Here's how you can retire with a corpus of Rs 5 crore

How about retiring as a Crorepati? A dream too far you think? Not really though. If you invest just over a lakh every year, you could very well retire as a Crorepati. Here’s a look:

The three essentials: When you try to plan a trip, you take three things into consideration – the starting point, the mode of transport and the destination. Exactly the same way, it is important to take these three factors into consideration while planning to retire as a Crorepati – the initial investment, the amount you will invest regularly and the final value you need. In financial terms, these are called – the present value (PV), the amount you pay regularly (PMT) and the future value of your investment (FV).

Future Value: When planning your retirement, the first thing you do is ascertain the sum of money that you want to retire with. Then, you move on to calculating the amount that you must invest each year, until retirement, to achieve this figure. The string of equal annual investments that you need to make to get to your target figure is called an annuity. The amount that you’ll end up with if you invest in this manner (assuming a constant rate of return) is called the Future Value of Interest Factor Annuity. Let’s simply call it Future Value (FV). In our case, the FV is Rs 5 crore. So, the goal is to ensure you have Rs 5 crore by the time you retire.

Understand the complexity: Just a point to note before we go forward and calculate the investment needed today. It is not a simple formula. Every year, you also earn an interest on the profits you have made. For example, today you earned an interest of say Rs 100. Tomorrow, you will earn another interest on not just your initial investment, but also this interest of Rs 100. This amplifies your final return.

Next step: Now that the end goal in sight, we can plan our investment journey. The first step is to calculate your initial investment. Don’t worry if this amounts to just a few thousands. Consider this your starting point. Next, calculate how much time you have – 20, 30, 40 years? Let us suppose you are in your twenties – 23, for the sake of calculation. Then you have 35 years until you retire. Now, we shall backtrack and use financial calculators or formulae on Excel. Using the calculators, we will find out how much you need to invest every year for the next 30 years to get Rs 5 crore.

Get your return right: If you are one of those investors who prefer the safety of FDs and earn about 10% per year, then you will have to shell out more money per year—Rs 1.8 lakh per year. This amounts to Rs 15000 per month. This amount reduces to Rs 1.15 lakh per year if your return increases even marginally to 12%—the return that debt funds usually offer.

You get the gist? The idea is that as your returns increase, you need to invest less and less every year to get Rs 5 crore in the end. So, if you opt for equity, which gives about 15% returns on average, then you can reach your goal by investing only Rs 56,743 every year until retirement. This is why you must choose your assets wisely and exercise absolute discipline with respect to spending.

Start early: The best advice on investing that you’ll ever receive is to start early. The sooner you start, the more years you’ll have to build your target corpus. Also, in case you are a bit less fortunate and manage to invest in the wrong assets, you’ll have enough time to make up for the mistake. In our calculations earlier, we assumed that you have 35 years to get to your target figure of Rs 5 crore. Given that the maximum retirement age is 58 years, you’ll need to start at the age of 23 years to get to this figure. Otherwise, you will have to increase the amount you invest every year.

Now let us take the example of a 33-year-old, who wants to retire with Rs 5 crore. He has 25 years to reach his goal. If he only invests in FDs and earns a paltry 10% return per year, then he will have to invest as much as Rs 5 lakh every year. In case of those earning a 12% return, this investment requirement falls to Rs 3.75 lakh. If he or she invests in equity and earns 15% on average every year, the per-year investment comes down to Rs 2.34 lakh. This is why it is better to start as early as possible.

Choose your assets wisely: Of course, the other thing to think about is where to put your money. The market is full of investment products: mutual funds, stocks, ULIPs, SIPs, and so on. Which of these will you invest in, to earn the 10% return we assumed earlier?

‘Higher the risk, higher the return’ is one of the thumb rules of investing. Stocks offer the greatest return because they are the riskiest of all assets. This is because they can fall in value, just as much as they can rise. Unless you are a seasoned investor, who has the time and understanding to analyse stocks, investing in equities might not be for you. You can instead opt for equity mutual funds. Government bonds, in contrast, are the safest assets to invest in. This is because investors have tremendous faith in the government’s ability to make periodic interest payment on its bonds. However, you need to invest a minimum of Rs 1 lakh in government bonds. Even then, they don’t offer the 10% return you need. Thus, you need an equity kicker in your portfolio.

The bottomline: It is best to opt for a combination of stocks and bonds to invest in. This can be achieved through mutual funds, ULIPs and other investment products. Consult a good financial advisor, who will take into account your age, investment objectives, risk appetite and circumstances; and advise you on the investment options that are best-suited to you.