Target net savings of 35% of pay for a corpus of ₹5 cr by age of 60
I am 38 years old, make ₹1.35 lakh a month, and want to accumulate ₹5 crore for my retirement. Where and how should I invest to achieve this objective?
—Name withheld on request
You are 38, and if you plan to retire at the age of 60 with a corpus of ₹5 crore, you should target a net savings rate of 35%. It means, of the ₹16.2 lakh you are earning every year, you should save at least ₹6 lakh. If your annual income grows at 5% you should be able to reach the targeted net savings of ₹5 crore by 60, while factoring in an inflation of 7%. For this to happen, besides income growth, you have to ensure that your investments grow at 10% a year post fee and taxes.
Considering that this is a long-term goal, you should be aggressive and need to invest at least 80% into equities and the rest into debt. This should help you achieve the 10% annualized return rate. Over the past few years, equities have generated very high returns, and hence there is a tendency for financial plans to extrapolate the high returns. However, over long periods, return revert to mean numbers and hence it’s always good to be conservative. Should the numbers truly come out better than expected, one can revisit later and have an early retirement. But since retirement post 60 is difficult, and could be taxing, it’s important that you err on the side of caution.
In terms of investment schemes, you should look at a combination of one active flexicap, one Nifty Index Fund, one mid-cap active fund, one midMFs, cap index fund, one small-cap index and one small-cap active fund. For the debt component, you can look at first exhausting all small savings schemes such as PPF. The rest can be allocated towards good quality corporate bonds, fixed deposits, and debt funds.
Finally, please note a few things as retirement planning is critical in countries such as India that do not have social security benefits. Please do not dip into this corpus for any reason, especially to meet discretionary expenses. Also, do not get worried by market down moves or be overexcited by up moves and keep investing.
Do review and start reducing equity allocations around one to three years before the retirement age so as to ensure that you don’t get exposed to radical fluctuations.
As the goal is long, a high equity exposure is helpful.
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