Recently, a friend told me that he had ‘finally’ managed to save Rs 1 crore (not including his real estate investments). And he was quite happy about this achievement as the first crore is a big milestone no doubt when it comes to us Indians.
In the course of our conversation, he casually asked a simple question –
Can I Retire with Rs 1 Crore in India today?
To me, it seemed that the bug of early retirement had bitten him too as he is just 33 – though the disease seemed in its infancy. 😉
But given my prior knowledge of his not-so-frugal lifestyle (despite good income), I knew that it won’t be possible. And I told him so. His reaction was that of a person who had been slapped hard. 😉
But this got me thinking…
What if someone had a comparatively more frugal lifestyle than my friend or was much older and nearing retirement (around 60), then would Rs 1 crore be enough to retire in India today?
Ofcourse it would depend on various factors. But what do you think?
Suppose you too had Rs 1 Crore today. Can you retire comfortably depending on where you are in life?
I can already hear the ‘No’ssss…
So let me disappoint you all a bit.
For most readers of Stable Investor, a corpus of Rs 1 crore will not be enough to retire.
Sorry. That’s the reality.
But let’s anyway see why Rs 1 crore may not be enough for most people’s retirement now. And if you too are thinking why I have chosen the figure of Rs 1 crore, then its more about the psychological attachment we Indians have with such large figures (more so with the word ‘Crore’) when it comes to saving for long term goals like retirement.
So let’s move on…
Is Rs 1 crore enough for 60-year old to Retire?
Some assumptions (for starters):
- Annual Expenses – Rs 6 lakh (= Rs 40,000 monthly + additional Rs 1.2 lakh insurance / travel / medical / buffer / etc.)
- Retirement Corpus Returns – 8% – portfolio mainly has debt (giving 6-8%) and some equity (giving 10-12%)
- Average Inflation – 6%
- Life Expectancy – 85 years
In this scenario, the money runs out by 79th year. Here is how:
So you see that Rs 1 crore is insufficient to provide for all expenses in 25 years of retirement (from age 60 to 85) in the given scenario.
Your options? Either reduce the expenses or don’t live long enough. Only the former is under your control as the latter (forcing yourself to not live long enough) is suicide and punishable under Indian laws.
But jokes apart, there are few important things to think about this above scenario:
First, in spite of regular expense being Rs 40,000 monthly or Rs 4.8 lac annually, an additional buffer of Rs 1.2 lac has been kept. You may feel that why am I overestimating the expenses, maybe unnecessarily? But this kind of overestimation or let’s say, having such buffers in retirement calculations is advisable. And that is because the retirement portfolio is open to some big risks:
- Sequence of Returns Risk – In the calculations, it is assumed that corpus will generate 8% average returns each and every year. But in reality, when the corpus is deployed in a mix of equity and debt, some years you might get higher returns from equity while in other years, you might see lower (or even negative) returns. Even debt returns move around a bit. So the overall portfolio returns will fluctuate accordingly. And if the initial sequence of returns in first few years is bad (or less than our assumption of 8%), then the corpus will get depleted much faster due to withdrawals for regular expenses and much lower returns replenishing the corpus (or losses depleting the corpus).
- Higher inflation Risk – We have assumed a reasonable (but more than the currently prevalent) 6% inflation in retirement years. But it is possible that the actual inflation in atleast few years may be unexpectedly higher. Who knows? This will naturally result in faster depletion of the retirement corpus if the retiree cannot reduce his expenses appropriately.
- Longevity Risk – We have assumed that life expectancy (from corpus dependence perspective) is 85. It’s entirely possible that you or spouse or luckily both (!) live much longer. If that’s the case, then you don’t want to run out of money at that age. Isn’t it?
- Unexpected and Uninsured Big Medical Expense – Its possible that an unexpectedly large medical expense (which is not fully covered by health insurance) might force you to dip into the retirement corpus (assuming no help from family/friends etc.). If that happens, then that too can compromise the corpus’s potential to last for full 25+ years.
- Adverse Future Taxation – You never know when the tax regime may change for the worse. They might unexpectedly introduce some new taxes or clauses which will result in lower in-hand post-retirement income or need to withdraw more from the corpus as the in-hand after-tax figures will be less.
So it is for these reasons (potential risks) that you need to have some buffers while calculating the retirement scenarios.
Another aspect is, and you will agree with me here, that “8% return every year” is a hypothetical scenario.
A more realistic scenario would be the retiree parking the corpus of Rs 1 crore in a conservative portfolio with 25% equity and 75% debt. With equity returns fluctuating every year between very high (let’s say +49%) to very low (let’s say -27%) and debt returns ranging from 6% to 9%.
I have simulated a return sequence of 25-26 years which eventually delivers 8% CAGR (our original return assumption used earlier). Have a look below:
Spend some time on the table above. A portfolio of 25% equity and 75% debt sees fluctuating returns every year. So the actual portfolio return every year varies but the 25+ year CAGR works out to be just what we wanted – a neat 8%.
And this is the problem with the concept of CAGR – an average CAGR of 8% does not mean 8% every year. I have written about this phenomenon in detail here and here. A lot of people fail to understand it and make mistakes in their expectations. And that can be disastrous.
Let’s now use the above sequence of realistic fluctuating returns on the Rs 1 Crore retirement portfolio from which, withdrawals for retirement expenses are taking place.
Let’s see how long it survives now:
Coincidently, this also survives till the age of 79-80.
You might ask – nothing has changed from the earlier example. But remember that this is just one of the possible sequence of returns. There can be millions of other sequence of year-wise returns.
As I mentioned in the risks of getting a string (sequence) of poor returns in the initial years, it can suddenly destroy the retirement corpus and lead to a retirement failure. More so if the equity allocation is unnecessarily high to begin with.
How?
Let’s simulate it:
- Portfolio Allocation – 50% Equity & 50% Debt (not so conservative now)
- Equity Returns in the first 4 years: (-)12% returns each in first 4 years
- Equity Returns in later years: same as used in the above example
- Debt Returns: same as in the above example
- Expenses: same as in the above example
Have a look at the simulation below. The corpus struggles due to a bad sequence of returns in the first 4 years (and high allocation to that struggling asset, i.e. equity) and gets exhausted in just the 72-73rd year itself:
This is exactly what the Sequence of Return Risk is.
A poor sequence of returns in initial years can deplete the corpus very fast if exposure to the asset giving poor returns is high.
And you never know what would be the sequence of returns in the initial years of your retirement. It may be good. It may be bad. You cannot choose the sequence. So that risk is always there. There are ways to manage this risk to some extent.
So now you see the difficulty in answering optimistically to questions like Will Rs 1 crore last full life? Or, How long your Rs 1 crore will last?
If you too were looking for the perfect answer to Can I Retire With Rs 1 Crore in India today? then it really depends on a ton of factors. There are no simple thumb rules here.
Retirement planning isn’t exactly rocket science. But its fairly tricky and a little difficult.
And not because it involves number crunching, but because of the uncertainties associated with all the factors that impact it. It is really not just about punching numbers in an online retirement planner or excel retirement calculator that many people feel it is. It has been rightly called as the Nastiest Problem in Finance. Do read the linked article and you too will be stressed about the idea of retirement calculations themselves! My apologies for painting a bleak picture but I try to share realities on Stable Investor.
And please if you do get hold of any sample Rs 1 crore retirement plan, then remember that it is not necessary that it will be applicable in your case too. Copy-pasting doesn’t work in personal finance.
For all middle class and young people, even though Rs 1 crore sounds like a large number, it won’t be enough because of not-so-low inflation and lack of social security in India. It might still work in certain cases where there are other sources of income post-retirement (like rental, your or/and spouse’s pension, etc.). But if the dependency is only on the retirement corpus, then it can be safely said that:
Don’t retire with Rs 1 crore in India!
Make sure you give retirement planning (or early retirement planning) the serious thought it deserves.
Ideally, the very first step should be to separate the goal of retirement planning from all other short/medium-term goals like a house purchase, children’s higher education and marriage, travelling, etc. Keeping the goal of retirement separate from other goal ensures that you can give it the undivided attention it deserves and more importantly, you don’t end up dipping into the retirement savings like many people do without realizing its consequences.
And it may sound repetitive but its best to start early when saving for retirement. Here is a great example of how saving for 10 years works better than saving for 30 years if started earlier.
Is Rs 1 crore good enough for your retirement is not the right question. You should rather ask How much money is enough to retire in India?
Ideally, a methodical and mathematical approach should be followed for planning your retirement savings. If you can do it correctly (and you should first know what can go wrong and where – do not miss reading this to understand), then it is fine. Else, better to take good advice from an advisor for proper retirement planning. Or you can even consider full financial planning that among other things, will also take care of your retirement goal.
Whatever path you chose to put in place your retirement plan, make sure you do not delay it, don’t get your assumptions wrong and more importantly, begin soon.
