How long would an investment portfolio of Re 1 crore at retirement last

Mr X retires with an investment portfolio of Re 1 Crore (cr) and is concerned about how long would his investment portfolio last or take care of his financial needs?

Longevity of protection from his investment portfolio depends on three important factors

1. Inflation (Non Controllable factor) – Inflation is the rate at which general level of prices for goods & services is rising. India’s Average inflation since FY 2000 (over last 17 years) stands at 6.5%. Mr X does not have any control over inflation and hence for analysis purpose let’s assume 5% long term inflation.

2. Monthly Investment Cash flow requirement (Controllable factor) – How much monthly cash flow Mr X requires from his investment portfolio depends on various factors like his other sources of income, life style, financial commitments etc.

For ex: Assume Mr X requires monthly expense of Re 1 lac for comfortable living. He gets a monthly pension of Re 25,000. So his monthly cash flow requirement from the investment portfolio would be Re 75,000 (Re 1 lac- Re 25,000).

3. Investment portfolio return (Controllable factor) – Mr X asset allocation would determine his return. Mr X could decide to park his money in an Bank SB account (potential to generate 0-3% CAGR return); invest in Fixed deposit instruments like bank FD, corporate FD, Bond Mutual Fund (potential to generate 4-10% CAGR return); invest in Equity instruments like Direct Equities, Equity Mutual Fund (potential to generate 8-15% CAGR return) or invest in alternative assets classes like gold, silver, real estate, REIT. Investors should take into account the tax impact as it would reduce investors return.

Mr X wishes to withdraw monthly Re 75,000 to meet his expenses and he is aware that inflation would push up his monthly expenses. The chart below depicts how long would Mr X  investment portfolio of 1 cr would last under various return scenarios.

Mr X investment portfolio would last / take care of his financial needs for only 8 Years at 0% return (held as cash). However if Mr X had wisely deployed his investment and generates 12% return on portfolio (Equity) then his portfolio would last/take care of his financial needs for 21 Years. Thus a wisely invested portfolio would last longer.

Conclusion: wisely selected investment portfolio during working years can significantly ease financial burden on retirement. if you don’t make your money work for you during working years then you might end up retiring late or lower the quality of life on retirement.

From the above example an investment portfolio held in fixed instruments (at 6% return) would last/take care of Mr X financial needs for only 11 years; while same portfolio held in Equity securities (at 12% return) would last/take care for 21 Years. Thus from the example a well held investment portfolio frees Mr X for 10 years (21 years-11 years); make your money work for you and retire comfortably.