Growing Annuity @ Retirement

Mahesh is 45 years old and his current expenses are Rs 75,000/- per month . He plans to retire by 60 and would like to have an annuity which would pay him enough for his current expenses. He would like this annuity to increase by 5% every year considering inflation in mind. How much should he start investing now so that it takes of my retirement till 85?

Assumptions

1. Inflation is assumed at 5%
2. Annuity is required from 60 to 85
3. Assume that he gets a return of 8% from 60 to 85
4. Equity would provide a conservative return of 10% over the long term (CAGR)
5. Debt would give a return of 7% CAGR

What will be my expense at 60 ?

We need to keep in mind the current expenses and inflation to find out his probable expense at 60.

1. Mahesh has informed that his current expenses are Rs 75,000 per month
2. He is considering an inflation of 5% which is reasonable.

Therefore by 60, his expenses would be approximately Rs 1,55,920 per month which will rise by 5% year on year .

What is the corpus he would require for retirement ?

Mahesh would require a corpus of Rs 3.41 crores considering that he would receive a yield of 8% after retirement and an inflation of 5%. His expense at 60 as we found out earlier will be Rs 18,71,040 annually .

What does he have now ?

1. He has about 20 lakhs ready to invest and
2. He can put approximately 10 lakhs surplus on a yearly basis till 60 .

What is the required rate of return ?

With the commitment that he has shown that he has ready to invest Rs 20 lakhs and a yearly investment of Rs 10 lakhs, he would require a return of 7.52% post-tax to achieve his corpus.

So what next ?

Based on his risk profile, it was suggested that

1. He invest in 30:70 ratio in equity and debt respectively.
2. This will augur well for him as he would receive an average return of 7.9% pre-tax
3. There would be enough room for any tax payments that is required to be made.
4. Over a period of 15 years , he would approximately make Rs 3.61 crores
5. As he reaches 60, he would stop making investments and initiates a Systematic Withdrawal Plan with the mutual funds

Systematic Withdrawal Plan(SWP) allows an investor to withdraw a fixed or variable amount from his mutual fund scheme on a preset date every month, quarterly, semi annually or annually as per his needs.

6. His yearly expense would be credited to his bank account which could be used for his monthly expenses
7. As he turns 60, some of his equity investments would slowly be moved to liquid / debt funds

Takeaways

1. With the advances in medical science, our lifespan has increased as well. Be prepared for extended life. Ensure you lead a healthy lifestyle.
2. Periodically assess where you stand with your finances and see if it is sufficient
3. Keep aside a buffer on the corpus that you require , this will help your extended life
4. While considering return on debt and equity , be conservative and use conservative numbers
5. Medical expenses increases, you may require additional help. You need to consider these expenses as well
6. Remember, you can’t earn money easily, when you are old. Organizations pay you for your time and youth. (of course, the wisdom your bring along)
7. If you start early, you could have reduced the huge yearly investment and also reduced the amount that you put away as an initial amount.

Can you help me with an annuity plan ?