How much should you withdraw from a retirement fund to make it last long enough?

The retirement planning strategy involves calculating the expenses at the start of retirement, calculating the retirement fund, and making a plan to accumulate it. The fund should then be invested in such a manner that after annual withdrawals, it lasts through the retirement years.

Estimating Retirement Corpus

Many people either haven’t done retirement planning at all or haven’t done it properly. They just rely on the amount that they will receive from their employer at the time of retirement. It may include the Employee Provident Fund (EPF), gratuity, leave encashment, superannuation, etc. Some people accumulate some additional money from their savings and investments, which may include PPF, investments in mutual funds, etc. But they are still not sure whether the amount that they have is an adequate retirement fund. The other thing that they are not sure about is how much money should they withdraw from this fund every year to sail them through their retirement years. In this article, we will understand how to arrive at the retirement fund amount, how to accumulate it, and finally, how to use it to sustain a retirement period of at least 20 years.

Let us start by understanding how much money should you have in your retirement fund.

How much should be your retirement corpus?

The retirement corpus amount will depend on your current monthly expenses, age, inflation rate, etc. Let us understand this with an example. Prakash is 31 years old, and his current monthly expenses are Rs. 50,000 (annual expenses Rs. 6 lakhs). He has 30 years left before his retirement. Let us assume that the inflation rate for the next 30 years will average 7% p.a.

If Prakash’s expenses increase at the rate of 7% p.a. for the next 30 years, his annual expenses in the 1st year of retirement (age 61 years) will be Rs. 44.81 lakhs. Let us assume that the inflation rate will be 5% p.a. during his retirement years (age 61 to 80 years, i.e., the next 20 years). If Prakash invests his retirement corpus at 7% p.a. during his retirement years, he will need a retirement corpus of Rs. 7.53 crores.

Also Read: 6 Steps To Calculate Your Retirement Corpus

How to accumulate the retirement corpus?

Prakash knows that he needs a retirement corpus of Rs. 7.53 crores. He has 30 years to accumulate it. He has an aggressive risk profile. He decides to follow appropriate asset allocation and invest in a mix of equity mutual funds, fixed income, gold, etc. His expected rate of return from his investment portfolio is 12% CAGR. Based on this calculation, he will have to invest Rs. 2.78 lakhs annually or Rs. 23,238 per month. He invests in equity mutual funds through the systematic investment plan (SIP) mode.

He will have to review his investment plan regularly (once in 6 - 12 months) to ensure his investments are performing on expected lines. He will have a retirement fund of Rs. 7.53 crores at the time of retirement.

How to invest a retirement fund?

Prakash will have to invest his retirement fund in a manner such that he is able to make an annual withdrawal for his regular expenses. The remaining will corpus will stay invested and earn regular income.

During his retirement years, if Prakash’s annual expenses grow at 5% p.a., and the retirement fund grows at 7% p.a., he will be able to sustain himself for his retirement years till age 80 years.

The utilisation of the retirement fund

The utilisation of the retirement fund

As seen in the above chart, Prakash’s retirement fund will grow for the first few years even after the annual withdrawals. Once the annual withdrawal amount starts increasing, the retirement fund will start falling. In the last year (age 80 years), the annual expenses will be equal to the amount left in the retirement fund. At this stage, Prakash will be able to make the last withdrawal, post which, the retirement fund will be exhausted.

Also Read: How And Why Should Women Build A Bigger Retirement Corpus Than Men?

During his retirement years, along with the retirement corpus, Prakash will need to provide for the following:

a) An emergency fund, equivalent to 3-6 months of regular expenses to be maintained in a separate savings account.

b) An adequate amount of health insurance to take care of any hospitalisation event(s).

It is recommended that you get in touch with your financial advisor, who can make a customised retirement plan for you. It will be based on factors such as your current monthly expenses, inflation rate, age, etc.

Actionable insights

To create a sustainable retirement fund, take the following steps:

  1. Calculate your expenses at the time of retirement based on your current monthly expenses and the expected inflation rate.
  2. Calculate the retirement corpus based on life expectancy, annual expenses, inflation rate and expected rate of return during retirement years.
  3. Calculate the amount to be invested every month to build the retirement fund based on the investment time horizon and expected rate of return.
  4. Invest the retirement fund in a manner such that it will last through your retirement years based on annual withdrawals.


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