Turning 40 without a retirement plan can often pose a financial challenge, particularly as rising incomes and lifestyle expenses leave little room for long-term savings. Even as careers progress and earnings grow, retirement planning can take a back seat, potentially leaving people unprepared for their post-retirement years.
As you grow older, you begin to realise that your current income may not always be there to support your expenses. That is why retirement planning takes top priority in your financial goals.
The good thing in this case is that even at 40, it is not too late to start. If you plan to retire around 60, you still have 20 years to build a retirement corpus that can support your lifestyle after you stop working.
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It is for you to decide what goal you want to set for your retirement. Considering your current expenses, you can use online inflation calculators to assess a minimum amount needed to sustain your lifestyle. The value can also depend on other goals like travelling, buying a house, health conditions and other additional expenses that are likely to add during your retirement years.
Assuming that your currently monthly expenses are Rs 70,000 and you plan to retire in 20 years. Here's how much corpus you will need:
Current expense: Rs 70,000
Inflation: 6%
Time: 20 years
Cost increase: Rs 1.54 lakh
Future cost: Rs 2.25 lakh
This means that at current expenses, you will need Rs 2.25 lakh 20 years later to maintain the same lifestyle. This estimates your annual expenses to Rs 27 lakh. At this rate, you need at least Rs 8 crore corpus to last around 30 years of your retirement.
Is It Possible To Build Rs 8 Crore Corpus At Age 40?
Since 20 years is a long time, you can start investing aggressively in mutual funds in the initial years. It will help you build a stronger corpus through the power of compounding. You can also invest in a public provident fund, which is a government backed-scheme that offers 7.1% returns per year.
Assuming you invest in mutual funds for 15 years at 12% expected returns:
- Monthly amount: Rs 41,000
- Step Up % (annual): 10%
- Investment duration: 15 years
- Expected rate of return: 12%
- Invested amount: Rs 1,56,32,060
- Estimated returns: Rs 1,99,71,721
- Total value: Rs 3,56,03,782
PPF returns:
- Annual investment: Rs 1.5 lakh
- Returns: 7.1%
- Time: 20 years
- Final corpus: Rs 66.58 lakh
After the first 15 years, you might want to bring more stability in your portfolio since mutual funds are market linked and do not offer guaranteed returns. For this, if you decide to invest your equity corpus into a mix of gold and other debt instruments, it may grow at a slower pace but your portfolio will stay protected from risks and volatility.
Assuming of the Rs 3.56 crore from mutual funds, Rs 2 crore are put in gold and Rs 1.56 crore in FDs:
Gold returns:
- Investment amount: Rs 2,00,00,000
- Investment duration: 5 year
- Expected rate of return: 10%
- Estimated returns: Rs 1,22,10,200
- Total value: Rs 3,22,10,200
FD returns:
- Investment amount: Rs 1,56,00,000
- Investment duration: 5 year
- Expected rate of return: 6.5%
- Invested amount: Rs 1,56,00,000
- Estimated returns: Rs 57,73,351
- Total value: Rs 2,13,73,351
These figures show that after 20 years of investment, you can end up with around Rs 6 crore corpus from mutual funds, gold, FD and PPF. This is short of what you are likely to need, but as a salaried employee your provident fund corpus, a mandatory government backed retirement scheme with 8.25% returns, may be able to compensate for the remaining corpus, depending on your salary, contributions and change in interest rates over time.
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But you also must understand that these figures are illustrative and the prices of equities and gold are not guaranteed. Additionally, the Rs 2 crore gains from mutual funds will trigger tax liabilities for you when you withdraw the money. For long-term equity assets, gains up to Rs 1.25 lakh per financial year remain tax free. You will need to accordingly plan your financial journey to minimise taxes while maximising your profits. You can consult an expert and share your goals with them to get a more accurate picture of how your investment journey might look.
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