How to build a ₹5 crore retirement corpus with ₹1.5 lakh monthly salary

-Name withheld on request

Firstly, it is great to hear that your cousin has successfully paid off their home loan at the age of 35 and has begun investing 30% ( ₹45,000 of ₹1,50,000) of his income towards their retirement goal. They are also utilizing the additional tax exemption under Section 80CCD by investing ₹50,000 in the NPS.

It is good to know that they are following a goal-based investing strategy, aiming to accumulate ₹5 crore for retirement. If we consider 60 years as their retirement age, they have 25 more years to build this corpus, assuming 12% returns from equity mutual funds and 10% from the NPS. 

With a systematic investment plan (SIP) amount of ₹45,000, a tenure of 25 years, and a rate of return (RoR) of 12%, the retirement corpus from mutual funds is estimated to be ₹8,53,93,579. Similarly, with an NPS amount of ₹50,000 annually, a tenure of 25 years, and an RoR of 10%, the retirement corpus from the NPS is estimated to be ₹54,09,088.

Please note that only 60% of the NPS corpus can be withdrawn as a lump sum, and a minimum of 40% must be invested in an annuity.

If your cousin wishes to retire early, they can aim to create a corpus of ₹5 crore. With an 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, the corpus would be ₹35,20,137. This means they will be able to retire in 21 years, at the age of 56, and will have an additional ₹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 are likely spending around ₹1,00,000 per month. To maintain the same lifestyle at retirement, considering present monthly expenses of ₹1,00,000, an inflation rate of 6%, and 25 years to retire (retirement at 60), their expenses 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 rate of 2.83%) would require a retirement corpus of ₹10,42,90,463. 

With an NPS amount of ₹50,000 annually, a tenure of 25 years, and an RoR of 10%, the corpus from the NPS is estimated to be ₹54,09,088. The required corpus, after accounting for the NPS, would be ₹9,88,81,374. To achieve this, over a tenure of 25 years with an RoR of 12%, the SIP amount required would be ₹52,108.

To achieve a total corpus of ₹10.5 crore, your cousin will need around ₹10 crore from their mutual fund portfolio. Considering the corpus generated from the NPS, they will need 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 covering 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.

One key observation is that while your cousin has started goal-based financial planning for retirement, other goals, such as children’s education, marriage, and vacations, have been overlooked. This could impact their cash flow, which will, in turn, affect their retirement goal. I would recommend that they consider a comprehensive financial plan that includes an emergency corpus, risk cover, and all their financial goals.

Rakshith H.D. is the head of digital sales at GoalTeller.