Saving for retirement is crucial for a comfortable and secure life after your working years. Many people start investing early during their service period, aiming to build a substantial retirement corpus over time.
It could be a wise step to start investing in the initial years of your employment for retirement planning. However, over the years, inflation can reduce the real value of the retirement corpus. Your intended corpus may not be enough to meet your monthly expenses during your retirement years. To build a substantial corpus and earn a steady income after retirement, financial experts often suggest a strategy involving both a systematic investment plan (SIP) and a systematic withdrawal plan (SWP) for mutual fund investors.
With an SWP, you can generate a steady monthly income while keeping the remaining corpus invested. This allows your money to continue to grow automatically, helping to minimise the impact of inflation. On the other hand, SIPs allow investors to build a large corpus with small investments regularly due to the power of compounding.
Let's try to understand this financial strategy to ensure a steady income after retirement through an example. If you have Rs 20,000 to invest every month in an SIP and you start at 35, here's how your investments would grow by your retirement age of 60 years.
Rs 20,000 Monthly SIP to Build Retirement Corpus
At an assumed annual interest rate of 12% per annum, your investments could grow substantially to more than Rs 3 crore in 25 years.
Monthly investment: Rs 20,000
Tenure: 25 years
Total investment: Rs 60 lakh
Estimated returns: Rs 3.19 crore
Total value: Rs 3.8 crore
This accumulated corpus can be used for regular monthly investments in your retirement years. Here's how a systematic withdrawal plan could be helpful for financial security with a retirement corpus of Rs 3.8 crore.
Monthly income through SWP
Let's assume that you withdraw 5% of the corpus per annum to meet your monthly expenses in post-service years. Here's how the retirement corpus will help in a steady income through an SWP:
Total corpus: Rs 3.8 crore
Withdrawal (at 5% per annum): Rs 19 lakh
Monthly income (via SWP): Rs 1.58 lakh
Annual returns (assumed rate of 8% per annum): Rs 30.4 lakh
So, in the given scenario, after the monthly incomes, there will be a pre-tax surplus of around Rs 11.4 lakh (Rs 30.4 lakh – Rs 19 lakh) per annum. This surplus amount remains invested and the interest earnings will be added to your overall corpus.
By taking only 5% per annum and letting the rest stay invested, you get a regular income while your corpus keeps growing without shrinking. Since most of your corpus continues to earn, your monthly income retains its purchasing power and can keep up with inflation. Withdrawing a small percentage of your corpus can make your retirement funds last for decades without running out.
The investment strategy may also involve keeping a portion of your corpus in funds that provide moderate growth and steady monthly income and investing the rest of the money in growth-oriented equity funds, which can later help you fight inflation.
However, it's important to note that mutual fund investments are never guaranteed, and actual returns may differ due to taxation and market-linked factors.
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