-Name hidden by request
First, it’s great to hear that your cousin successfully paid off the mortgage at age 35 and started investing 30% ( ₹45,000 of ₹1,50,000) from his income towards their retirement goal. They also avail the additional tax exemption under Section 80CCD by investing ₹50,000 in the NPS.
It is good to know that they follow a targeted investment strategy aimed at accumulation ₹5 crore for pension. If we consider 60 years as the retirement age, they still have 25 years to build this corpus, assuming a return of 12% from equity funds and 10% from NPS.
With a systematic investment plan (SIP) amount of ₹45,000, a term of 25 years and a return (RoR) of 12%, the pension corpus of investment funds is estimated at ₹8,53,93,579. The same applies to an NPS amount of ₹50,000 per annum, a term of 25 years and an RoR of 10%, the NPS pension corpus is estimated at ₹54.09.088.
Keep in mind that only 60% of the NPS corpus can be withdrawn at once and at least 40% must be invested in an annuity.
If your cousin wants to retire early, he or she can try to build a corpus ₹5 crores. With a SIP amount of ₹45,000, an RoR of 12% and a retirement corpus target of ₹5 crore, the required tenure would be 21 years. For the NPS, with an annual contribution of ₹50,000, an RoR of 10% and a tenure of 21 years would be the corpus ₹35,20,137. This means that they can retire in 21 years, at the age of 56, and receive an extra pension. ₹35 lakh in their NPS account.
However, considering their annual income of ₹18,00,000 and their current investments of ₹5,40,000 in SIPs and ₹50,000 in the NPS, they probably spend about approx ₹1,00,000 per month. To maintain the same lifestyle in retirement, taking into account the current monthly expenses of ₹1,00,000, 6% inflation and 25 years to retire (retire at 60), their expenditure at retirement would increase to ₹4,29,187 per month.
During the retirement period (30 years with a life expectancy of 90 years), the expenses of ₹4,29,187 at retirement, an inflation rate of 6% and a post-retirement RoR of 9% (real return of 2.83%) would require a retirement corpus of ₹10,42,90,463.
With an NPS amount of ₹50,000 per annum, a term of 25 years and an RoR of 10%, the corpus of the NPS is estimated at ₹54.09.088. The required corpus, after accounting for the NPS, would be ₹9,88,81,374. To achieve this, over a period of 25 years with a RoR of 12%, the required SIP amount would ₹52,108.
To achieve a total corpus of ₹10.5 crore, your cousin will need approx ₹10 crore from their mutual fund portfolio. Considering the corpus generated from the NPS, they will have to add an additional SIP of ₹7,000 to their current SIP of ₹45,000.
Additionally, I would recommend diversifying their mutual fund investments. They have only three schemes for large-cap, flexi-cap and small-cap. They could diversify their allocation as follows: 10% in large-cap funds, 15% in large and mid-cap funds, 20% in flexi-cap funds, 15% in mid-cap funds, 20% in small-cap funds, 15% in hybrid funds and 5% in gold.
An important observation is that although your cousin has begun goal-based financial planning for retirement, other goals, such as child rearing, marriage, and vacations, have been overlooked. This could impact their cash flow, which in turn will impact their retirement goals. I would recommend that they consider a comprehensive financial plan that includes a contingency corpus, risk coverage, and all of their financial goals.
Rakshith HD is head of digital sales at GoalTeller.
