Is Rs 2 Crore Enough To Retire With Rs 1 Lakh Monthly Expenses? Financial Planner Reveals Hidden Risks

Financial planner Basavaraj Tonagatti recently answered a retirement planning query. Is a Rs 2-crore corpus sufficient to fund Rs 1 lakh monthly expenses in India? In a video posted on YouTube, Tonagatti describes why a simple calculation may not be enough to provide financial security in retirement years.

Tonagatti starts explaining the scenario with a typical situation, whereby a retiree has Rs 2 crore and puts monthly expenditure at Rs 1 lakh, which works out to Rs 12 lakh yearly. As per simple calculations, this looks reasonable if the corpus is put into a product offering steady returns. For instance, a bank deposit yielding 6% return per annum would result in around 12 lakh yearly, precisely meeting the retiree's financial needs.

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However, Tonagatti says that this calculation ignores a number of risks that threaten long-term financial security. Firstly, the inflation risk. In the long term, the cost of living will necessarily increase, which means that Rs 12 lakh a year might no longer support the same lifestyle. If inflation is not factored in, retirees will see their purchasing power erode gradually. This may lead to cuts in spending or tapping into the principal amount.

The second factor is reinvestment risk. When a retiree depends on fixed deposits or comparable instruments, the rate at the time of reinvestment might be less than initially thought. This may decrease annual returns, create a shortfall between expenses and income, and shorten the lifespan of the retirement corpus.

Tonagatti also points to the sequence of returns risk, applicable to investors investing in market-linked products. Even assuming a product delivers 6% returns on average, variations in monthly or yearly returns can impact withdrawals. In case of returns being lower in the initial years of retirement, the retiree might have to tap into the principal, speeding up corpus erosion and reducing funds’ longevity.

A practical calculation for retirement sufficiency should take into account several risks, Tonagatti suggests. Inflation risk deals with the effect of increasing spending over time, while reinvestment risk raises the issue of uncertainty of returns when matured investments are rolled over. Sequence of returns risk, meanwhile, is the volatility of investment returns, which can influence withdrawals and the longevity of the retirement corpus.

He recommends that retirees factor in these scenarios in their planning so that their corpus can support their desired lifestyle over the long run. Simply relying on nominal returns without assessment of potential risks could leave retirees in a weak financial position.