Will your retirement corpus fall short?

It takes both math and a set of assumptions about the future to estimate the adequacy of a retirement corpus.
Satish has just turned 58 and is looking forward to retiring in the next two years. He is quite proud of the fact that he has accumulated a sizable corpus by investing diligently in PPF, EPF and some equity mutual funds-all of these being choices that he made after considerable research and deliberation over the past 25 years. He'd like to give himself a pat on the back! However, he can't help but wonders if the corpus would suffice for his needs.
Satish did all the right things by starting early, saving regularly and keeping his retirement corpus untouched till the end of his professional life. But the adequacy of his corpus will depend not only on his savings, but on future inflation as well. Over the next 30 years or so, his retirement income might turn out to be quite similar to his first salary — nice to begin with, but too small in the long term.

It takes both math and a set of assumptions about the future to estimate the adequacy of a retirement corpus. Many retirees make the mistake of comparing the return on a safe investment with inflation rate to satisfy themselves. For instance, Satish might assume that a government saving scheme that offers 8% returns would be adequate to fulfil his post-retirement needs, since inflation is 7% per annum. But this math ignores the fact that the interest income is a simple rate, while inflation is compounded yearly.

What this would mean is that Satish's large corpus would become smaller and smaller in real terms as the years roll by. To counter this, Satish needs to implement two strategies. First, he should make sure that he dips only into a small portion of his retirement income. For example, if the amount he needs each year is about 5% of his total corpus, he is on safe ground. Second, he should ensure that a portion of the corpus is invested in growth assets like equity funds, to fight inflation. Over a 15-year time frame, by the time Satish needs more money due to inflation, his corpus would have grown in value. It is important to ensure that the corpus provides both income and growth for it to be adequate over retirement.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
Source : ET wealth