Defusing the retirement bomb: Part II

In continuation with the earlier posts on retirement bomb, this post tries to solve the second part of the retirement equation.


How to bring the multiple down?


Traditional retirement advisers suggest a 50 x corpus of your annual expenses at the time of retirement.


Why 50x?


This assumes zero real return on your retirement corpus, and 50 years life expectancy after retirement. Essentially, it means that if the inflation is 9% in the economy, your corpus also increases @ 9% (after tax) every year, in line with inflation.


You withdraw 2% of your corpus every year. Since the corpus is 50x, 2% of corpus = annual expense


At 2% withdrawal rate, and zero real return, your corpus will last 50 years.
If your net return is lower than inflation (e.g. 6% post tax Fixed deposit return vs 9% inflation), your effective withdrawal rate will be 2% + 3% (9%-6%) = 5%. So, your corpus will be over in just 20 years!


How to reduce the multiple required?


Getting a positive real return on your corpus will reduce the multiple required. If you can get 2% real return on your portfolio every year on an average, the multiple will come down to only 25x


E.g. let us say your corpus is 1 crore today, and your annual expense is 4 lakhs, and inflation is 9%. Every year you get 2% real return on your corpus. 2% real return means nominal return of 11% (2% real + 9% inflation).


You can withdraw 4% from your portfolio every year (4 lakhs in first year, 4.4 lakh in second year and so on) to meet your annual expense (2% real return + 2% capital withdrawal). Your portfolio will again last for 50 years.


1 crore is only 25x of annual expense, and will meet retirement corpus objective, if you can achieve 2% real return on your corpus!


Here is the table of real return, and multiple of annual expense required to retire!









Conservatively, one should set aside Rs. 20-50 lakhs for emergency/medical expenditure and for years of negative real returns over and above the retirement corpus!


Happy Investing!
Source:Equityinvestor.com