Retirement Planning: 2% Lower Returns Requires 49 Lakh Higher Corpus: Can you count on 12% return on equity for a long period after retirement?

If you are planning to retire in the next 10 to 20 years, even a small deviation in your investment or retirement plan can result in a Monthly income In the post-retirement period, the impact can be enormous. That’s why it’s important to plan well so as not to be surprised at the last minute when it becomes difficult to change course.

One of those critical factors is retirement planning What you should take seriously is the annual return that your retirement fund generates during your post-retirement life. If you can generate a higher return, you will need a smaller retirement fund; however, if your returns are expected to be lower, be prepared to generate a larger retirement fund.

The situation becomes more complicated for you as the country may move from a phase of high economic growth to a phase of lower growth over the long term, which may affect the profitability of your retirement investment.

Have you done your calculations and are you prepared for any surprises?

Monthly income of Rs 1 lakh: You need a larger retirement fund for any drop in annual returns

If you want to get Rs 1 lakh as monthly income after retirement, but you want the amount to grow by 4% every year to meet inflation, and if the expected annual return on this corpus is 12%, you would need a retirement corpus of Rs 1,443 crore so that the corpus remains intact after 25 years of retirement life. However, if the expected return falls by 2%, to 10%, the retirement corpus will have to go up to Rs 1.75 crore, which is Rs 32 lakh more. In case the annual return falls by a further 2%, to 8%, you would need Rs 2.24 crore as a corpus, which is Rs 48.75 lakh more than what you needed when calculating at an annual return of 10%.

Assumptions: The corpus generates returns to provide monthly income for 25 years without any loss of principal.

Can you count on high returns during your retirement?

While high returns in the post-retirement period would make life more comfortable, this is easier said than done. When you stop having an active income from work and rely only on your savings, your risk appetite decreases and your asset mix will shift towards safer debt products. But even that won’t make life easier.

Some of the high-yield instruments that we tend to take for granted may not deliver the expected returns after a long period, such as 20 years. Today, annual returns of more than 8% on fixed-income instruments and 12% on equities are often taken for granted, but will it be the same when one retires or when one is in the midst of retirement? This will depend primarily on the economic trajectory of the country and its speed of growth. Equity and debt returns are usually high in a country that is in a high-growth phase, but that does not last for long. Much will depend on how long this high-growth phase lasts in India.

“All countries experience periods of high economic growth that can be sustained if planned well. For example, the United States continues to show strong growth despite being the world’s largest economy. India’s growth will depend on its planning. If India aims to become a developed country by 2047 and plans well, it can continue to experience high economic growth. However, it is not certain that this growth will lead to high economic growth. capital returns “Over the long term, equity markets tend to factor in events at a faster pace,” says Anand K Rathi, co-founder of MIRA Money.

What matters most to him is whether his investment will yield high returns over a long period or not. While most people are confident about the short- and medium-term returns, it is difficult to predict these long-term figures. “I am confident about the next 10-15 years and believe we could see high equity returns, similar to the past 12-15%, over the next decade. Beyond that, it will depend on how well the economy is managed and how effectively the current plans are executed. If we can deliver on our plans, it is likely that the bull market can continue for a longer period,” says Rathi.

Some experts foresee a prolonged period of higher growth. “India is in a sweet spot right now. It has favorable demographics, a stable macroeconomic environment, and a growing middle class. The combination makes it possible for India to sustain a high rate of economic growth for the next 30 years. Equity markets will provide the pace at which the Indian economy grows in the coming years, making Indian stocks the right asset class to participate in India’s growth story,” says Manish Kothari, co-founder and CEO of ZFunds.

The direction of inflation determines the returns on debt and fixed-income instruments

A country’s interest rate depends largely on the level of inflation it has. “The Indian government has been prioritising low inflation for the past decade. If future governments continue to keep low inflation as a priority, the interest rate in India will come down in the next 10 to 20 years,” says Kothari.

While many advanced economies, such as the US and Europe, have kept inflation around 2% for a long period, it may be difficult for India to bring inflation to that level and keep it there for a long period. “I don’t foresee a significant decline, but we could see inflation staying around 4% for a longer period, and it can come down further if we manage the supply chain effectively. It won’t be a significant decline, but it is expected to be on a downward trajectory,” Rathi said.

The government’s focus on lowering inflation is likely to reduce it in the long run. “If the Indian government continues to prioritise low inflation and sticks to its current policies, India is expected to continue to record low levels of inflation over the next 10 to 20 years,” says Kothari.

Why interest rates are likely to fall significantly after 10 to 20 years

Interest rates in India have been gradually coming down and the trend is likely to continue. “Interest rates in India have shown a trend of ‘lower highs and lower lows’, indicating a gradual decline in the upper range of interest rates. In 2018, interest rates were hovering around 8-8.5%, but are now peaking at 7-7.5% and are expected to come down below 7%. Meanwhile, the lower end of rates has been closer to 5% and even below 5%,” Rathi said.

In the long term, interest rates are likely to continue to fall. “I think we will not see the same high fixed returns on investments in the future that we see today. Currently, many banks are offering 7.5% returns, but I don’t think this is sustainable. It is important to understand that the real interest rate, which is the interest rate offered by banks minus the inflation rate, typically remains positive in India. Currently, it is quite high, more like 2-2.5%, but historically it has been around 1.5%,” says Rathi.

What this means is that safe debt instruments and other fixed-income instruments are unlikely to generate high returns after 10 to 20 years.

High returns can continue during the accumulation phase of the investment phase.

If you are planning to retire in the next 10 to 20 years, you may not have much to worry about when it comes to building your retirement fund through regular investments. “When investors are in the accumulation phase of their life, they should always consider investing in instruments that generate higher returns year after year. This will enable them to build a higher retirement fund,” says Kothari.

India’s high-growth phase is likely to benefit equity investors with high returns for at least the next two decades. “During the accumulation phase, it is important to consider a steady rate of return because there is a risk and the return should ideally compensate for that risk. While returns may fluctuate, overall growth should be positive during this phase. That is why it is beneficial to focus on steady returns during the accumulation phase,” says Rathi.

Be prepared to consider lower returns during the withdrawal phase or adjust your investment.

Once the retirement phase begins, people prefer stability. “After retirement, this capital should be used in a way that generates consistent returns, making withdrawals predictable,” says Kothari.

As the retirement phase will come after a long gap of 10 to 20 years and may continue for the next 25 years, the dynamics of returns will change significantly by then. Instead of regretting having made a bad investment decision years ago, it is better to plan for low returns and save a larger amount as a retirement fund. “Once investors have reached a stage where they are not earning, they should focus on safety of capital. This entails having a low-risk portfolio, which means they will get low returns on their portfolio. Hence the need to build a large fund when they are in the accumulation stage,” says Kothari.

Even a low return on the debt portion of your investment may not be bad news. Lower inflation would mean that you won’t need to increase your monthly income drastically every year. “Instead of focusing on absolute interest rate figures (like 5%, 4% or 7% for fixed deposit interest rates), we should look at the real interest rate, which takes into account inflation and changes in interest rates. This means that as inflation declines, so will interest rates, and it may not significantly impact our investment portfolios until real interest rates are 1% or more,” says Rathi.

Smart planning and a smart mix of assets can give you the best of both worlds – high returns and safety. “You could allocate your money into three buckets – short-term, medium-term and long-term. The short-term category would be comprised of mostly debt; the medium-term category could include some debt and a small amount of equity, and the long-term category would involve mostly equity. Since post-retirement life could last 25-30 years, it makes sense to include some equity in the portfolio. If you are okay with this approach, you could continue using a constant rate of return,” Rathi adds.