.

Rajeev’s story could have been better. He needs about ₹2.5 crore in today’s money to retire and live easily till he is 90. If he had invested ₹9,000 per month in 2000, and increased the monthly amount by six per cent a year, he would have ₹2.6 crore today (instead of a fixed income of ₹5,000).

The last 20 years, the equity markets have been great, with over 20 per cent annualised returns in mutual funds. The next 20 years might not yield that much, so you need to invest more. The calculation is a one-time process — a few hours with Excel, or with a financial advisor, will help you.

But the return is invaluable: A retirement of 30 years with no worries of running out of money. Even if you don’t take the cash-stash with you to the next world, you’ll need enough of it to build memories that are worth leaving behind.

(This article assumes eight per cent in low-risk investments, and an inflation of six per cent a year)

Deepak Shenoy , based in Bengaluru, is CEO at Capitalmind